As the old saying goes, the only sure things in life are death and taxes. This goes for everyone, even the Childfree community. If you’re a U.S. citizen, you are taxed on your worldwide earnings. This means that even if you’re a citizen who lives elsewhere, you still owe U.S. income taxes on every cent you make. Income taxes are the most expensive taxes Americans pay. And you have to file income taxes every year, even though the Internal Revenue Service (IRS) has all of your information anyway, by way of income reporting forms filed by those you work for (including W-2s and 1099s). Let’s take a look at how income taxes work for Childfree people.
How Do Deductions Work?
Deductions are adjustments to your earned income that allow you to lower your taxable income. So, to create a very simple example of how this works, if you have deductions equal to $20,000, and your adjusted gross income (AGI) was $60,000 for the year, you’ll only pay taxes on $40,000 of it.
Most taxpayers (nearly 90%) take the standard deduction, which is a set amount you can deduct based on your filing status (single, married filing jointly, or head of household). So many people take this deduction rather than itemizing (listing individual deductions) because it usually results in paying less in taxes. While it’s common to hear people talk about being able to deduct medical costs or interest paid on a mortgage loan, you are only eligible to claim deductions like these if you itemize.
The biggest difference between income taxes for Childfree people and parents is that there are no child-related deductions if you have no children. But this also means Childfree people don’t pay for the expenses of raising children, which are more costly than any tax deductions parents receive.
Marital Status Matters
Your marital status is key when figuring out how to file, and your taxes owed will vary based on it. Depending on the incomes involved, you may or may not save money by filing jointly as a married couple. It’s described as either “the marriage penalty” or “the marriage bonus,” and it’s worth consulting a tax professional or Certified Financial Planner to determine whether it’s worth filing jointly or separately for your situation.
Tax Brackets
Another factor to consider when it comes to income taxes is your tax bracket. The U.S. has a marginal tax rate, with different parts of your income being taxed at different rates. This could mean that money you make for working overtime, for example, is taxed at a different rate than your regular income.
The tax brackets range from 10% all the way up to 37%, and qualifying amounts vary based on your filing status (single, married filing separately, etc). To make matters even more confusing, at the end of the year, when you find out what you actually paid in taxes, it won’t actually match any of the brackets.
A Balancing Act
Ultimately, paying taxes is a balancing act. If you’re a W-2 employee (as opposed to being self-employed), your employer’s human resources department will have you fill out a W-4 form, which tells them how much to withhold from your pay for taxes. Come tax time, if you either owe a lot of money or receive a big refund, your withholding is off, and you can fill out a new W-4 form to adjust it. For example, if you owe $2,400 for tax year 2022, and get paid twice a month, you can request that HR withhold $100 extra from each paycheck, to compensate.
While many people are excited by the prospect of a tax refund, remember that this is money that the government held onto all year, and is now returning to you, without interest. Don’t think of a tax refund as “bonus free money.” It pays to make adjustments as necessary to avoid overpaying or underpaying your taxes (if you underpay, you’ll owe and be charged penalties and fees). Note that every time something changes for you, you’ll have to make these adjustments. This could be getting a new job, adding a side gig, becoming self-employed, getting married (or divorced), or moving states.
Keep track of changes and monitor how much you’re paying in taxes, and work with a CFP or tax professional to ensure that your math is correct and you’re doing all you can to maintain this income tax balancing act.