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Taxes: How Much Do You Really Know?

Taxes: How Much Do You Really Know?

Handing your W2’s and 1099’s to your preparer might be the extent of your participation when it comes to income taxes. Having a general understanding of how taxes work can give you a new perspective on just how much of a share is owed to Uncle Sam.

Join Matt Robison and I this week as we discuss the basics of taxes. Get a crash course on:

  1. Income: Wages (W2 or other), interest income capital gains and qualified dividends 
  2. Adjusted Gross Income (AGI): Wages – above-the-line deductions

What are above-the-line deductions?: Contributions from HSA, contributions to traditional IRA, student loan interest (unless your income is too high), self-Employment costs (such as health insurance, retirement plan contributions, 50% of self-employment taxes), alimony, and certain education expenses 

3. Taxable Income = AGI – standard or itemized deductions

  • Standard deduction ($12,950 Single, $25,900 Married, Filing Jointly (MFJ)

Itemized Deductions:

  • State, Local, Other Taxes
  • Mortgage and Investment Interest Expense
  • Charitable Giving
  • Medical Expenses (above a limit)
  • More….

4. Total Tax = Taxes on Taxable Income

  • Taxes: Income tax, capital gains tax, AMT, NIIT, Medicare Surcharge, etc

5. Payment or Refund: Total Tax – Credits – Taxes Paid

  • Credits: Child Care Credit, Dependent Care Credit, Lifetime Learning Credit, etc
  • Taxes Paid: From your paycheck or estimated tax payments

Well, that’s as simple as I can make it in just 5 steps!

AGI (step 2) is very important because that number gives you your tax bracket. But did you know that we have marginal tax brackets? 

If you’re like a lot of people, you probably think marginal means that if you are MFJ and your AGI is $150,000, you owe 22% in Federal Income Taxes, ($33,000) right? WRONG! 

  • The “marginal” means that for the first $20,550, you owe 10% in taxes. [$2,055]
  • You then owe 12% on the next $63,000 (the next tax bracket) [$7,560]
  • Then, 22% on the next $66,450 (the bracket you are in) [$14,619]
  • That’s a total of: $2,055+$7,560+$14,619 = $24,234. Not $30,000 !
  • It means a difference of almost $6,000 in your favor

So now you have your tax bill. Using the same example as above, you owe $24,234 in federal taxes. This is your total tax. Now come the credits (hopefully!). Credits differ from deductions in one major way, they are dollar for dollar. Deductions reduce your total tax bill by reducing your Taxable Income. Credits, on the other hand, come straight off your total tax bill. Some credits include the Child Tax Credit, Child & Dependent Care Credit, or the Lifetime Learning or American Opportunity Credit.

Obviously credits are the way to go! Once you’ve deducted your credits, you then subtract any payments you’ve already made (withholdings or direct payments) and this will determine what you owe or are owed in the form of a refund. 

Learn more about Mike and my services at and connect at

Are you ready to create your ideal lifestyle? Let’s Connect.



Welcome to real financial planning broadcast on WKXL and available wherever you get your podcasts, I’m Matt Robison joined as always by Mike Morton of Morton financial advice. And the host of financial planning for entrepreneurs. Mike, how are you?


Hey, I’m good, man. I like what makes this real is the two of us are real. And we’re really here talking about it.


It really reminds me of probably the funniest animated movie of the last decade or two Megamind where the ridiculously sad, sad, tired parodied superhero was like, let’s get real for a second here. It’s gonna sound like a doofus when I say that. But it’s the name of the show. So I’m starting to get here’s a dumb question. Speaking of sounding like a doofus. Hey, Mike, how do taxes work.


All taxes? Why is this a question taxes, income, taxes,


Income taxes? All right, there’s only two certain things in life, death and taxes. So you think we would know a lot about both of these things? You were just saying to me before we got on the air, that a surprising number of people like smart people, like come to you and say, how do taxes work?


Well, here’s the thing, like, everyone understands, I pay taxes. So you have some income, the higher my income, the more that is taken from me, that kind of sucks. And I owe taxes, it just comes out of my paycheck. There’s some line items. And then at the end of the error, sometimes I owe a couple of thousand, or I have to pay a couple thousand. But what I do as part of my practice, of course, many of the conversations have a tax overlay, before adding to saving in certain accounts. If we’re buying and selling reinvesting in a portfolio rebalancing. If we’re saving for education, if we’re doing estate planning, these all have tax implications. Remember, it’s not how much you make. It’s how much you get to keep that matters. And so I started talking about taxes all the time, and people’s eyes start glazing over or they say, Wait, I don’t really know how tax system really works.


Now you’re right. You know what, let’s cancel this episode, let’s talk about the NFL. What do you think about the Patriots? I’m joking, I’d say that our mission in this show is in about 20, maybe a few minutes more, we want to explain this in a nutshell, you can sound really smart at cocktail parties.


That’s when you’re talking about taxes. What I want to do is I really want people to understand at a high level and trust me, it’s going to be pretty basic, okay. But I want you to have a good sense of how the tax system works for you personally, your federal payments that your federal taxes, and it’s pretty straightforward. And it’s just good to know, it’s really good to know to make smart decisions about bonuses and income and saving and all kinds of stuff.


Look for the same reason that a lot of people listen to Car Talk, but they don’t really want to know how to fix their engine. I want to know the basics, like what’s the spark plug? So here we go. Let’s start with income taxes, just 30,000 feet. Now, how does it work at the most basic level?


Alright, so we’re gonna talk about federal income taxes today. So how it works is this, you have your income and wages. Alright, this is all the money that you make, you might take some deductions above the line deductions to get to your adjusted gross income.


Sorry, I got to ask how above the line, but we’re gonna get into some of those details like above the rings, hang tight a second.


See, you’re already getting very complicated. All right.


I may take some deductions, I’ll bear as you go.


Right. So you have income and wages, then you have adjusted gross income, then you take your standard deduction to get to your taxable income. And then based on your taxable income is the total amount of tax that you owe.


Okay. All right. And that’s it. I start with all the money that’s coming in. Yep. And then there are some deductions. So you take something out of that, you end up with adjusted gross income. And then there are some more specific deductions. Oh, there’s a general deduction. There’s a standard deduction that I take.


Yeah, let me pause. You got to exactly right income, all your stuff coming in, take some deductions potentially, to get your adjusted gross income. And the reason is pause at AGI is because many things are based on AGI. Okay, so that’s why you have this adjusted gross income. It is usually many times it is equal to the entire pie, all the stuff that came in, okay, but that’s your AGI. And then from there, you take other deductions, either a standard deduction or itemized deduction, and that gets you to your taxable income, and then the amount of taxes you owe is based on your taxable income and then you have hopefully paid most of those taxes throughout the year already.


I see. So then you have the credits, the payments you’ve made, and then here’s how much tax you owe. That’s right. Okay, that makes sense. So maybe we can break that down. So where does the money come from?


Where does money come from? You and I just talk on a podcast. What’s gonna pay some money?


Just Gen Z for a second and say, yeah, that’s what the money is for. It is doing work, that’s right. Oh, man, we just lost the most important demographic of our listenership directly angry emails and social media tweets and posts to Mike board. All right. Yes. So the money has been working both income and wages.


So it’s from mostly for most people, it’s coming from your paychecks. If you’re a business owner, it’s coming from your revenue minus your expenses, it could be coming from Social Security payments, that’s income, Social Security payments could be coming from pensions, it could be coming from all kinds of stuff checks that are coming into your checking or savings accounts, we also are going to include here interest income. So remember that thing called interest which, up until about a minute ago, you were getting none of but now it’s 5%. So interest income counts, and then capital gains qualified dividends, if you have a brokerage account where you maybe had something that went up in value, and you sold it, that’s a gain, and qualified dividends from your investments, all lumped into this income and wages and that area got and all the money that’s coming in from various sources.

Matt 5:58

That actually makes a lot of sense to me. So I know we paused on Adjusted Gross Income a moment ago, and I pushed the point of what are these above the line deductions, maybe all joking aside, we could break them down a little bit. It does sound a little bit like a mafioso skimming off the top.

Mike 6:17

But here’s the thing about why they’re important to understand the difference what we say above the line and below the line. The above the line is income and wages, we just told you that, then we’re going to do above the line deductions to get to our AGI. And I told you AGI is used for a lot of limitations. In the IRS code, you can only take certain credits or deductions or other stuff based on your AGI. So if you have above the line deductions, they’re very valuable. They’re great, because it’s lowering your AGI, you subtract above the line deductions from your income to get AGI and you want your AGI to be as low as possible, because then you qualify for more good stuff. Okay, so that’s above the line deductions, the other way to think about above the line deductions is, every dollar you can save above the line is saved at your marginal tax rate, and we’re gonna talk about marginal tax rates, because it’s one of the things I really want you to know, a marginal tax rate is Matt, the next dollar you make. How much are you taxed? It is your tax bracket, your margin. So it could be 24% could be 35%. So in other words, you make $1. And you’re going to owe 24% or 24 cents. But for every above the line deduction, that’s exactly what you’re saving, you’re saving 24 cents on the dollar for every above the line deduction. So they’re really great if you qualify for above the line deductions.


I see and what kinds of examples are we talking about.


So examples are big contributions to retirement accounts traditional, like an island, like an IRA, or your 401K can be contributions to HSAs Health Savings Account, student loan interest, depending on your income and wages, self employment costs, and then there’s a bunch of other ones that might show up here alimony, some education expenses, and a bunch of other fairly minor ones. They don’t apply to too many people, but those would be the big ones that are above the line deductions.


Got it? All right. So you skim those off the top and the take home on that is as much as you can get. You’re getting massive value there. The lower your AGI the better off you are from a tax standpoint. But then you said there’s like another round of potential deductions a standard or itemized? What are those? Those are below the line?


That’s exactly right. So those are below the line deductions. Now the AGI is what we got to that’s really important for all kinds of stuff, you read this in any kind of, hey, if you qualify for X, Y, or Z, it’s all based on your AGI. Alright, so that’s why that’s important. But now we’re going to take another set of deductions before we can calculate the tax you owe. And these are below the line and their deductions. And typically, you either take a what’s called the standard deduction, or you try to itemize all the certain things that can qualify for deductions. And if your itemized deductions is more than the standard deduction, you can take your itemized deduction. So we’re kind of looking at one bucket or the other, I’m either going to take the standard, or I’m going to take the itemized, okay. And this is where the standard deduction for singles is about $13,000. This year for couples, it’s almost $26,000. So we’re going to take that off of your AGI to create your taxable income.


Got it. Okay, and then I guess the final steps in the process are, you’ve got your taxable income. Now, we’ve got to put some tax on it.


Yeah, that’s right. Exactly. You have a couple of different taxes that are put on that taxable income to create your total tax owed. All right. So you have ordinary income tax. That’s probably the majority. But if you have any capital gains, you have capital gains tax, and there could be some other taxes as well. Medicare surcharges, net investments, taxes, AMT taxes. So there’s different things that all these different schedules are looking at, hey do you owe and the reason why there’s so many different like schedules and different things is because people have tried to get around paying taxes. And so the code gets more and more complicated to try to close loopholes, but most of its income tax, and and you come up with this total tax. And once you have your total tax, that’s how much you are paying in taxes. All right. So that’s how much you’re paying in taxes. And hopefully, you’ve paid a lot of it already, by coming out of your paycheck or whatever it is, and as a total taxes that you owe. Are you ready to create your ideal lifestyle? Let’s discover what’s most important to you and design a plan to have more of that in your life. Go to meet Mike All one word, meet Mike


Got it. Okay, let’s circle back for a moment to the buzzword you hit before marginal tax rates and how they apply to tax brackets. I have a very vivid memory as a young economic student in college making a mistake with a professor and thinking that, let’s say there was a cut off between two tax brackets at I’ll just look at one that’s real $10,275. And let’s say the tax bracket, the 10% tax bracket applies to anything below 10,275. And then the next tax bracket up the 12% tax bracket applies to anything over that. And I thought okay, as soon as I earn 10,276, everything all 10,276 gets 12%. No, that’s not true. It’s the marginal tax rate. So maybe you can explain that better than I just did. But that’s a really important concept here.


It’s really important. And a lot of people kind of mess this up, I get this question as well. So it’s really important to understand this. There are tax brackets. Oh, yeah, we can all recognize that. Oh, yeah. Remember, there’s tax brackets. If you don’t, if you don’t make hardly any money, you know, you’re in a low 0% or 10% tax bracket. So there’s tax brackets, and they’re all have a certain amount of income. I’m going to talk about married filing jointly, okay, but single is what Matt just mentioned. Okay. So the first, if you make income up to $20,000, approximately your 10% tax bracket from $20,000 to $80,000, you’re in the 12% tax bracket. Okay, now, the way the brackets work, and then it’s 22%, up to about 180,000. So if you make $150,000 $150,000 falls in the 22% tax bracket. Alright, what does that mean for you? What it means is the first 20,000, married filing jointly is taxed at 10%. Okay, so that’s $2,000 bucks. So you’re going to owe $2,000, the next one from $20,000 to $80,000 is taxed at 12%. Okay, so you’re just gonna be $2,000 plus 12% of that $60,000. The next set of money from $80,000, up to your $150,000 is taxed at 22%. So you see that as you make more, it’s that next set is taxed at a higher rate. Okay? So that’s what the tax brackets mean. And this is why, if you have $150,000 of income, the next dollar you make you pay 22% of that to the federal taxes on that two cents on that dollar, that next dollar, you’re gonna make you got a bonus of $1, you’re gonna pay 22 cents or 22% on that dollar, okay? It doesn’t mean all the dollars, just that next one, and that’s called your marginal tax rate. Or you can think of it as I’m in this tax bracket, those are the same. And it’s really important because if you want to go out, if you’re going to get a bonus or a raise, that’s the amount you’re going to pay in federal taxes on any of that bonus or a raise, because that’s the marginal tax rate you’re in. But it’s not the total tax that you paid for all your income.


And the reason I wanted to punch him at that point, is because I come from more of a policy perspective, and that misunderstanding can lead people to think the wrong thing about our system. People have probably heard many times that we have a progressive tax system. That means that the more you make, the higher those marginal tax rates are, but it is not a cliff at each of those brackets. It’s not the case that you go over the cliff with that $1 And now everything before that gets the high bracket. You’re right, that’s not what it is. Because that’s what would make it seem like hey, why would I make more money, because I’m gonna get taxed so much more on everything I made, right, the amount of kind of sand in the gears that the breaking on your incentive to make more money is actually much, much more gradual than that. It just means that again, using your married levels, we go from $83,550, which is the top of the 12% bracket, and then that next dollar is 22%. Do I want to make that next dollar? Yes, because I’m still keeping 78 cents of that dollar. That seems like a pretty darn good deal to me, let’s cover just one more topic here that I think we have time for, but I think is super important here, which is the difference between tax deductions and tax credits. We just did a show about this, that people may hear it on the radio before after this where we were talking about student loan debt and the ability to write that off. And so there there are tax credits and tax deductions. What’s the difference? Which would you rather have?


Yeah, you definitely rather have credits than simple deductions. So I mentioned your total tax, okay. And that could be ordinary income tax, capital gains tax and other taxes. So that’s your total tax, then you get to take some credits and payments off of that. So the credits you get to take or like the Child Tax Credit, child and dependent care, credit, lifetime learning credits, American Opportunity credits, okay, these are credits that come straight off the taxes you owe. So if you owe $50,000 in taxes, and you have a credit for $5,000, you now owe $45,000 of taxes. Okay, $50,000 minus the $5,000 credit. So a credit is directly one for one coming off your taxes, you get every dollar of it. Now, remember, we said above the line deductions, you’re saving at that marginal tax rate. And that’s why again, marginal tax rates are so important, Matt, you made the point. Look, I still get to keep 78 cents on that dollar. But the flip side is if you’re in Ohio, say you’re in the 35% tax bracket. If you can find a way of reducing some of your income above the line deductions, you’re saving 35 cents on the dollar. And so that’s really good, too, right? So both ways are good. So that’s 35 cents on the dollar. That’s great. Credits are dollar for dollar, you’re saving 100%. So credits super valuable. We try to grab as many of those as you possibly can versus love


The way you said that actually is such a great way to remember it credits are dollar for dollar, you get $1 of credit, get $1 of savings, deductions are at that tax rate. And so hey, I’d like to save 35 cents off my tax bill. That’s money. I like money. We need money, but it’s just not as valuable as the full value the full dollar.


Yep. Yeah, that’s exactly right.


I think that we could go on forever. We could literally go on through the whole tax code, which is we could do a probably about a 36 hour show. Walking through this not even begin to scratch the surface. But is there one in just like 30 seconds, is there one thing that you really want people to remember?


In fact, you know, it’s interesting. We did a really good job, I think, Matt of covering the big words and pausing on things that matter, marginal tax rates, the credits and the deductions. And remember, it’s total income above the line, AGI standard or itemized deduction, then your total tax owed, then take off your credits. That’s what I want you to remember.


Perfect. All right. That’s everything you ever needed to know. Mike Morton, Morton financial advice. Thanks so much.


Thanks, Matt. Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial I’d love to get your feedback. If you have a comment or question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice. Opinions expressed as our of the date of recording. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.

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