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How to do Taxes for the First Time

By February 17, 2023Tax Strategy, Taxes
How to do taxes for the first time?

How to do taxes for the first time?

Let’s start with brackets. The first thing we look at is the filing status, because each status has a different tax bracket: single, married filing jointly, head of house, married filing separately and surviving spouses. Each is a separate tax bracket.

Know your tax bracket

Single is pretty obvious. Married, filing jointly, if you’re married and you file on the same tax return.  Married filing separately is when you’re married, but you file separate tax returns. Head of  household, is you filing without a spouse and you have dependents. A surviving spouse is if you have a spouse that passed away recently. Decide what bracket is best for you and your situation. With each bracket you have a 10% bucket, and once that bucket is full, all the overflow now flows down to the next bucket. It’s like a cascading waterfall full of buckets. As an example the 10% tax bracket, if I’m single, I have taxable income between zero and $11,000, I’m going to pay 10%. 

This means every US taxpayer pays 10% on the first $11,000 of taxable income. Warren Buffet, Jeff Bezos, Elon Musk, all the wealthy people, they still pay the same 10% on the first $11,000. Also the guy who panhandles on the side of the road who’s deciding to claim that as taxable income pays 10% of $11,000. So let’s say I have $11,100. I now have $100 in the 12% tax bracket. It’s a bucket, it’s not a recapture. Once I’m over $11,000 I don’t pay 12% on everything I only pay 12% on the extra $100 or whatever that number is. As you can see on the bracket, if we’re looking at the single, the second bracket goes up to $44,725.

How the IRS comes up with the algorithms on these numbers beats the crap out of me, but they post the brackets every year. I’m paying 12% of the money between $11,000 and $44,000. Then I pay 22% between $44,000 and $95,000. Again, it’s not everything, it’s the first $11,000. I paid 10%, the next $33,725 I paid 12% and the next $51,000 I pay 22%. It’s a cascading bucket. 

Having the right filing status is important

I know a common question we get, especially with newly married couples, is do we file together or not? You can make almost twice as much money filing married filing jointly as you do a single filer. It’s 10% from $0 to $11,000 for singles, but it’s $0 to $22,000 for married filing jointly, so usually married filing jointly is a better tax bracket. There are scenarios where it makes sense for your tax professional to look at married filing separately, but those can be pretty specific scenarios.




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