Federal Income Tax Brackets
Ever wonder what a ‘tax bracket’ is and which one you fall into? It’s not as difficult as you might think.
First off, you need to know two things: your filing status and your taxable income. The four filing statuses are: single or married filing separately, married filing jointly, qualifying widow, or head of household. Your taxable income is your income for the year minus your deductions and credits for the year. As you can see, your tax bracket will change if your status changes (for instance, if you get married), or if your income level changes (for instance, you got a promotion or you made a whole bunch of donations).
Now you can see which tax bracket you fall into. There are six of them, 10%, 15%, 25%, 28%, 33%, 35%, which correspond to 1-6 below. Let’s start with “single or married filling separately” as an example. First, find your income level in the six choices below. (The numbers in this article apply to 2006 taxes.)
1) $0-$7,825
2) $7,825-$31,850
3) $31,850-$77,100
4) $77,100-$160,850
5) $160,850-$349,700
6) $349,700 and up
Let’s say your taxable income is $7,825. You are in the 10% tax bracket, which means you will pay 10% tax, or $782.50. Likewise, if you make $5000, you would pay $5000 x 10% or $500 in taxes.
Now let’s move up the ladder. This is where it gets a little more complicated. Let’s say you make $20,000 a year in taxable income. You’re in the 15% tax bracket, but that doesn’t mean that you multiply your $20,000 by 15%. No. Instead, you pay 10% on the first $7,825 (which was the top amount for the 10% tax bracket). For all the money you make above $7825 - in this case, $12,175 - you pay 15%, or $1826.25. Add the $782.50 and the $1826.25 together, and your tax is $2608.75.
The third bracket, corresponding to #3 above, is the 25% bracket, and it works the same way. You still pay $782.50 (10%) on the first $7825 of taxable income, plus $3603.75 (15%) for the next $24,025 - the money between $7825 and $31,850. Then you figure out how much more you owe over $31,850 and pay 25% on that amount. So if your taxable income is $40,000, the amount over $31,850 is $8150. 25% of $8150 is $2037.50. Add $782.50 + $3603.75 + $2037.50 and you get your total tax, which is $6423.75.
I think you get the idea. The taxable income ranges are different for each of the filing statuses. Here are the other three - two, married filing jointly and qualified widow, use the same scale.
Married filing jointly or qualifying widow:
1) $0-$15,650
2) $15,650-$63,700
3) $63,700-$128,500
4) $128,500-195,850
5) $195,850-$349,700
6) $349,700 and up
Head of household:
1) $0-$11,200
2) $11,200-$42,650
3) $42,650-$110,100
4) $110,100-$178,350
5) $178,350-$349,700
6) $349,700 and up
What does all this mean? First off, it means you can now comfortably state what tax bracket you’re in.
But let’s look a little bit deeper. If you look at these brackets, it’s clear that people who make more money pay more taxes - that’s why it’s called a “progressive tax”, because the tax goes up as the income goes up. So why does it seem like the rich don’t really pay that much in taxes? Simple. You’ll recall I mentioned that the tax is based on your taxable income. You can reduce your taxable income through tax credits and deductions. The lower you can get your taxable income, the less you have to pay.
So if you make a lot of money but donate a large chunk of it, you lower your taxable income. Or if you pay a large amount of interest on your mortgages, which is also deductible, your taxable income also goes down. One big way to reduce your taxable income is by putting money into a pre-tax retirement fund, like a 401k plan. There are many other deductions, and we’ll talk about them in future weeks.
This works no matter what tax bracket you’re in. You might be married and making only $40,000 a year, putting you in the 15% tax bracket, but if you could make a few small changes, maybe you could get your taxable income down to $37,000 and save $450 in taxes.
Just remember: get your taxable income down and your taxes go down. Simple as that.
