Taxes: brackets, deductions, credits
Taxes on what you earn
Understanding taxation is a crucial part of managing personal finances. In the United States, there are two main types of individual income tax: federal and state. Both use progressive tax brackets, which means that the rate of tax increases as the taxable amount increases.
Will a Raise Cost Me? draws the 2026 brackets for your own wages, with FICA, California, and whether a 10% tithe makes itemizing worth it. Where Taxes Bite compares state income, sales and property taxes on one map.
Federal income tax rates range from 10% to 37%, depending on your income level. If you live in California, state income tax rates range from 1% to 12.3%.
In addition to income taxes, there are also payroll taxes, which include Social Security and Medicare taxes. The Social Security tax rate is 12.4%, and the Medicare tax rate is 2.9%. These are typically split between the employer and employee, with each paying half, unless you are self-employed, in which case you are responsible for the entire amount.
Understanding the difference between marginal and effective tax rates is also important. Your marginal tax rate is the rate you pay on the last dollar of your income and determines your tax bracket. On the other hand, your effective tax rate is the average rate at which your income is taxed, taking into account all of the tax brackets through which your income passes.
A practical tip is to consider filing your own taxes. With tax software, this task may not be as daunting as it seems. Not only can this save you money, but it can also provide a valuable learning experience, increasing your understanding of how taxation works and how it impacts your finances.
Tax Deductions
Understanding tax deductions and credits can significantly impact your tax liability. Tax deductions reduce your taxable income, while tax credits directly reduce the amount of tax you owe.
Tax Deductions: These reduce your taxable income, lowering your overall tax burden. Common deductions include the standard deduction, student loan interest, taxes, retirement contributions such as those to a 401k, and Health Savings Account (HSA) contributions.
For the tax year 2026, the standard deduction is $16,100 for singles and $32,200 for married filing jointly (MFJ); the IRS adjusts these amounts each year. The standard deduction is a set amount that reduces your taxable income, and it’s available to all taxpayers who do not itemize their deductions.
Itemized deductions include mortgage interest, taxes paid (such as state and property taxes), and charitable donations. If your itemized deductions total more than your standard deduction, you might choose to itemize. For example, if you earn $125,000 and tithe 10% of your income, you may find it beneficial to itemize.
Tax Credits: These are even more valuable than deductions because they directly reduce the amount of tax you owe. An example of a tax credit is the Lifetime Learning Credit, which can provide up to $2,000 per tax return to offset the cost of higher education.
For year-end tax moves — loss harvesting, Roth conversions, and donation bunching — see the End-of-year financial checklist.