How can i determine my tax bracket

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Determining the Federal tax bracket can be a confusing endeavor without familiarity of basic tax law. The bracket in question refers to the marginal tax rate on applicable taxable income after adjustments, deductions and exemptions have been taken into account. Note that the difference between gross income and taxable income can be substantial, often moving at least one marginal bracket down. To determine federal tax brackets. you first need to add up taxable income subject to income tax, which is not necessarily every source of income one may have. Then, adjust for proper deductions, exemptions, allowable expenses and so on. Tax law is complex, especially for higher-income filers and those with multiple income streams. See the references below for detailed guidance on properly reporting income.

Gross Income

The first step is determining gross taxable income. This is taxable income from wages, salaries, commissions, business/investment income, tips and other sources. Some income is not subject to Federal income tax, therefore irrelevant to the tax bracket calculation. The IRS has a comprehensive guide called Publication 525 that specifies whether a given source of income qualifies as taxable or not taxable. From here on in, the focus will be on taxable income.

Adjusted Gross Income

Exemptions and Deductions

Amount of exemptions and deductions from AGI will depend on your specific financial situation, dependents and filing status. After exemptions and deductions are subtracted, you arrive at taxable income. At this point, it is time to consult the tax bracket charts. Once again, your marginal tax bracket will depend on taxable income as well as filing status. For tax year 2014, there were seven marginal brackets ranging from 10 percent to 39.6 percent rates on

taxable income.

Explanation and Example

It is very important to note that marginal brackets apply only to the portion of taxable income above the previous bracket maximum. Therefore, there won’t be a situation where you will have to pay more income tax if more income bumps you into a higher bracket. Consider the following example for someone filing “Single” and with taxable income of $89,300. They would land in the 25% marginal bracket. What this means for tax calculations is as follows:

•10 percent bracket tax: 0.1 x 9,075 = 907.5

•15 percent bracket tax: 0.15 x (36,900-9,075) = 4,173.75

•25 percent bracket tax: 0.25 x (89,300-36,900) = 13,100.00

•Total income tax = 907.5 + 4,173.75 + 13,100.00 = 18,181.25

•Remaining income = 89,300 – 18,181.25 = 71,118.75

Now imagine the same single filer had taxable income of 90,000 dollars. Since the cap for the 25 percent bracket is 89350 taxable income, the extra income now puts him into the marginal 28 percent bracket. Going through the income tax calculation again gives:

•10 percent bracket tax: 0.1 x 9,075 = 907.5

•15 percent bracket tax: 0.15 x (36,900-9,075) = 4,173.75

•25 percent bracket tax: 0.25 x (89,350 – 36900) = 13,112.50

•28 percent bracket tax = 0.28 x (90,000 – 89,350) = 182.00

•Total income tax = 907.5 + 4,173.75 + 13,112.50 + 182.00 = 18,375.75

You can see that even though the income boost raised the filer’s marginal bracket and total tax burden by $194.50, the remaining after-tax income increased by over 500 dollars.

Remember that bracket limits change every year, as do the amounts you can deduct and exempt from gross taxable income.


Category: Taxes

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