A very common question we receive is regarding income and tax brackets. Many people are concerned that if they earn too much money, it will result in a huge increase in taxes from entering the next highest tax bracket. While entering a higher tax bracket increases your tax rate, it is important to note that it doesn’t affect all of your income.
In 2020, the first four tax brackets for a married filing jointly couple are:
10% 0 to $19,750
12% $19,751 to $80,250
22% $80,251 to $171,050
24% $171,051 to $326,600
Let’s say that you and your spouse had combined total wages of $171,051. You might think that this would put all of your income in the 24% tax bracket, but this is incorrect. Here is how your income would be divided:
The first $19,750 is taxed at 10%
The next $60,500 is taxed at 12%
The next $90,800 is taxed at 22%
The next $1 is taxed at 24%
As you can see, earning that extra dollar over the limit will only result in 24 cents more tax. You don’t need to be worried about earning more money triggering a large increase in taxes due to reaching the next bracket. You do, however, need to make sure that you are setting aside enough in withholding and/or estimated payments to cover your income and self-employment tax.
Even though the 1040 extension deadline has passed, Clergy Financial Resources is still available to file your return for 2019, or for previous unfiled years. For more information, visit our website at https://www.clergyfinancial.com/services/clergy-tax-preparation/ for more information on getting your tax return started.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101