Wednesday, January 29, 2014

Do You Know Your Tax Bracket? Part 2, Married Filing Jointly

Last week I talked about tax brackets if you are filing as Single. This week I am going to go over the same thing for Married Filing Jointly.

Though it is 2014 now, you are about to file your 2013 taxes. Let's say that Alexis and John got married in 2013. Congratulations!  But Alexis' taxes are going to change a little now that she is no longer single. For our example, she still does not have any kids or a mortgage or rent to deduct.

It is not as simple as saying Alexis and John made a combined $120,000 so they are in the 25% tax bracket and their tax is $30,000. The IRS charges 10% of the first tax bracket, 15% of the second, 25% of the third etc but it is not 25% of their full $120,000 in earnings.

First there are your standard deductions just for being a person. It is $12,200 for a married couple and the personal exemption is $7,800 for the two of them. This brings their taxable income down from $120,000 to $100,000. $100,000 is in the bracket marked 25%. This might seem to mean that their tax would be 25% of that or $25,000.  That is not the case. Their taxes are $16,858.

Here are the tax brackets for Married, Filing Jointly:

Taxable income between 0 and $17,850 is charged based on 10%.
Taxable income between $17,851 and $72,500 is charged based on 15%.
Taxable income between $72,501and $146,400 is charged based on 25%.
Taxable income between $146,401 and $223,050 is charged based on 28%.

So Alexis and John are not charged based on 25% of their $120,000 income or even the $100,000 income after their deductions. Instead they are charged 10% of the first $17,850, 15% of the next $54,649 ($72,500 - $17,851) and 25% of the remaining $27,500 ($100,000 -$72,500).

That means $1,785.00 is charged for the first bracket and
                    $8197.35 is charged for the second bracket and
                    $6875.00 for the third bracket
that equals $16857.35  and the IRS rounds it up to $16,858.

If you are worried about your tax bracket, you can always look at extra deductions such as charitable contributions or putting more money into your retirement account. I recommend you consult a tax professional or use a reputable tax software.

The most important point to remember is that you are not charged a flat percentage of your total income so going up a tax bracket is not as bad as it sounds. You do not suddenly owe 28% of your whole income because you and your spouse made $146,401 and the end of the 25% bracket is $146,400. You only owe 28% on that last dollar.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.