Why do we pay 10% of our paycheck to the government for taxes, and why/under what circumstances do we get it back in tax returns, or have to pay more in tax returns?
In: Economics
We pay different amounts of income based on income to the government, as there are a number of marginal tax brackets. We pay 10% of our first $9,875 in income, 12% of income from 9,876 – $40,125, 22% of income from $40,126 – 85,525, with the top bracket being 37% on income above $518,401. Mariginal means we only pay the higher percentage on the income above that amount, not on all dollars earned.
Our employers withhold and submit an estimated amount, based on how we fill out forms telling them our filing status (single, marries, head of household), how many dependents, and other factors.
When we do our taxes, we determine what we actually owe vs. what was already paid through those withholding. This will change based on other income (investments, rental property, side gigs, etc), deductions (money set aside in retirement accounts, health insurance premiums, student loan interest, mortgage interest, charitable deductions, investment losses, etc), credits (child tax credit, buying an electric vehicle, educational expenses, etc.). If we overpaid our taxes, we get a refund. If we underpaid, we owe more.
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