This column is part of the Journal’s “The New Rules of Money” package about the financial challenges facing young adults.
If you’re getting your first paycheck this year, congratulations! You’ve arrived. Welcome to the strange, confusing world of U.S. income taxes.
You’re joining more than 200 million Americans each year who gather forms, face complex calculations and file an income-tax return with the Internal Revenue Service by April 15.
Often the tax code seems like a crazy quilt, and not just for new filers. Some features came in when typical households had one earner and dial telephones, so they don’t mesh well with the 21st century.
Taxable income by tax rate, 2019
Always, the tax code is complicated. That is partly because of how Congress works—or doesn’t work. But the code also reflects modern economic life, which is far from simple. Its provisions have profound effects on individuals’ retirement savings, investments, health care, homeownership and charitable giving, among other things.
Above all, the U.S. individual income tax is a powerhouse. It raises nearly half of all federal revenue, a much higher percentage than in many developed countries.
You’ll likely be filing income taxes for a long time, so here are answers to some basic questions.
How much money can I earn before I owe federal income taxes?
The short answer is $12,200.
That is the “standard deduction” for most single people in 2019. For most married couples, it doubles to $24,400.
With taxes, a deduction is something everyone hopes for. Deductions are amounts subtracted from income the government taxes you on, so having them lowers your tax bill.
People can either list key deductions for items like state taxes or charitable donations on a special form, or they can skip that process and choose the standard deduction. This year nearly 90% of filers will opt for the standard deduction because it will save them more.
Often the tax threshold is higher than $12,200 or $24,400, however. People paying student-loan interest get a special deduction of up to $2,500 for such interest per return. So a single person taking it can earn up to $14,700 before owing tax.
Workers who contribute to retirement accounts like a traditional IRA or a 401(k) can raise their nontaxable amount by $6,000 or more. Less often, taxpayers qualify for credits that reduce their actual taxes rather than just their income.
What are the rates on taxable income?
They range from a low of 10% to a high of 37%, and they phase in as income rises. State or local income taxes are on top of that.
OK, so why did the company that paid me a pittance for an internship take out so much for taxes?
The answer is withholding—and it has nothing to do with emotional style.