America 250- Income Taxes Present

 

As I noted in last week’s post, we are in the final stretch of 2025 income tax season and I am teaching a new class called Income Taxes: Past, Present, and Future on April 15 as a small part of the nationwide America 250 effort. Previously, I described past history of income taxes in America.

This post discusses class highlights relating to current income tax laws and policies.

 

Gross and Adjusted Gross Income (AGI)- Under current law, taxpayers start out with their gross (total) income from sources such as wages, dividends, taxable interest, business income, alimony received, and required minimum distributions from retirement plans. Adjustments to income, often referred to as “above the line deductions,” include educator expenses, student loan interest, 50% of self-employment tax, health insurance for self-employed workers, and retirement plan contributions.

 

Individual Income Tax Rates- The U.S. federal income tax system uses progressive tax rates, meaning higher levels of income are taxed at higher percentages. As of 2026, the tax brackets range from 10% to 37%. Each rate applies only to income within its bracket, so taxpayers pay gradually higher rates as their taxable income increases.

 

Long-Term Capital Gains- Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income and tax filing status. Long-term capital gains are calculated by subtracting the cost basis (usually the initial purchase price plus additional deposits such as reinvested dividends) from the selling price of an asset held longer than one year.

 

Standard Deduction- The standard deduction is a fixed amount that taxpayers can subtract from their AGI before calculating federal income tax. It reduces taxable income without requiring taxpayers to itemize individual deductions. For 2025 returns filed in 2026, the standard deduction is $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. Taxpayers age 65 or older or blind may claim an additional standard deduction amount.

 

Senior Tax Deductions- There is an additional standard deduction available to taxpayers age 65 or older that reduces taxable income beyond the regular standard deduction. For 2025 tax returns, the extra deduction is $2,000 for single filers and $1,600 per eligible spouse in married couples filing jointly. The bonus senior deduction under the OBBBA tax bill is an additional temporary increase to the standard deduction designed to reduce taxable income for income-eligible older adults.

 

Required Minimum Distributions (RMDs)- RMDs originated with the creation of individual retirement accounts in 1974. They are the minimum amounts that retirees must withdraw each year from most tax-deferred retirement accounts, such as traditional IRAs and employer savings plans. Under the SECURE 2.0 Act, RMDs generally begin at age 73. The required withdrawal is calculated using IRS life-expectancy tables based on age and account balance at the end of the previous year.

A Personalized OBBBA Assessment

 

One of the benefits of being a professional financial educator is the ability to use knowledge and skills gained through professional development experiences and work projects to enhance my own personal finances. I started my financial education career 50 years ago and it has proved invaluable personally as a resource to gradually build wealth. Knowledge is, indeed, power!

Case Example: OBBBA

A recent example of how my financial education career intersects with my life was the need to quickly digest the content of the 900+ page One Big Beautiful Bill Act (OBBBA) that was signed into law on July 4. Several clients wanted written content about it and class slides needed to be updated. To be clear, the word “beautiful” is not a personal opinion but part of OBBBA’s title.

OBBBA Resources

To gain needed background information, I collected articles about OBBBA and also went to the ultimate source of information about legislative changes related to personal finance: Kitces.com. Nobody provides a better summary and analysis of legislation than this talented team of financial researchers and writers. Their work is truly outstanding, including analyses of the 2017 Tax Cuts and Jobs Act (TCJA) and the SECURE and SECURE 2.0 acts affecting retirement planning.

Personal  OBBBA Applications

As I delved into the details about OBBBA, I started to think about its application, personally, for the income taxes I file jointly with my husband (i.e., mfj). At the end of a blog post for one client, I encouraged readers to do a personal OBBBA analysis to inform their future financial plans. OBBBA is a very wide-ranging piece of tax legislation that will affect individuals and families at different ages, income levels, and lifecycle stages very differently. Below is an example:

Three Key OBBBA Impacts

After studying up on OBBBA, I concluded that I will be positively affected in three main ways:

Extension of TCJA Tax Rates and Tax Brackets- The seven marginal tax rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%) currently in effect were made permanent instead of increasing to 2017 levels if the TCJA had been allowed to expire.

Higher Standard Deduction- OBBBA increased the 2025 standard deduction to $31,500 (up from $30,000) for married couples filing jointly (mfj). In addition, as a couple both age 65+, my husband and I get an additional $1,600 apiece for a total standard deduction in 2025 of $34,700.

 

Charitable Deduction for Non-Itemizers- Like about 90% of American taxpayers, we have not itemized deductions since TCJA took effect in 2018. Starting in 2026, OBBBA will introduce a new cash-only charitable contribution deduction for non-itemizers: $2,000 for mfj.

 

Irrelevant OBBBA Features

I also concluded that there are a lot of OBBBA features that do not pertain to me personally. I am ineligible for the new senior tax deduction, pay less than $4,000 in SALT tax (there is no state income tax in Florida!), do not work for tips, and do not work overtime for an employer. In addition, I do not have minor children or a home mortgage and have no plans to buy a new car.

Bottom Line

Take the time to do an OBBBA analysis for your own tax filing status (e.g., single, mfj). Then convert what you learn into financial action steps. For example, you may need to adjust your tax withholding during the remaining months of 2025. You cannot expect your employer, the Social Security Administration, or other entities that withhold taxes to make any automatic changes to your withholding.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Do You Know Your Income Tax Rates?

 

With 2023 tax season well underway, now is a good time to examine income tax rates, which are a percentage of taxpayers’ income that is taxed. 

The U.S. income tax system is progressive, which means that taxes take a larger percentage of income from taxpayers with higher taxable incomes. Federal marginal income tax rates are established by Congress and change periodically.

There are actually five tax rates that taxpayers should be aware of: marginal tax rate, short-term capital gains tax rate, long-term capital gains tax rate, the tax rate on dividends (qualified and non-qualified), and effective tax rate. Below is a brief description of each tax rate category:

 

Marginal Tax Rate- The tax rate applied to the last dollar that an individual (or married couple filing jointly) earns. Under the most recently passed tax law, the Tax Cuts and Jobs Act of 2017, there are currently seven income range segments for four tax filing status categories (single, married filing jointly, married filing separately, and head of household) that are taxed at increasing rates as income rises. 

The current marginal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If someone is in the 22% tax bracket, portions of their income are taxed at 10%, 12%, and 22%.

 

The term “ordinary income” is frequently used to refer to income sources that are taxed at the marginal tax rates described above. Examples include salary, wage, commission, bonus, and tip income, rents and royalties, interest, and required minimum distribution (RMD) withdrawals from tax-deferred retirement savings accounts (e.g., 401(k)s, 403(b)s, and traditional IRAs).

 

Short-Term Capital Gains Tax Rate- A short-term capital gain (STCG) is the profit made on an investment that is held for a year or less. It is taxed at the ordinary income tax rates; i.e., the same marginal tax rate as the income sources noted above.

 

Long-Term Capital Gains Tax Rate- A long-term capital gain (LTCG) is the profit made on an investment that is held for a year and a day or longer. There are three LTCG tax brackets that are based on taxpayers’ taxable income and tax filing status. The LTCG tax rates under current tax law are 0%, 15%, and 20%.

 

Tax Rate on Dividends- The tax rate on dividends depends on three factors: taxable income, tax filing status, and whether a dividend is considered qualified or  nonqualified. Qualified dividends must meet certain IRS criteria and are taxed at 0%, 15%, and 20% (the same tax rate as long-term capital gains). 

Nonqualified dividends are taxed as ordinary income. The type and amount of each type of dividend is reported to taxpayers by investment custodians on a 1099-DIV form.

 

Effective Tax Rate- This tax rate takes into account the fact that higher ranges of income are taxed at progressively increasing rates. It is calculated by dividing the total amount owed on a tax return by total taxable income. 

For example, if a couple owes $25,000 on a $150,000 taxable joint income, their effective tax rate is $25,000 ÷ $150,000 = 16.7%, even though their 2023 and 2024 marginal tax bracket is 22%. An effective tax rate is always lower than a marginal tax rate.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

What is Your Federal Income Tax Rate?

Knowing your tax rate can help you prepare a tax return and take action(s) to reduce your tax liability. Do you know your federal income tax rate? You may actually have several different tax rates (e.g., ordinary income, dividends, long-term capital gains), depending upon sources of taxable income. This post describes the different federal tax rates that apply to taxpayers.

Ordinary Income Tax Rate- The seven federal income tax brackets for ordinary income (e.g., salary/wages, interest income, short-term capital gains, and RMDs (withdrawals) from tax-deferred retirement plans) in 2022 and 2023 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

 

These tax rates apply currently through 2025 under the Tax Cuts and Jobs Act. Income taxes are progressive (i.e., higher percentage of income for higher income earners) and taxpayers pay different tax rates on different tiers of income up to their last dollar earned.

 

Long-Term Capital Gains (LTCG) Rate- This is the tax rate assessed on profit from the sale of a capital asset (e.g., stock, bonds, mutual funds, property). To benefit from long-term capital gains rates, an asset must be held for more than a year (e.g., a year and a day or longer).

 

Current LTCG tax rates are 0%, 15%, and 20% and, like ordinary tax rates, they rise with income. The capital gain on the sale of an asset is calculated by subtracting its cost basis (initial deposit + subsequent deposits + commissions/fees to purchase the asset) from its sales price.

 

Capital Gains on Homes- There is special rule for capital gains from the sale of a primary residence that is owned and used for at least two of the last five years prior to its sale. Single tax filers can exclude up to $250,000 of capital gain and joint filers can exclude up to $500,000.

 

Qualified Dividend Tax Rate- This is the tax rate assessed on qualified dividends that are distributed by a taxpayer’s investments (e.g., stocks and mutual funds) in taxable (i.e., non-retirement) accounts. Like ordinary and LTCG tax rates, taxes on dividends are progressive.

 

The current tax rates assessed on qualified dividends (which are reported as such by account custodians) are 0%, 15%, and 20% depending on tax filing status (e.g., single, couple filing jointly, head of household,) and income. Ordinary dividends are taxed at ordinary tax rates.

 

Effective Tax Rate- While not an “official” tax rate that people use on their income tax returns, this is a very useful metric to analyze what percentage of your taxable income is being spent on federal income taxes. Many people also use their effective tax rate to estimate tax withholding. The formula for determining someone’s effective tax rate is Tax Liability divided by Taxable Income. 

Examples: $5,000 ÷ $45,000 = 11.1% and $40,000 ÷ $245,000 = 16.3%.

 

In summary, it is not enough to simply prepare your taxes to determine if you receive a refund or write a check to the IRS. Take the time to examine the tax rates that affect your income.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.