By Rickie Houston CEPF®
You’re probably adhering to a progressive tax system if you’re paying more in taxes as your taxable income increases. With progressive taxes, there’s a direct correlation between income level and tax rate. This means that lower-income filers will pay less in taxes than higher-income earners. In this guide, we take a closer look at the progressive tax system.
While lower-income filers encounter low tax rates, high earners take on a heavier tax burden in a progressive tax system. This is because progressive tax rates rise as taxable income rises. The federal income tax system provides a great example. This system uses income ranges to create tax brackets.
In the U.S., income tax rates increase as tax filers’ income levels increase. For the 2020-2021 tax year, married couples filing jointly will be taxed at a 10% rate if they make between $0 and $19,750. However, the rate shoots up to 37% for couples making more than $622,051. Taxpayers pay incrementally higher tax rates only on the portion of income that exceeds the lower brackets.Types of Progressive Taxes
Below, we’ve identified some of the most common progressive taxes:
One of the key differences between progressive taxes and regressive taxes is that progressive taxes are more beneficial to lower-income individuals. While progressive tax rates rise as income levels rise, regressive taxes place a heavier financial burden on low-wage earners.
Sales taxes, payroll taxes, property taxes and sin taxes are all forms of regressive taxes. For example, payroll taxes are regressive because individuals making less than $137,700 have to pay at least 6.2% of their income, while filers making above $137,700 don’t have to pay payroll taxes on the portion of their income that is greater than $137,700.Bottom Line
In a progressive tax system, higher-income individuals will pay more in taxes than lower individuals. This is because the tax rate increases as taxable income rises. This is different from a regressive tax system in which high earners pay the same or less in taxes. It’s wise to familiarize yourself with the different types of progressive and regressive taxes so you won’t be caught off guard with your tax bill.Tax Planning Tips For Beginners
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