U.S. Tax Computations & Credits: How to Lower Your Tax Bill
Overview: Individual federal income tax liability is calculated using a progressive rate structure for ordinary income and preferential rates for long-term capital gains and qualified dividends. Understanding these rates — and the credits available — can help you pay less tax.
✅ Ordinary & Preferential Rates
- Ordinary Income Tax Rates (2023): 10%, 12%, 22%, 24%, 32%, 35%, 37% — applied progressively as taxable income increases.
- Preferential Rates: Long-term capital gains and qualified dividends taxed at 0%, 15%, or 20% based on taxable income thresholds.
✅ Marginal Tax Rate
- Marginal rate = tax on additional income. For example, moving from $75,000 to $90,000 MFJ income may add tax at a higher bracket on the extra $15,000.
✅ Key Tax Credits
1️⃣ Child & Dependent Care Credit
- 20%–35% of work-related expenses for care of a child under 13 or a disabled dependent/spouse.
- Max expenses: $3,000 for one dependent, $6,000 for two or more.
- Credit phases out as AGI increases; minimum rate is 20% for AGI over $43,000.
2️⃣ Education Credits
- American Opportunity Credit (AOTC): Up to $2,500 per student for first four years; partially refundable (40%).
- Lifetime Learning Credit (LLC): 20% of qualified tuition/fees up to $10,000 per return; unlimited years.
3️⃣ Earned Income Credit (EIC)
- Refundable credit for low- and moderate-income taxpayers. Amount depends on earned income and number of qualifying children.
4️⃣ Adoption Credit
- Up to $15,950 (2023) for qualifying adoption expenses. Nonrefundable but can carry forward for up to five years.
5️⃣ Retirement Savings Contributions Credit
- Up to 50% of contributions to a qualified plan or IRA, limited to $2,000 per taxpayer.
6️⃣ Foreign Tax Credit
- Credit for taxes paid to foreign countries. Limited to the lesser of foreign taxes paid or the proportionate U.S. tax liability.
7️⃣ General Business Credit
- Combines various credits (investment credit, research, low-income housing, work opportunity). Unused credits can carry back 1 year and forward 20 years.
✅ Other Notable Taxes
- Self-Employment Tax: Covers both employer and employee FICA portions.
- Additional Medicare Tax: 0.9% on wages exceeding thresholds ($250,000 MFJ).
- Net Investment Income Tax (NIIT): 3.8% on net investment income if AGI exceeds thresholds.
- Kiddie Tax: Unearned income of children under certain ages taxed at parent's rate above $2,500.
🔗 Helpful References
👉 Know the rates, claim the credits — pay only what you owe, and nothing more!
