The IRS tax brackets are probably the misunderstood part of the tax code.  Most people think that all of their income is taxed at the highest percentage that their income throws them into.  This is not true.  The income tax system in the United States is a progressive tax system. That means that different parts of your income is taxed at different rates.

One of the questions I often get is how will it affect my taxes if I take this much taxable income from a retirement account?  Or how much in taxes will it cost me if I bring in this extra income?  That is where understanding the tax tables come into play.  It all starts with your filing status, because the first thing you have to do is figure out your taxable income.

When working on people's taxes and have them have a balance due after starting that new job, I have to have a conversation explaining how the new W-4 form works.  You know, that form you have to fill out to tell your employer how much money to withhold from your paycheck to cover your tax liability.

If you don't like owning taxes at the end of the year, then here are some things you should know:

1. When you have to fill out a W-4 form

You are not required to file a W-4 form with your employer each year, but a lot of people don't realize that you are allowed to fill out a new form any time your situation changes.  Like you get a second income coming into the household, get married or you have a new child.

Those who make more than $400,000 aren't the only people the IRS is looking at regardless of what you hear in the media.

The IRS believes that sole proprietors' underreporting of income and overreporting of expenses cost the government about $182 billion of projected lost revenue not paid voluntarily in tax year 2021 alone.  This figure doesn't even take into consideration underpaid or unpaid self-employment taxes.

Here are some of the suggestions that government auditors are looking at to lower noncompliance:

If you want to pay less when you retire, moving to one of the states that don’t tax retirement income might be one way to do that. So, if your retirement income includes Social Security benefits, distributions from a 401(k) or IRA, or a pension, you might want to consider one of these states.

Even though these states don't tax "traditional retirement income," you might still have to pay tax on other types of income you earn in retirement, such as from wages, interest, and dividends. (Federal income tax still applies in these states.)

Alaska

Alaska doesn’t tax your Social Security benefits, your pension, your 401(k) or IRA distributions. That’s because Alaska has no state income tax. 

One of the common misconceptions that divorced parents have is that whatever the divorce agreement says will be honored by the IRS.  This is no longer true.  Starting in 1996, the IRS came up with the custodial parent rules and Form 8332 (or its equivalent) to determine who can legally claim a dependent.   

In brief, the custodial parent is the one where the dependents live more than six months out of the year.  The custodial parent has all rights to claim all credits (child tax credit, additional child tax credit, earned income credit, education credits, child care credits, etc).  In fact, the only credit that the custodial parent can give to the non-custodial parent is the child tax credit.  Let me use an example of how this currently plays out:

Did you know that there are several categories of income are not taxable in the eyes of the IRS?

Here is a list of some common types of nontaxable income. Needles to say, it's good to consult a trusted tax professional or financial adviser if you are uncertain about your tax burden and how to minimize it. 

Here are Some Examples

Note: The following are examples of nontaxable income. (This list is not all-inclusive.) In some cases, you may have to report nontaxable income on your federal income tax return even though it isn't subject to tax.

For more information on what the IRS considers taxable, see IRS Publication 525.

The FBI has issued a warning to Americans that they should exercise caution when scanning QR codes with their smartphones because cybercriminals tamper with the codes to steal login and financial information.

A QR code—the square barcode that people can scan with their smartphone cameras—can provide quick and convenient access to a website or to a direct payment to an intended recipient.

Businesses have started using QR codes to provide contactless access to services, for instance, enabling access to restaurant menu items on a smartphone that can then be conveniently ordered.  But the more convenient technology tries to make life, the more ways that scammers can find ways to use it.

One of the most - I think - was the tax rule concerning those whose join the military was that your state of residence for tax purposes was where you signed up for the military.   So, if you joined the military from a state that has state income tax laws, you had to pay state taxes to to that state - even if you currently live in a state that had no tax.

Congress finally fixed it.

The Veterans Auto and Education Improvement Act of 2022 (VAEIA) was signed into law Jan. 5, 2023. The Act expands existing legislation protecting military service members’ and their spouses’ residency.