Hacker News new | past | comments | ask | show | jobs | submit login

Most states have a income tax [1]. Our federal tax is progressive so you pay 15% of the first $X. Anything you make over that is taxed at 25% and on and on.

We get a standard deduction, which varies depending on whether you are single, married, and/or have children. Deductions reduce your taxable income. For example a single person making $35,000 would get a standard deduction of $6,300 making their taxable income $28,700.

You are entitled to a dependent deduction, so if the hypothetical single person above has a kid he can knock another $4,050 [2] off of his taxable income making it $24,650.

The other ways to reduce your taxable income for working people are retirement plan and health saving (HSA) contributions. every dollar you take out of you paycheck and contribute to either of those is not counted towards your taxable income. There are maximum amounts to both. Typically a person making $35,000 won't have much income available to put away in this way so working people don't usually get to take advantage of those [3]. There's also flexible spending accounts which work the same as HSAs except if you don't spend the money input in a set amount of time you lose it. These accounts make sense for sunk costs like daycare.

Lastly there are tax credits. Credits reduce the amount of tax owed (as opposed to the amount of taxable income). For example, if my taxable income $10,000 and I was taxed at 15%, I would have a tax bill of $1,500. If I also got a $500 tax credit, my tax bill would be reduced to $1,000. Parents get a $1,000 for each child[4]. There's also a childcare credit which is a pain to calculate so I won't do it here.

There are of course other exemptions and credits but for most people, what I've listed sums up how our tax code works.

[1]: http://www.money-zine.com/financial-planning/tax-shelter/sta... [2]: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Tax-Ex... [3]: http://www.forbes.com/sites/niallmccarthy/2016/09/23/survey-... [4]: https://www.irs.gov/uac/ten-facts-about-the-child-tax-credit




> Our federal tax is progressive so you pay 15% of the first $X.

Nit picking here: There's actually a 10% bracket below the 15% one.




Guidelines | FAQ | Lists | API | Security | Legal | Apply to YC | Contact

Search: