Demystifying Tax Brackets: Learn How to Take Advantage Now!

Hey everyone, welcome back to the channel, and a special welcome to our first-time viewers. Today I am demystifying tax brackets. Hardly a day goes by without someone asking me which tax bracket they're in, or how can they know. When you don't understand how tax brackets really work, that spells disadvantaged taxpayer to me. But I'm going to tell you everything you need to know and how to take advantage of tax brackets. Stay tuned.

Welcome to another edition of We Are Talking Money. I'm Phil Clark, wealth advisor and founder of OmniStar Financial Group, and today it's tax brackets and understanding how they work and how to use them to your advantage. Before we dig in, please do me a favor and hit that thumbs up button and consider subscribing to our channel. We deliver new videos every week with one goal in mind, and that is helping you make better financial decisions. Okay, let's get started.

Now, in their simplest form, tax brackets are the income ranges with a stated rate that ultimately determines the percentage of tax you're going to pay. The United States uses a progressive tax system, and that simply means as your income increases, you move higher in the tax brackets. Each tax bracket has a range of income and its own percentage rate. Now, as you move up the brackets, tax rates increase, hence the progressive rate system. Under current law, we have seven brackets.

Things can get a little confusing at this point, but hang in there. I think it will explain itself as we go. Now, your entire income is not taxed at the rate that's associated with your bracket. The U.S. uses a marginal tax system, which means only the income within each bracket is taxed at that rate. So let's take a look at the brackets for a moment, and I think you'll get a better picture.

Notice that each bracket has a range of income, or your earnings, and a corresponding tax rate. The income in lower brackets is taxed at a lower rate. Let's say that you fall into the 24 tax bracket. That doesn't mean your entire income is taxed at 24. The first portion, zero dollars to twenty two thousand dollars of earnings, falls into that 10 percent bracket. Then the next bracket of 12 percent would apply to your earnings that are twenty two thousand one dollars up to eighty nine thousand four hundred and fifty dollars, and so on. Only the amount of income between that threshold, in this case of one hundred ninety thousand seven hundred fifty one dollars, is going to be taxed at twenty four percent. Here's how that would look.

As your income rises, this progressive taxation continues until you reach the highest tax rate. Maybe you're already there, and if you are, congratulations. When you reach the 37 percent tax bracket, you're making a lot of money. That's a good thing.

Now, understanding tax brackets can help you plan your finances better. It's important to know how much of your income is subject to different tax rates. Now, many people will say, well, why does that really matter? Well, here's why. You want to make informed decisions regarding investments and specific account types, deductions with qualified dividends, capital gains, unrealized gains and losses, and overall financial planning.

For example, let's say that you're getting a raise. Naturally, you start thinking about increasing your retirement plan contributions, and you do that using pre-tax dollars. Now, generally we would say that's a good idea. However, the fact that you could be in a situation that isn't going to necessarily cost you a lot more in terms of tax might make it a good idea to consider a Roth contribution as opposed to increasing that pre-tax contribution. Now, this is a simple example, but the point is every situation must be carefully considered before making decisions.

Now, one of our planning elements is Tax Strategies. Understanding brackets, or tax brackets, and how they work, it can play a major role in managing this risk and maximizing your wealth. Remember, growing your wealth, it's all about how much you keep, and that includes mitigating the potentially harsh bite taxes.

To make an informed decision, here are a few tips to remember when it comes to tax brackets. First, it's always a good idea to consult a tax professional or wealth advisor who is astute with understanding the tax laws and tax brackets. This will help you ensure that everything within the tax system is being used to your advantage. Second, having a solid financial plan creates the foundation for good tax planning. Be sure that you're asking questions about tax regulations that might affect you. It can change each year, so keeping yourself informed is very important. And lastly, remember that properly filing your taxes is important for avoiding penalties. If you make estimated tax payments, be sure they're paid on time and that you're not paying too much.

Now, thanks for watching. I hope this video has inspired you to continue gaining knowledge of tax brackets, a progressive tax system in the United States that will absolutely affect your outcomes. Make sure that you understand them and put good tax planning in to your financial planning. Don't forget to subscribe to our channel. Hit that notification bell so you can stay updated with all of the useful information that we're providing. Thanks again for watching. I'll see you next time on We're Talking Money.

Thanks for joining us on We're Talking Money. Be sure to visit us at omnistarfinancial.com, where you can learn more about how we provide value to our clients. So subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

This podcast is a publication of OmniStar Financial Group. The content is developed from sources believed to be reliable and accurate with all information. The information in this material is not intended as tax or legal advice, may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security or service provided by OmniStar. All expressions of opinion reflect that of the authors and are subject to change. Any distribution, use or copying of this podcast other than the intended recipients is prohibited.