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A graduated income tax is the same thing as a progressive income tax system, where you pay a larger percentage of tax on your income as you earn more money. This system works differently from the flat tax system, in which everyone gets taxed at the same percentage of their income. Here’s a breakdown of […]

\n","featuredImage":{"id":"cG9zdDoyMzY0NDc=","databaseId":236447,"altText":"A taxpayer reviewing the federal income tax brackets to calculate how much he owes in the graduated income tax system.","date":"2024-02-02T22:41:14","fileSize":178007,"mimeType":"image/jpeg","modified":"2024-02-16T23:35:15","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/02/iStock-1411399368.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-2-16","readable":"February 16, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMzY=","databaseId":136,"userId":136,"avatar":{"url":"https://secure.gravatar.com/avatar/1d295f71ad5f26fc505155b8d7e5e2a0?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jeff White is an Editor for SmartAsset. He's an expert in a variety of personal finance topics, such as investing, banking and retirement, and also holds the Certified Educator in Personal Finance (CEPF®) designation. 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","

Understanding the Graduated or Progressive Income Tax

","

The graduated or progressive income tax system is a structure where the tax rate increases as the taxable amount increases. So, taxpayers who earn more will pay more taxes.

","

The goal of this system is to distribute the tax burden more equitably among taxpayers of varying income levels. It is guided by a social equity principal: Taxpayers with a higher ability to pay should contribute more towards the public treasury.

","

Pros and Cons of a Graduated Tax

","

Advocates of the graduated or progressive income tax system argue that it can promote social justice and support targeted wealth redistribution. While critics push back, saying that it is less economically efficient than a flat tax system, does not incentive productivity and can create the potential for greater tax avoidance or tax evasion. Here’s a roundup of the most common reasons in favor and against.

","

Advantages of a Graduated Income Tax

","

Advocates of a graduated income tax system highlight several potential benefits. First, supporters argue that it plays an important role in addressing income inequality.

","

By imposing a higher tax burden on individuals with higher incomes, the system aims to redistribute wealth and foster a more equitable distribution of resources within society. This approach aligns with the “ability to pay” principle, which asserts that those with greater financial means should contribute a larger percentage of their earnings to support essential government services. These typically include education, healthcare and social welfare programs.

","

Advocates argue that the graduated income tax system not only serves as a fair means to finance public goods, but also contributes to a more just and inclusive society. Additionally, proponents contend that this type of taxation could enhance economic stability by closing the gap on income inequality, and ultimately fostering a more balanced and sustainable economy.

When it comes to revenue generation, the graduated income tax has proven to be a robust tool. According to the U.S. Department of Treasury, the graduated income tax in the U.S. has generated 51% of total federal revenue as of February in fiscal year 2024. For a comparison, Social Security and Medicare taxes made up another 34% in the same period.

","

Advocates argue that this revenue is significantly more than what a flat tax system could raise. But this is primarily due to the higher tax rates applied to higher income brackets.

","

Disadvantages of a Graduated Income Tax

","

Critics of the graduated income tax system argue several drawbacks with this approach. One of the most significant is its complexity. The U.S. tax code, which spans over 2,600 pages, can make it difficult for taxpayers to understand their obligations and could potentially lead to errors in tax calculation or filing.

","

Opponents also argue that higher tax rates on higher incomes could drive high-earning taxpayers to look for ways to avoid taxes or evade them altogether. According to the IRS, tax evasion costs the U.S. government an estimated $458 billion annually.

Furthermore, economists like Thomas Sowell argue that progressive taxation can discourage investment and economic growth. The argument is that by imposing a higher tax burden on the wealthy, the system can reduce the incentive for entrepreneurship and risk-taking, which are key drivers of economic growth.

","

Graduated Tax vs. Flat Tax

","

","

The debate between a graduated tax system and a flat tax system focuses on how you tax income. In a graduated tax system, individuals are taxed at different rates based on their income levels. Advocates argue that this approach promotes income equality by placing a higher tax burden on higher earners, redistributing wealth and addressing social and economic disparities. Critics, however, believe that higher tax rates on the wealthy can stifle economic incentives and hinder job creation, which could potentially reduce economic growth.

","

Supporters of the flat tax system, on the other hand, argue that it imposes a uniform tax rate on all income levels, which treats everyone equally regardless of their earnings. They also point out that the flat tax focuses on simplicity, as it involves a single tax rate for all income brackets, and therfore makes it easier to understand and administer.

","

Additionally, they argue that a flat tax reduces compliance costs for both individuals and government agencies, which eliminates the need for complex tax planning and reduces administrative burdens.

","

Critics, however, argue that a flat tax disproportionately impacts lower-income individuals, as a single rate can be regressive, meaning that it takes a larger percentage of income from those with lower earnings.

","

One key distinction between both systems lies in their philosophical underpinnings. Graduated tax proponents often argue for the principle of ability to pay, asserting that individuals with higher incomes should contribute a larger share of their earnings to support government services. Flat tax advocates, conversely, highlight the idea of fairness through equality and assert that a uniform tax rate treats everyone impartially.

","

Tips for Graduated Income Tax Planning

","

When planning for taxes under a graduated income tax system, you need to consider your income level, potential deductions and credits, among other factors.

","

An individual taxpayer earning $75,000, for example, would fall into the 22% federal tax bracket for tax year 2024.

","

But, with strategic tax planning that takes advantage of deductions and credits, you could lower you taxable income and potentially fall into a lower bracket.

","

Bottom Line

","

","

Graduated income tax is a system where the tax rate increases as the taxable income rises. It is designed to grow economic revenue and distribute the tax obligation to those who can afford it. But while advocates argue that the graduated income tax distributes the tax burden more evenly among taxpayers, critics say that it can potentially disincentive taxpayers and undercut economic growth.

","

Tips for Tax Planning

","$4a","

Photo credit: ©iStock.com/Djordje Djeric, ©iStock.com/Thapana Onphalai, ©iStock.com/Jirapong Manustrong

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The IRS allows, and even encourages, charitable donations from tax-advantaged retirement accounts such as an IRA. Not only can this help you efficiently do some good, but you can take a solid tax deduction in the process. Here’s what you need to know. If you’re interested in making charitable donations, a financial advisor can help […]

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He runs his own independent financial planning firm called Belonging Wealth Management, where he helps clients plan out their retirement distributions, minimize taxes, build financial plans and more. He also holds a PhD in Finance from Hampton University, and spent years as an Assistant Professor of Finance at both Louisiana College and East Texas Baptist University.\r\n\r\nBrandon's areas of expertise include financial planning, retirement planning, taxes, Social Security, investing, annuities, general personal finance and more. His quotes have appeared in publications like Forbes, U.S. News and World Report, Business Insider and more.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Brandon","fullName":"Brandon Renfro, CFP®, RICP, EA","lastName":"Renfro, CFP®, RICP, EA","name":"Brandon Renfro, CFP®, RICP, EA","postCount":{"pageInfo":{"offsetPagination":{"total":95,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"brenfro","__typename":"User"},"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/ira-donation-to-charity","metaDesc":"Wanting to donate some of your IRA earnings to charity? 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","

If you’re interested in making charitable donations, a financial advisor can help you create a plan.

","

How Can You Donate Money From an IRA

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There are three main ways to donate retirement assets:

","

Make a direct transfer. The first, and easiest, is to simply give away your distributions. With this method, you cash out and withdraw assets as normal from your retirement account. Then, once you have the cash in hand, you can give it to the charity you prefer.

","

You would pay any applicable taxes on an IRA withdrawal, typically income taxes, and only can take a charitable giving deduction if you itemize your taxes.

","

Minimize taxes with a QCD. The second way of donating from an IRA is through a Qualified Charitable Distribution (QCD).

","

Here, you transfer assets or money directly from your retirement account to the charity in question. You never cash the assets out. The IRS allows you to treat this as a tax-free transfer, meaning that you do not have to apply the assets to your taxable income for the year. This is true even if you take the standard deduction, making a QCD not only a very tax-efficient form of charitable giving but also a great way to meet your required minimum distributions tax-free.

","

However there are a couple of limits on QCDs. First, in general, you cannot make a qualified charitable distribution with Roth IRA money. Second, you must also be at least 70 1/2 years old, and can only give up to $100,000/$200,000 single/jointly. Finally, the distribution must go to a qualified, tax-exempt charity that does not benefit you in any way.

","

If you can meet those requirements, this is an excellent way to donate money through your IRA.

","

Donate through estate planning. Finally, you can donate to charity through your estate planning.

","

Your estate can transfer an IRA to charities directly (by transferring the portfolio and its assets), indirectly (by cashing out the IRA and donating the money) or in trust (by establishing a trust that will distribute the assets). This can be a good way to give a significant sum if you have large retirement assets. It can also create a very significant tax advantage for your estate, which can in turn reduce any taxes that your heirs and/or estate would owe.

","

However be careful if you establish a trust, as this can complicate the tax advantages of your donation. If a qualified charity receives these assets, then your estate will get a tax deduction for the value that it gives. If a trust receives these assets, it may be more difficult to engineer that tax deduction.

","

Why Donate Money From an IRA

","

","

There are many reasons to donate money from your IRA. The chief two are altruism and taxes.

","

Altruistically, this is an excellent opportunity to give back. In your retirement you have the time and opportunity to start helping causes that you care about. If your portfolio has done well, you may also have the means. By donating from your IRA you can help support causes and institutions that matter to you, and through proper estate planning you can make that a part of your legacy.

","

Financially, donating money from your IRA can confer a significant tax benefit. For current retirees, under ordinary circumstances you must itemize your taxes in order to take a charitable giving deduction. With a QCD you can write off this donation even if you take the standard deduction. For estate planning purposes, charitable giving can be a way of managing the potential taxes associated with a very wealthy household. This deduction will reduce the taxable value of your estate, lowering the taxes that your estate and heirs must pay.

","

Bottom Line

","

","

Donating money through your IRA is a great way to give back and manage your taxes. While you can make these donations directly, by taking a distribution and giving away the cash, it’s often more efficient to do this through a qualified charitable distribution or long-term estate planning.

","

Charitable Giving Tips

","$62","

Photo credit: ©iStock.com/Andrii Lysenko, ©iStock.com/SolStock, ©iStock.com/kate_sept2004

"],"experts":{"name":"Jennifer Mansfield, CPA","topic":"Taxes","bio":"Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice.","imageUrl":"https://d31s10tn3clc14.cloudfront.net/imgs/jennifer-mansfield.png","email":"jmansfield@smartasset.com"},"link":"/taxes/ira-donation-to-charity","published":{"datetime":"2024-1-19","readable":"January 19, 2024"},"shareInfo":{"title":"How to Donate to Charity With Money From Your IRA","origin":"/taxes/ira-donation-to-charity"},"isNewsArticle":false},{"id":"cG9zdDoyMzUxMDU=","databaseId":235105,"postId":235105,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":783,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwOQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19509,"categoryId":19509,"link":"https://smartasset.com/tax-policy/articles","name":"Tax Policy","postCount":{"pageInfo":{"offsetPagination":{"total":86,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-policy","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$63","date":"2024-02-09T15:23:10","excerpt":"

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The earned income tax credit can provide substantial financial benefits for low-income working individuals and families, reducing taxes by hundreds or even thousands of dollars. Not just anyone can qualify for this tax break, however. EITC eligibility depends on your income, filing status, qualifying children and a number of other factors. You also have to be a U.S. citizen or be married to someone who is, for instance. Speak with a financial advisor to ensure that you qualify for every tax credit and deduction that you’ve earned.

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Earned Income Tax Credit Essentials

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The EITC offers eligible tax filers a refundable tax credit equal to a percentage of their total earnings up to the maximum allowed. If you qualify for the EITC, you may even get money back if no income tax was withheld from your paychecks. The EITC for 2024 ranges from a high of $7,830 (up from $7,430 in 2023) for families with at least three children down to a low of $632 (up from $600 in 2023) for taxpayers with no children.

","

Instituted in 1975 and made permanent in 1978, the EITC is intended to relieve poverty by incentivizing people to work so they have earned income to make them eligible. Working taxpayers receive EITC payments of about $57 billion annually, most of it going to parents.

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EITC Qualifying

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The dollar amount of the EITC slides up and down based on your total earnings and number of children. Benefits rise with each additional qualified child, up to three or more children ($4,213 for one, $6,960 for two and $7,830 for three or more). For eligible workers without children, maximum credits stand at $632. So parents see much higher credits. But the EITC encourages labor force participation for all qualifying lower-income taxpayers.

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Basic thresholds for EITC eligibility include having income below set limits tied to your filing status and number of claimed dependents, receiving investment or interest income below $11,600 for tax year 2024 (up from $11,000 in 2023), meeting citizenship and residency requirements, having a valid Social Security number, using a permitted filing status, and earning qualifying income through work.

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Additionally, you must reside in the United States for over half the year before you can qualify without kids. Exceptions exist for military personnel, some clergy members, surviving spouses and taxpayers with disabilities.

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Filing status matters too. You can only get the EITC if you are married filing separately when you meet certain conditions. To qualify as head of household, you must be unmarried (which can include legal separation) while paying for over half of the cost of keeping up the home where you and your qualifying dependents lived.

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And, if you’re married filing jointly, only one spouse needs to satisfy the rules regarding Social Security numbers and U.S. residency. In other words, non-citizens can qualify if married to a citizen or resident alien meeting those requirements.

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EITC Earnings Limits

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The rules for determining whether your earned income allows you to claim the EITC are somewhat more complicated. Eligible earned income varies depending on your tax filing status and number of children. The table below shows the 2024 income level where this tax credit gets phased out completely. For example, a single taxpayer with two children needs earned income below $55,768 to get any portion of the credit.

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Number of Children	Maximum EITC	Earnings Level Where EITC Get Fully Phased Out
0	$632	$18,591 singles; $25,511 joint return
1	$4,213	$49,084 singles; $56,004 joint
2	$6,960	$55,768 singles; $62,688 joint
3	$7,830	$59,899 singles; $66,819 joint

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These maximum earnings figures adjust annually. In 2023, the thresholds were slightly lower. The maximum possible EITC credit also rises each year to adjust for cost of living.

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Bottom Line

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In providing substantial financial assistance to working families, the earned income tax credit aims to lift millions out of poverty annually. In 2024, taxpayers earning under $66,819 may be eligible to claim the EITC, receiving up to $7,830 depending on income, number of children and filing status. Ensuring eligibility requires satisfying earned income limits, having Social Security numbers for everyone listed on the return all dependents and meeting rules regarding filing status, citizenship and household expenses.

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Tax Planning Tips

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Photo credit: ©iStock/tommaso79, ©iStock/Antonio_Diaz, ©iStock/ridvan_celik

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While you can’t avoid taxes, the IRS allows you to lower your tax burden by combining tax deductions and credits. Here are nine common tax-saving strategies to protect your wealth. A financial advisor can help optimize your investment portfolio to lower your taxes. Aim For Long-Term Capital Gains Long-term capital gains are profits from the […]

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While you can’t avoid taxes, the IRS allows you to lower your tax burden by combining tax deductions and credits. Here are nine common tax-saving strategies to protect your wealth.

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A financial advisor can help optimize your investment portfolio to lower your taxes.

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Aim For Long-Term Capital Gains

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Long-term capital gains are profits from the sale of assets held for more than one year. The tax rates on long-term capital gains are typically lower than those on short-term gains, providing an opportunity for tax efficiency. For example, a single filer making $95,000 in 2024 will pay a 15% long-term capital gains rate. On the other hand, their tax rate for standard income and short-term capital gains is 22%.

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To qualify for long-term capital gains treatment, you must hold an asset for more than one year before selling it. In addition, your income level determines your capital gains tax rates. As a result, it’s advisable to sell investments to realize gains in years when your overall income is lower, potentially resulting in a lower tax rate.

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Tax-loss harvesting can also help reduce your tax bill. Specifically, the U.S. tax code lets capital losses offset capital gains. This means you can deduct up to $3,000 of capital losses in excess of capital gains. So, if you sell assets for less than you bought them, the loss can lower your taxable income, and possibly lower your overall tax rate.

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Max Out Retirement Accounts

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Contributing pre-tax dollars to retirement accounts can reduce taxable income while building a nest egg for the future. Popular retirement accounts serving this purpose include 401(k)s and traditional IRAs.

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You can lower your taxable income every year through contributions to traditional retirement accounts. Specifically, you can contribute $7,000 to an IRA in 2024 or $8,000 if you’re over age 50. Likewise, you can contribute $23,000 to your 401(k) in 2024 or $30,500 if you’re over age 50.

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Taking advantage of one or both of these accounts can reduce your taxable income by tens of thousands of dollars. If your employer provides a 401(k) and you open an IRA, you could lower your taxable income by $30,000 if you’re under age 50.

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In addition, 401(k)s and IRAs offer tax-deferred growth. This way, you won’t have a tax burden every year for how much your accounts accumulate. Instead, you’ll pay income taxes when you withdraw the money.

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Invest in Municipal Bonds

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State and local governments issue municipal bonds to fund public projects, such as schools and infrastructure. Investors buy these bonds and then receive the principal with interest over time from the government. In essence, municipal bond investors give municipalities a loan and profit from the interest payments. Fortunately, most municipal bond interest is exempt from federal income taxes, giving you a federal tax-free income stream. The downside is that municipal bond interest rates may be lower than other investments.

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Fund a Health Savings Account

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Health Savings Accounts (HSAs) are tax-advantaged accounts linked to high-deductible health plans. If your employer offers a health insurance plan with a high deductible (or you have your own high-deductible plan), you can contribute to an HSA and draw from the account to pay for medical expenses.

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Your HSA contributions are made pre-tax, just like your 401(k). Your funds also grow on a tax-deferred basis, and your employer might even match a portion of your deposits. Withdrawals are tax-free if you use the funds to pay for medical care and other qualified expenses.

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Like IRA and 401(k) contributions, your HSA has an annual limit. Specifically, individuals can contribute $3,850, and families can contribute $7,750 in 2023. The numbers for 2024 are $4,150 for individuals and $8,300 for families.

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Claim Tax Credits

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Tax credits directly reduce your tax liability, providing a dollar-for-dollar reduction in the amount of taxes you owe. You may qualify for the following:

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Child Tax Credit: Families with qualifying children may be eligible for the Child Tax Credit. You’ll get up to a $2,000 credit for each dependent you have under age 17.
Child and Dependent Care Credit: If you pay for the care of a dependent adult or a child aged 13 or under, you can claim this credit. You can receive up to 20% to 35% of your care expenses, maxing out at $3,000 for one dependent and $6,000 for two or more.
Earned Income Tax Credit (EITC): The EITC lightens the tax burden of lower-income families. The more children you have, the higher the benefit. For example, qualifying families with three or more children in 2024 will receive $7,830, while qualifying families with one child will receive $4,213.

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Contribute to a 529 Plan

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A 529 plan is a tax-advantaged savings plan for future education costs. It’s like a 401(k) in that earnings are tax-deferred, but it pays for school instead of retirement. Contributions to a 529 plan are not tax-deductible on the federal level, but the earnings grow tax-free if used for qualified education expenses. Plus, contributions may be tax-deductible in some states.

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Donate to Charity

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Giving to a 501(c)(3) registered charity can also reduce your taxes. Both money and items count for this deduction. Specifically, you can deduct between 20% and 60% of your adjustable gross income in charitable donations, depending on your circumstances. Remember, itemizing your deductions is necessary to claim this tax advantage.

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Look for State and Local Tax Breaks

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Beyond federal taxes, explore tax breaks offered by your state and local governments. For example, more than 30 states offer pass-through entity tax benefits for small business owners. In addition, New York City residents receive an exemption for parking taxes, and New Jersey dwellers can deduct medical costs above 2% of their adjustable gross income.

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Some states also have a 0% income tax rate. If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, you won’t pay any state income taxes. Likewise, New Hampshire doesn’t tax earned income – but it does tax interest and dividends (though that is currently being phased out).

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Make Your Home Energy Efficient

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Investing in energy-efficient improvements for your home can result in tax credits and long-term cost savings. The Inflation Reduction Act of 2022 provides up to a $3,200 tax break through 2032 for heat pumps, energy-efficient windows and doors, and insulation improvements. Additionally, the Residential Clean Energy Credit provides a tax benefit equal to 30% of the cost of solar panels, wind and geothermal energy, and fuel cells/battery storage.

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Bottom Line

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Adopting strategic financial practices can significantly mitigate the impact of taxes on your income. Even if you take the standard deduction, you can qualify for most of the items listed above. Remember, saving for retirement provides one of the largest tax deductions available. Working with a tax professional can help ensure you’re optimizing your taxes and keeping as much of your hard-earned cash as possible.

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Tips for Protecting Income from Taxes

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