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Tax Thresholds

Tax thresholds are the minimum numbers set by the government as the amount of income that individuals and businesses must make before paying taxes. Tax thresholds are important for taxpayers because they determine the amount of taxes owed and when the amount is due. Knowing about the various tax thresholds can help taxpayers better manage their finances and their tax obligations.

Individuals. In the United States, individuals are expected to pay taxes on the income from employment, investments, and other sources. Taxpayers must consider their filing status when they look at the tax thresholds they are subject to, as the filing status will determine the amount of income that is subject to taxation. Federal income tax is generally broken down into several different levels depending on the amount of dollars earned. As an example, in 2020, individual taxpayers who made up to $9,875 were only subject to the 10% tax bracket. While the tax rate was the same for all of these taxpayers regardless of how much they earned within that range, individuals who earned more than $9,875 paid more in taxes.

Married Couples. Married couples usually benefit from a joint tax filing status, which allows them to file one combined return that includes the incomes of both spouses. This status is beneficial for many couples because it reduces their overall taxes owed. The tax threshold for married couples filing jointly is higher than for individuals. As of 2020, married couples filing jointly could earn up to $19,750 in the 10% tax bracket.

Businesses. Businesses have different tax thresholds based on the type of entity they are. Tax thresholds are also based on the number of employees, the amount of profit and income, and other factors. For instance, businesses that are considered large must pay taxes on their income that exceeds a certain amount. Similarly, some small businesses may be exempt from paying taxes if their income is below a certain amount.

The different tax thresholds are necessary to ensure that individuals and businesses pay their fair share of taxes. Taxpayers should familiarize themselves with the different thresholds so they can plan ahead accordingly and pay the right amount of taxes. Understanding the tax thresholds can also help taxpayers maximize deductions and credits and reduce the amount of taxes they are required to pay.

Tax Deferred Compensation is an important retirement planning tool available to all taxpayers.

Generally, with tax-deferred compensation, one’s contributions (within limits) to such plan are not included in taxable income until money is withdrawn. In some cases, taxes can be deferred even longer if the money is rolled over into another qualified plan. Tax deferred compensation can help reduce current taxable income and therefore help reduce tax liability. This can be especially beneficial for taxpayers in higher income brackets.

Under IRS regulations, for 2019, an individual may contribute a maximum of $19,000 to a 401(k) or 403(b) plan and $6,000 to an IRA. There are also catch-up provisions for individuals of 50 and above that can increase these amounts by $6,000 and $1,000, respectively. Additionally, employers have the option to match the contributions of their workers to these plans; however, these contributions do not count towards the maximum contribution allowed for the individual.

Tax-deferred compensation provides benefits to taxpayers beyond the simple reduction of current income-tax liabilities. For example, if one invests their tax-deferred contributions in a conservative or stock fund, that money can grow tax-free and can be transferred to another qualified account in order to further increase the tax-deferment. By taking full advantage of the tax deferment, one can maximize the money they accumulate toward their retirement, allowing them to reap the benefits of their tax-deferred compensation for years to come.