It is almost the end of the year, and tax time is quickly approaching. In the last 11 months, you've withheld the usual amount, but are still nervous about filling out those annual reports. Federal taxes are a complicated combination of calculations using various mathematical equations. When determining how much to pay in federal taxes there are three specific areas the average person must address.

Tax brackets

Federal taxes are calculated on a marginal scale. Specifically, every taxpayer begins at the lowest tax bracket and as the year progresses, the more money earned determines how far each particular taxpayer travels up the brackets. With each bracket the overall percentage increases for that amount of money earned. For example, if last year you earned $85,000, the first $8,000 are taxes at 10 percent, followed by the next dollars up to $33,000 being taxed at 15 percent, all the way up to the final $3,000 of the year's wages being taxed at 28 percent. So by the end of the year, more than one quarter of each dollar earned is expected to be paid to the government.

Withholding

Those employed by a business have the option of their employer withholding a specific amount of their yearly income. ideally the amount withheld will be just enough to pay his annual tax requirements without any additional being due or returned. For those who are self employed, it is recommended to calculate the amount of taxes that will most likely be owed and pay them quarterly to avoid payment penalties at the end of the year.

Credits and Deductions

A credit is a dollar for dollar reduction on the total amount of taxes owed. Examples of credits include losses on investments and dependent credits. Credits are the best way to reduce the amount of federal taxes owed and avoid paying additional taxes at tax time. A deduction is a dollar for percentage reduction in taxes, so long as the maximum deduction amount has not already been reached. Examples of deductions include donations to charity, mortgage interest, student loan interest and medical expenses. While deductions are slightly helpful, the maximum amount is typically reached very quickly, so deductions are not as dependable as credits.

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Tax Brackets

Federal Taxes