by Joe Miller,
Director of Development
I hate filing taxes. Don’t get me wrong—I don’t mind paying taxes. After all, income taxes maintain the 350,000 acres of public lands at the heart of Nature’s Mountain Playground. And those public lands, in turn, attract the visitors who provide funds the county uses to expand ambulance service, provide recreation for our kids, preserve historic landmarks, support local artists and keep our libraries open.
No, the taxes are fine. It’s the act of filing taxes that I hate. It’s tedious and overcomplicated.
Those complications generate a lot of confusion about how taxes work. I’m going to try and clear up a couple of those here.
Fair warning—there are a bunch of numbers in the first bit. But stick with it, because at the end I’m going to talk about a tax program that could mean a nice refund for a lot of Pocahontas County residents.
The biggest confusion I’ve come across is about tax rates.
Income taxes use what economists call marginal tax rates. “Marginal” is a complex concept in economics, but when it comes to tax rates, it just means the rate that you pay on the last dollar of taxable income.
That’s a mouthful. An example might help.
If Bob has $11,600 in taxable income for 2024, then he will owe 10% of that ($1,160) in federal taxes. The 10% marginal tax rate applies to every taxable dollar between $1 and $11,600.
At $11,601, the marginal tax rate jumps to 12%. But that doesn’t mean paying 12% on the full taxable income. It means paying 12% on every dollar over $11,600. So, if Sue has a taxable income of $20,000, she’ll owe $2,168 in federal taxes. She pays the same $1,160 that Bob does on the first $11,600 of her income. She then pays an additional $1,008, or 12% of the amount over $11,600.
Every single person, no matter their total income, pays 10% on the first $11,600 of taxable income, then 12% on amounts between $11,601 and $47,150 and so forth.
There’s a difference between your marginal and your effective tax rates. Your marginal rate is the amount you pay on your last dollar of earned income. Your effective tax rate is the number you get when you divide your tax bill by your taxable income. That means Sue has a top marginal tax rate of 12%, but an effective tax rate of 10.84%.
The second big confusion is between deductions and credits.
The short version: a deduction lowers your taxable income. That is, every dollar you deduct is one on which you’re not paying taxes. So, Sue found another $3,000 in deductions, she would lower her taxable amount to $17,000, which reduces her tax bill by about $360.
Tax credits, on the other hand, are subtracted from your total tax bill. If we gave Sue a $3,000 regular tax credit, then her tax bill is zero, since her total amount owed is less than the $3,000 we’re subtracting.
There’s one more twist. Some tax credits are refundable.
If we gave Sue a $3,000 refundable tax credit, then the IRS would write her a check for $832.
Around 40% of Americans end up not paying any income taxes. That’s because by the time they finish taking all their deductions, their taxable income has dropped to zero. For the people who fall into this category, additional tax deductions or regular tax credits don’t do much.
Refundable tax credits put money back in the hands of working Americans.
The biggest refundable tax credit is called the Earned Income Tax Credit, or EITC. IRS spokesperson Rodney Bearman says that around 100,000 West Virginia tax filers qualify for the EITC. That’s about 1 in 8 of all filers in the state.
But Bearman says that not everyone who qualifies actually claims the credit—usually because they are unaware that they are eligible.
The upper income limit for the EITC is $66,819. Not everyone who earns less than that will qualify—the number depends on your marital status and the number of dependents you have. But if you earn less than $66,819, you should definitely check to see if you qualify!
Berman noted that an easy way to check is to use the IRS Free File electronic service. That’s a guided program that will help you find all the deductions and credits for which you qualify. And, like the name says, it’s free.
You’ll need a computer and internet access to use IRS Free File. If you don’t have one at home, then stop by any branch of the library to use one of ours. You can also pick up paper forms at each branch, should you prefer to do things the old-fashioned way.
If you run into trouble, don’t hesitate to ask your local librarian. We’re not tax experts, but we can help you connect with people who are. (Volunteer Income Tax Assistance and Tax Counseling for the Elderly are both great programs!)
Or just stop by and we can commiserate about how annoying the whole process is.