When you (or your tax preparer) has finished completing your 2025 IRS tax returns, you’ll probably either owe taxes or receive a refund.
But do you really know how this number came about?
Likewise, if you want to estimate taxes you might have to pay based on future income how do you do it?
A common misconception
Many people believe that a future tax bill is calculated based on the tax bracket their income pushes them into.
But that’s not actually true. In fact, taxable income is calculated at different federal tax bracket tiers.
A simplified hypothetical example
Craig, 45, is a single self-employed filer who earns $90,000 from gigs and contracts and $30,000 in taxable investment income from dividends and interest, for a total of $120,000 in gross income.
For purposes of this illustration, we assume that Craig doesn’t deduct business or other expenses or make estimated quarterly tax payments. We’re also not going to factor in the income-lowering impact of the standard deduction he’ll take when he completes his 2026 tax return next year.
At first glance, it looks like Craig’s entire gross income of $120,000 income would put him in the 24% tax bracket, requiring him to pay $28,800 in federal taxes.
If you thought this, you’re among the 52% of Americans who share this belief, according to the Tax Foundation.
Fortunately, it isn’t true. Different slices of taxable income are taxed at different tax rates.
So, using Craig’s example, his $120,000 of gross income would theoretically be taxed as follows:
- The first $12,400 would be taxed at 10% ($1,240).
- The next $37,999 would be taxed at 12% ($4,560)
- The next $55,299 would be taxed at 22% ($12,166)
- The remaining $14,299 would be taxed at 24% ($3,432)
Added together, his unadjusted IRS tax bill would be $21,398, which is a lot better than $28,800.
Don’t forget Social Security and Medicare taxes
Craig would still be on the hook to pay Social Security and Medicare taxes on his $90,000 of self-employed income.
This combined rate is 15.3% and applies to 92.35% of net self-employment income.
So, in Craig’s case, $83,115 of his $90,000 in earned income could be subject to Medicare and Social Security taxes. This could add $12,726 to his overall 2026 tax bill.
Moving from hypothetical to reality
In the real world, Craig would try to take as many business and other deductions as possible to reduce his taxable income.
And when he completed his 2026 returns in 2027, he would be able to apply the single-filer standard deduction of $16,100, which could lower his tax bill even more.
That’s why using gross income projections to estimate a full-year tax bill can result in overly high estimated tax payments.
Of course, these overpayments can always be refunded. But until they are, this money is sitting in IRS coffers where it's not earning any interest for the taxpayer.
That’s why, if you’re worried about getting socked with a huge 2026 tax bill in 2027, you might want to consult a professional tax preparer. They can help you make more accurate estimates of what your actual 2026 tax bill might be and come up with a plan for adjusting taxes withheld from your paycheck or making quarterly tax payments that sit in the “goldilocks zone”—neither too high or too low.
This material has been provided for general informational purposes only. Canby Financial Advisors does not offer tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax professional on any tax-related issues.
This article was authored by Martin Baker and Jeffrey Briskin. Martin is a financial advisor and Director of Financial Planning with Canby Financial Advisors, LLC, an Investment Adviser registered with the U.S. Securities & Exchange Commission. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or ability. Martin can be reached at 508.598.1082 or mbaker@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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