Monday, December 16, 2013

2014 Tax Brackets: What You Can Expect to Pay

for the writes: It's not unusual to see our tax brackets change every few years, and it's just about expected that income levels referenced in them will change from year to year. Thus, to get an idea of what you are likely to pay in taxes, check out the latest 2014 tax brackets:
Tax Rate
Single Filers
Married Filing Jointly
Head of Household
$405,751 and above
$457,601 and above
$432,201 and above
Data: IRS.
That's right -- there are seven 2014 tax brackets, up from six brackets in 2012. (Remember, too, that the 2014 tax brackets above represent the taxes you'll pay in 2015 on the income you earned in 2014.)
Marginal vs. effectiveIt's important to understand, as you survey the 2014 tax brackets above, that they can be easily misunderstood. You might assume, for example, that if you're single and have taxable income of $36,900, the top limit of the 15% bracket, you should avoid earning another dollar, as that would kick you into a higher tax bracket and cost you a whole lot more in taxes. That's not the way it works, because the tax rates above are marginal, not effective.
This is how you need to read that table of 2014 tax brackets: Imagine that you're single and you earn $36,901. Here's what happens: Your first $9,075 of income is taxed at 10% ($907.50). Your next bunch of income, from $9,076 to $36,900, is taxed at 15% ($4,173.75). Finally, your last dollar of income gets taxed at 25%, or $0.25. Add them together, and the 2014 tax brackets show you that your total tax bill will be $5,081.50.
Let's see what your effective tax rate is now. Divide $5,081.50 by your taxable income of $36,901 and you'll get 13.8%. That's the overall tax rate you paid. So the extra dollar that pushed you into the 25% bracket clearly did not have much of an effect.
Effective tax rates matter because they reflect what you actually pay in taxes. A marginal tax rate really just reflects how much you'll pay on a certain dollar, or your next dollar, of income. When Warren Buffett criticizes our tax structure, complaining that wealthy folks such as him pay less in taxes than people such as his assistant, he's referring to effective taxes. Many wealthy people collect much of their income in the form of dividends, for example, or long-termcapital gains, and these are generally taxed at lower rates.
As April 15 approaches, keep in mind the difference between marginal and effective tax rates and make smart tax decisions to keep your total bill as small as possible.


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