Thursday, January 23, 2014

Do You Know Your Tax Bracket? Part 1, Filing Single

It is coming up on W-2 time here in the USA. If you do not already have it, you will soon be getting that piece of paper that says how much you earned last year.  This leads to the inevitable filing of taxes.   Do you understand your tax bracket?

To make it simple, I am just going to look at Single status this week and Married Filing Jointly status next week.  I have put a link at the bottom to a article on tax brackets that lists several other categories as well if you would like to check it out.

Though it is 2014 now, you are about to file your 2013 taxes.  It is not as simple as saying you made $50,000 so you are in the 25% tax bracket and your tax is $12,500.  The IRS charges 10% of the first tax bracket, 15% of the second, 25% of the third etc but it is not 25% of your full $50,000 in earnings.

For example, lets make up a single woman named Alexis.  Alexis made $50,000 in 2013. Alexis has no kids or mortgage so she will be using the standard deduction. That means she does not have to count the first $6100 of her income.  Now she is down to $43,900.  The personal exemption is $3,900. Now she is down to being considered to have made $40,000 for 2013.  If she is in the 25% tax bracket that means she owes $10,000 right?  No, fortunately for Alexis, it does not. She only owes $5,929.

This is because the full amount of your income is not charged for the tax bracket you end in. Rather you are charged based on percentage for each tax bracket you go through to get to your final bracket.

Here are the tax brackets for this year:

Taxable income between 0 and $8925 is charged based on 10%.
Taxable income between $8926 and $36,250 is charged based on 15%.
Taxable income between $36, 251 and $87,850 is charged based on 25%.
Taxable income between $87,851 and $183,250 is charged based on 28%.

So Alexis is not charged based on 25% of her $50,000 income or even the $40,000 income after her deductions. Instead she is charged 10% of the first $8925. 15% of the next $27,324 ($36,250 - $8925) and 25% of the remaining $3751 ($40,000-$36,250).

That means $892.50 is charged for the first bracket and
                  $4098.75 for the second bracket and
                    $937.50 for the third bracket
that equals $5928.75 and the IRS rounds it up to $5929.

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 made $87,852 and the end of the 25% bracket is $87,851. You only owe 28% on that last dollar.

Next week I will go over the same charts based on Married Filing Jointly.

No comments:

Post a Comment