Friday, January 30, 2015

Understanding Income and Tax Brackets

Frank Addessi for The Simple Dollar writes: There is a good reason so many people seek professional help with preparing their income taxes. It’s because the tax is complicated, and at the heart of the convoluted system are tax brackets.

Federal income tax rates are divided into seven brackets that are based on income and range from 10% to 39.6%. If that was the whole story, understanding federal income taxes would be a breeze –but that’s not the whole story.

How Many Tax Rates Are There?

Let’s start with some scary numbers: Your income will be taxed at more than one of 28 possible tax rates. Now, take a deep breath as we start to unpack the whole thing.
There are seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. And there are four different filing statuses:
  • Single: This applies to unmarried people.
  • Married filing jointly: For married couples who are combining their income on a single tax return.
  • Married filing separately: Married couples who are each filing their own federal income tax return.
  • Head of household: This applies to individuals who are considered single for filing purposes and provide more than half the support for a child and are able to claim that child as an exemption.
There you have it, seven tax rates multiplied by four filing statues equals 28 possibilities. You’re not subject to all those possibilities, because you can only file your return using one status. However, it’s possible that you will be taxed at up to seven different rates, depending on your income.

Income Tax Name Games

Much of the confusion about taxes comes from the terms used to discuss them.
Tax brackets: These are most easily understood when you recognize them for what they are. Each tax bracket includes two amounts: a base amount and a ceiling amount. Any income that falls in between those two numbers means you are in that tax bracket.
RateSingleMarried JointlyMarried SeparateHead of Household
10%Up to $9,075Up to $18,150Up to $9,075Up to $12,950
15%$9,076 – $36,900$18,151 – $73,800$9,076 – $36,900$12,951 – $49,900
25%$36,901 – $89,350$73,801 – $148,850$36,901 – $74,425$49,901 – $127,550
28%$89,351 – $186,350$148,851 – $226,850$74,426 – $113,425$127,551 – $206,600
33%$186,351 – $405,100$226,851 – $405,100$113,426 – $202,550$206,601 – $405,100
35%$405,101 – $406,750$405,101 – $457,600$202,551 – $228,800$405,101 – $432,200
39.6%More than $406,750More than $457,600More than $228,800More than $432,200
Marginal tax rate: When you hear people say they’re in the 28% tax bracket, they are referring to their marginal tax rate. Your marginal tax is based on your “last dollar” of income. That means if you are single and earned $200,000, your marginal tax rate would be 33%.
SNIP, the article continues @ The Simple Dollar, click here to continue reading....


Post a Comment