Protect Against Collisions and More If you drive a car in the United States, liability insurance must cover it. This type of policy pays for medical and property damage resulting from a vehicular accident. You can also purchase comprehensive and collision insurance to cover other costs. These additional coverages help protect the value of your car should it be damaged. If you are calculating how much it will cost to buy a car, you need to take into consideration the cost of insurance as well. In this article, we’ll review the basics of car insurance and the best auto insurance companies in America, including costs, pros and cons. This is a brief introduction to automobile coverage. Liability Coverage When an accident occurs, liability insurance covers you, household members and authorized drivers for the costs associated with property damage and bodily injury. It covers the cost to repair or replace property damage that you caused. [youmaylike] You are also covered if you cause the bodily harm or death to someone else while you are driving the car. This includes medical expenses, loss of income and specified legal defense costs. Collision Insurance If you are involved in a collision, this type of insurance will help pay for repairing or replacing your vehicle. If the collision is your fault, the coverage may extend to other damaged vehicles involved in the accident. States do not mandate that you buy collision insurance, but your lender or car dealer will if you finance or lease the car. Policies offer a range of deductibles, which is how much you’ll have to pay for repairs before the insurance kicks in. Larger deductibles lower the policy premiums but expose you to more out-of-pocket expenses if a collision occurs. Comprehensive Insurance Comprehensive insurance covers damage to your car that occurs for reasons other than a collision, including theft, fire, vandalism, weather and natural disasters. This coverage is often required if you finance your automobile. You can add riders to this insurance to provide coverage of additional costs, including auto towing, glass repair, daily rental while your car is in the shop and emergency roadside service. As with collision insurance, you can set the deductible on your comprehensive insurance policy to cut your premium costs. Gap Insurance If your car is severely damaged in an accident or other incident, you might find that your comprehensive and collision damage won’t provide enough coverage to pay off the amount you owe on the vehicle. Many policies pay only the fair market value of a totaled car, which might be only 80% of the amount you owe. You can buy additional insurance to plug this gap and ensure you can pay off the car loan in full if the vehicle is destroyed or stolen. Normally, car leases require you to buy gap insurance. If you pay cash or pay off your loan, you can save money by avoiding or dropping gap insurance when no longer needed. Top Five Auto Insurers These five insurers all offer full coverage policies and many additional services. Amica Amica is a superstar among car insurers, winning accolades from Consumer Reports and J.D. Powers. It’s known for handling the claims process smoothly. The average annual cost for full coverage: is $1,360. Pros You can have your car repaired at any body shop, without restrictions. Offers a premium package which, for an additional cost, provides full glass coverage, rental coverage, good driving rewards and identity fraud monitoring. Superior financial stability rating from A.M. Best. Cons Missing some discounts, such as military, low-mileage and prepay discounts. Must speak on the phone to get a quote. Sparse website when it comes to customer education. State Farm State Farm is the country’s largest multi-line insurance company. It excels in customer service and regularly garners high marks from customers. The average annual cost for full coverage: is $1,337. Pros Superior financial stability rating from A.M. Best. Excellent online quote tool, getting customers a quote in as little as five minutes. Easy claim handling and top service from its more than 18,000 agents and its easy-to-use mobile app. Cons Doesn’t offer coverage for new car replacements or uninsured motorists. Missing prepayment and automatic payment discounts. The Hartford While only 11th in size, The Hartford is big when it comes to policy options. It offers rates based on your actual driving as well as full replacement of new cars when destroyed shortly after purchase. Average annual cost for full coverage: N/A. Pros Solid benefits, including superior roadside assistance and towing programs. High marks from customers for their purchase experiences. One of the few insurers with mechanical breakdown coverage for out-of-warranty repairs. Cons Mediocre service interaction according to J.D. Power surveys. Sparse online learning materials. Geico Geico is the second-largest U.S. car insurer. It is a favorite among tech-savvy geeks who appreciate the insurer’s mobile app and excellent online service. The average annual cost for full coverage: is $1,627. Pros Geico offers plenty of ways to save, such as multi-vehicle, driving history and vehicle safety equipment discounts. Special savings for active and retired military members and federal employees. Full-featured mobile app for getting quotes, buying insurance, managing your policy, submitting claims, summoning roadside assistance and making payments. Cons Human help may be in short supply, as just about everything is handled online. No gap insurance is offered. USAA No insurer matches USAA for service to military members. Unfortunately, it's only available to active service members, their families and retired veterans. Average annual cost for full coverage: $896. Pros Superior financial stability rating from A.M. Best. Top-ranked purchase experience score from J.D. Power. Cons Missing gap coverage. Doesn’t offer interior vehicle coverage or new car replacement coverage. Limited availability. The Right One for You Competition in the insurance industry helps drive down prices and prompts insurers to offer money-saving features. For example, your carrier might reward you for a safe driving record and for having a long-term relationship with the insurer. The right insurer for you is highly rated for service, offers the exact coverage you want and does so at an unbeatable price. You should always gather multiple quotes before selecting an insurer, and make sure you get credit for all applicable discounts.
What Are Tax Brackets?
A tax bracket is an income range and its associated tax rate. They tell you how much tax you must pay on your taxable income, i.e., your net income after deductions, exemptions and credits.
Each bracket specifies your marginal tax rate, which is the tax you pay on your last dollar of net taxable income. The more you make, the higher the bracket you occupy. That’s because the U.S. tax system is progressive, taxing those with high income more than those with low income. At least, that’s the way it works in theory. In practice, there are plenty of tax breaks and loopholes that the wealthiest can exploit to lower their taxes, if not their bracket.
Now, let’s take a deeper look at tax brackets, and how exactly they work.
Determining Your Tax Bracket
For 2019, there are seven U.S. tax brackets. Each bracket specifies a minimum and maximum threshold of net taxable income. Those bracket thresholds depend on your filing status: single, married filing separately, married filing jointly, or head of household.
Doing the math, that’s seven brackets times four filing statuses, which means there are 28 separate tax brackets. To determine yours, follow these steps:
- Complete your tax return. This will tell you your net taxable income.
- Pick a filing status.
- Find the tax bracket for your filing status in which your net taxable income falls.
For most folks, you accomplish all of this using IRS Form 1040 and its schedules. The instructions for the form show the year’s tax brackets. You must use the correct year’s instructions because the brackets are indexed for inflation. That is, they creep higher over time to compensate for the effects of inflation.
Example Tax Brackets
For 2019, the tax brackets for married couples filing jointly are:
Suppose you are married and your joint net taxable income in 2019 is $50,000, which falls into the 12% bracket. To figure your tax (dollar-rounded):
- Subtract the lower bracket threshold from your income. In this case, that’s ($50,000 - $19,051), or $30,949.
- Multiply the difference by 12%: (0.12 x $30,949), or $3,714.
- Add the product to the minimum tax for the bracket: ($1,905 + $3,714), or $5,619. That’s your federal income tax bill for the year.
The amount on the check you submit with your tax return depends on how much tax you’ve already paid in for the year due to withholding and estimated tax payments.
Some simple math will tell you your actual average tax rate. In this case, its ($5,619 / $50,000), or 11.2%, slightly below the nominal 12% rate for the bracket.
This bracket applies to ordinary income, such as salaries, wages, tips, commissions, and interest. Certain income, known as long-term capital gains, is subject to lower tax rates.
Long-Term Capital Gains Tax Brackets
Income is taxed at a lower rate if it is considered a long-term capital gain. This type of income tax applies to gains on the sale of investments you held for more than one year. It also applies to qualified dividends, which are most dividends from American corporations (as well as some foreign corporations).
Some dividends, such as those from real estate investment trusts, master limited partnerships, and unqualified corporations are treated as ordinary income. For a dividend to qualify, you must have owned the dividend-paying stock within a specified time window centered on the ex-dividend date of the dividend. That time window is 121 days for common stock and 181 days for preferred stock. The ex-dividend date is the first date on which the stock trades net of the current dividend.
The three long-term capital gains tax brackets are 0%, 15% and 20%.
For example, if you had earned $100,000 in long-term capital gains, you would owe 15%, or $15,000 in capital gains tax. Note that for gains on property held for a year or less, and for un-qualified dividends, the income is subject to the ordinary tax brackets.
How Tax Brackets Affect You
There are a few different ways that tax brackets can affect you. Let’s take a look:
- Tax brackets affect you in that they specify how much of your money you’ll be sending Uncle Sam for income taxes.
- Many states and municipalities charge income tax using their own tax brackets. Once again, these affect you by reducing your post-tax income.
- Tax brackets affect your behavior if they motivate you to act on lowering your bracket (which we’ll talk about next).
How to Change Your Tax Bracket
Let’s assume you want to lower your tax bill. If you can reduce your net taxable income enough, you might even be able to lower your tax bracket, which will reduce your marginal taxation rate. Here are some things you can do to lower your taxes and perhaps your tax bracket:
- Shelter your income from taxes. You do this by diverting part of your income into tax-deferred retirement accounts, such as IRAs and 401(k)s.
- Increase investments in tax-free municipal bonds, dividend-paying stocks, and long-term holdings (greater than one year).
- Work less. If you reduce your income, you reduce your taxes. If you are one of the fortunate few who doesn’t depend on every dollar earned, you may find it worthwhile to cut back on your work and enjoy more time for yourself.
- Be bracket savvy. Know how far you are from your next bracket. If you are close, consider turning down that next raise if it will throw you into the next bracket, because you might otherwise end up with less money after taxes.
- Review your filing status. Some people get married or divorced to reduce their taxes. Married folks should always check to see whether it’s cheaper to file jointly or separately.
- Increase your deductions. There are fewer deductions than before, but you can still deduct certain amounts of charitable contributions, property taxes, and some state taxes. Self-employed individuals and business owners qualify for many more deductions.
- Hire a clever CPA. If you are wealthy, you can afford the kind of advice that an experienced advisor can give you. This should involve legal advice, such as trust accounts, foundations, family offices, offshore accounts, tax shelters, and so forth.
Once you have a better understanding of what tax brackets are and how they work, you should be able to determine yours, and how to make decisions that will influence it in a positive way.