Financial Education · Tax Strategy

Taxes

The IRS doesn't remind you about deductions. It doesn't flag credits you're eligible for. It collects what you report and cashes your check. Understanding how tax brackets actually work (not how most people think they work), which deductions exist, and how account types affect a lifetime tax bill is the difference between understanding a tax return and just paying it.

What it covers

Tax brackets are marginal — your entire income isn't taxed at the highest rate you hit, only the portion above each threshold. A W-2 comes from an employer and has taxes withheld throughout the year. A 1099 means you're responsible for your own taxes, including self-employment tax on top of income tax. Deductions reduce your taxable income: the standard deduction (an amount the IRS sets each year) vs. itemized deductions like mortgage interest and charitable contributions. Tax-advantaged accounts work differently from each other: a traditional 401(k) takes pre-tax contributions and is taxed on withdrawal, and a Roth IRA takes post-tax contributions and grows tax-free.

Why it matters

A single filer earning $75,000 in wages and taking the standard deduction pays an average federal income tax rate of about 11%, even though the top bracket they reach is 22%. That gap is marginal brackets at work. Every dollar contributed to a traditional 401(k) lowers taxable income in the year it goes in. Money in a Roth IRA can grow and come out tax-free in retirement when the rules are met. The rules are public. Most of the confusion comes from never having had them explained.

Key terms

Marginal Tax Rate

The tax rate applied to the next dollar you earn — not your entire income. In the 22% bracket, only the dollars above the point where that bracket starts are taxed at 22%. The dollars below are still taxed at the lower rates.

Standard Deduction

A fixed amount that reduces your taxable income without itemizing expenses. The IRS sets the amount each year. Most filers take this rather than itemizing because it's larger than their qualifying itemized deductions.

W-2

A tax form from your employer showing annual wages and taxes already withheld from your paychecks. If enough was withheld throughout the year, you get a refund when you file. If not enough, you owe the difference.

1099

A tax form for income paid without employer withholding, such as freelance work, gig income or investment dividends. On freelance and gig income you owe both the employee and employer portions of Social Security and Medicare tax (self-employment tax). Dividends are not subject to it.

Pre-Tax vs. Post-Tax

Pre-tax contributions (like a traditional 401k) reduce your taxable income today; you pay taxes on the money when you withdraw it. Post-tax contributions (like a Roth IRA) are taxed now, but all future growth and withdrawals are tax-free.

How GenHedge connects

Tax strategy connects directly to market activity. Capital gains taxes apply when you sell investments at a profit — and the rate depends on how long you held them. Dividend income is taxable. Selling, swapping or spending crypto is usually a taxable event; buying it with dollars is not. Market moves have tax consequences for anyone who sells, which is why the tax side sits next to the market side.