Tax Filing and Financial Education
This is part our educational blog series “The Short Form” to simplify tax. A tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
Explore the world through the lense of tax policy. TaxEDU is a great way to learn more about taxes.
Every year, millions of Americans face a task that requires both: filing taxes. Insufficient tax and financial information can have serious consequences for taxpayers. This can lead to a tax audit if they fail to claim benefits which could reduce their tax liability, or if they claim benefits for which they are not eligible. The IRS may select a person or company at random or based on unusual deductions or income.
.
According to the National Financial Educators Council, financial illiteracy cost Americans more than $243 billion in 2024 alone–roughly $1,015 per person. In financial literacy, taxes play a major role. However, they are often overlooked. In fact, the IRS Taxpayer Advocate declared tax literacy to be its top issue of the year in a 2024 report to Congress.
With the April 15th deadline to file your 2024 tax return (or for an extension) fast approaching, and Financial Literacy Month underway, it’s important to understand basic tax concepts and how they relate to tax filing.Improving Tax LiteracyLast year, TaxEDU and the Tax Foundation’s Center for Federal Tax Policy conducted the National Tax Literacy Poll examining American taxpayers’ basic knowledge and opinions on income tax filing. The National Tax Literacy Poll conducted by TaxEDU and the Center for Federal Tax Policy of the tax foundation revealed that over 61 per cent of US taxpayers were unaware of basic tax concepts relating to income tax filing. More than half of respondents were also reportedly unaware of how
tax bandsA tax band is the range in incomes that are taxed according to a given rate, which can vary depending on filing status. In a progressive system of corporate or individual income tax, rates increase as income increases. The federal income tax system has seven brackets for individual income; the corporate income tax is flat.
These findings are alarming. Someone who is unfamiliar with tax brackets and rates of marginal tax may make serious financial mistakes, such as avoiding a promotion or overtime because they fear losing money due to a higher rate. It’s not that simple!
Not every dollar of your income will be subject to your highest marginal tax rate. The marginal tax rate is how much additional tax you pay for each additional dollar of income. The average tax rate is calculated by dividing the total tax paid by the total income earned. A marginal tax rate of 10 percent means that 10 cents from every dollar earned will be taxed.
. The income within the first bracket is taxed according to that rate, and the income within the next bracket at the next rate, etc., until you reach your top marginal rate. The income within the first bracket is taxed at that rate, the amount within the next bracket at the next rate, and so on until you reach your top marginal rate.
TaxEDU’s How Do Tax Brackets Work? video provides a helpful breakdown of tax brackets and how they operate.Many taxpayers may also be unaware that tax brackets change from year to year due to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck will cover less goods, bills, and services. It is sometimes called a “hidden” tax, as it makes taxpayers less wealthy due to increased costs and “bracket-creep”, while increasing government spending power.
, or as a consequence of changes to the tax code, adding an additional layer of complexity.
Preparing for the FutureThe better we understand taxes, the better we can manage our finances, but it starts with familiarizing ourselves with basic tax concepts like how tax brackets work. Financial Literacy Month and tax filing season offer a great opportunity to become a bit more familiar with the tax code, and TaxEDU is here to help.https://www.youtube.com/watch?v=kYeZko1WKHQ
Confused? TaxEDU can help you improve your tax knowledge. Our resources to help you understand them aren’t.
Learn more
Share this articleTwitterLinkedIn
