By Rickie Houston CEPF®
If you’re paying less in taxes as your taxable income increases, you’re likely following a regressive tax system. Regressive taxes offer an inverse relationship between income levels and tax rates; that is, a lower income will typically earn you a higher tax rate. A higher income, however, will earn you a lower tax rate. In this guide we take a closer look at how regressive taxes work.
In a regressive tax system, an individual’s tax burden decreases as income increases. This means that you’ll be taxed at a lower rate as your taxable income rises; you’ll be taxed a higher rate the lower your income is. So wealthier individuals will pay less in taxes than lower-income individuals. This is completely opposite to a progressive tax system, but we’ll explore those differences further below.Types of Regressive Taxes
Below, we’ve identified some of the most common regressive taxes:
Regressive taxes benefit higher-income individuals since taxes decrease as income increases. With progressive taxes, however, taxes are based on an individual’s specific amount of taxable income, and the tax rates increase as income increases.
For instance, for single filers making between $0 and $9,875, the federal income tax rate is 10% for 2021. But single filers making more than $518,401 will be taxed at a 37% tax rate. The same applies to married couples filing jointly or separately, as well as heads of household. The federal rate starts at 10% and increases as income increases.Bottom Line
With a regressive tax system, you’ll incur higher tax charges the lower your income is. As your taxable income rises, you’ll be taxed at a lower rate. And when it comes to payroll taxes, you won’t have to pay anything on the portion of your income greater than $137,700. Progressive tax rates rise as taxable income increases, though. It’s wise to make the distinction between both taxes when planning out your budget.Tax Planning Tips
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