Let’s Talk Taxes

Ah, tax time! Everyone’s favorite time of year!

Jk, taxes are generally no fun. Seeing how much money is taken from your pay, preparing paperwork to send to the IRS, paying penalties for mistakes… no thanks to all of it.

But whether we like it or not, taxes are a part of life. We encounter taxes everywhere… from sales tax to state tax to federal income tax, and they’re firmly with us like a barnacle on a ship. Run from them, and the IRS will find you. And then FINE you.

So since we can’t escape taxes — at least those of us who aren’t billionaires — let’s do the next best thing and seek to understand them.

Disclaimer: I am not a CPA. I cannot provide tax advice, and you probably wouldn’t want me to try. I’m just a regular old taxpayer who didn’t understand how it worked until well into my adult life. Now I’ve got the basics, and I want to share information. Because you’re worth it.

Why do we pay taxes?

I think the IRS says it best themselves, stating on their website: “Taxes provide revenue for federal, local, and state governments to fund essential services--defense, highways, police, a justice system--that benefit all citizens, who could not provide such services very effectively for themselves.” Taxes help support our community, our resources, and the people who live in it.

How much are we supposed to pay?

The amount you pay varies based on several factors. Where you live, your marital status, the amount you earn, the amount you spend, and even the amount you save.

U.S. Federal Tax brackets, explained

Okay, friends, let’s dispel a myth. Making more money does not mean that you will bring home less money. Many people believe that getting a raise that bumps them into a higher tax bracket results in less money in take-home than before. Simple math could make that true in some cases. But, friend, hear me. Tax math is NOT simple.

In the US, federal tax uses what’s called a progressive tax system with marginal tax rates. Yeesh, gross words, right? Let’s simplify.

You know those wooden nesting dolls that are different sizes and stack into each other? Tax brackets are like nesting dolls. Hang with me…

Tax brackets are like nesting dolls

Imagine as you get paid throughout the year, your money gets placed into each of these dolls, starting with the smallest and moving up one size at a time. As you fill one doll with cash, you move to the next largest, and so on.

Each doll holds a different amount of money. The 10% doll is the smallest and holds only up to $11,000. All earnings up to 11,000 are taxed at 10%. So whether it takes you ten minutes or 1 full year to earn $11,000 the first $11,000 is always taxed at 10%. The next doll holds the next $30,000. That $30,000 is taxed at 12%. As so on. Different progressions are taxed at different rates.

So contents of the tiniest doll would be 10%, then the next size up 12%. The next is 15% and so on until the biggest doll is 37%.

A Practical Example

Let’s say you make $50,000 and you’re single. The first $11,000 that you earn is taxed the lowest rate of 10%. Then the next $30,000 is taxed at 12%. Then the last $9,000 will be taxed at 22%. So instead of paying 22% on all 50,000, you’re paying a different percentage on different levels as your earnings grow. So yes, higher earnings result in higher taxes, but also higher earnings.

Why do we get tax refunds?

Simply put, if you get a refund, it means you overpaid the IRS over the course of the year. They’re literally refunding you your own money. A refund is not a bonus. It’s a loan you accidentally gave the government and they’re paying you back. Without interest.

Why I’d rather pay taxes on April 15 than get a refund

While a surprise check can be fun, I’d rather have that money throughout the year and put it to work in investments or savings accounts (or to buy stuff). It gives me more margin, and if I know my numbers and do my math right, I can break close to even.

I’m a money nerd though. Many people would rather not see that money at all and get a little bonus the next year. Out of sight, out of mind is an excellent savings strategy if it works for you. BUT again, the IRS refund is paid back with no interest, so you could be better off putting that money in a high yield savings account so it can work for you, not giving it to the government so they make money off your money instead.

Find the balance that works for you and your money mindset, but use this information to arm yourself for the decision. And always pay your taxes, friends.

*Based on 2024 tax rates. These rates change regularly, so check with the IRS for this year’s rates.