Tax Brackets
Posted on June 28, 2008
Filed Under Federal Income Tax, Key Concepts
The concept of tax brackets is shorthand for the grouping of various levels of taxable income according to tax rates. In a progressive tax system such as the U.S. federal income tax, the point at which an increase in taxable income results in a marginally higher tax rate marks the beginning of a new tax bracket.
For individuals filing a federal tax return in 2007, there are six tax brackets that group together tax rates and levels of taxable income according to filing status: the 10%, 15%, 25%, 28%, 33%, and the highest federal income tax bracket (pdf file), 35%. Individuals married filing jointly (including surviving spouses) are in the most favorable tax brackets, those married filing separately in the least favorable. An unmarried individual (or a married person living apart from his or her spouse for the last half of the tax year) who maintains a household for a child, parent, or other qualifying relative can file as head of household and land in a more favorable tax bracket than those condemned (or unwittingly choosing) to file as single or married filing separately.
For example, the 10% tax bracket includes taxable income up to $7,825 for single and married filing separately, $11,200 for head of household, and $15,650 for married filing jointly. The 15% tax bracket ranges from $7,825.01 to $31,850 for single and married filing separately, $11,200.01 to $42,650 for head of household, and $15,650.01 to $63,700 for married filing jointly. The 25% tax bracket ranges from $31,850.01 to $64,250 for married filing separately, $31,850.01 to $77,100 for single, $42,650.01 to $110,100 for head of household, and $63,700.01 to $128,500 for married filing jointly. Click on federal income tax brackets for details on the 28%, 33%, and 35% brackets. (Please note in the example that follows, I round beginning and ending amounts in tax brackets to the nearest dollar.)
For a taxpayer with enough income to fill some but not all of a bracket, the rate applicable to that bracket is the taxpayer’s marginal tax rate. Any taxable income in excess of $349,700 ($174,850 for married filing separately) is subject to the top marginal tax rate of 35%. The effective tax rate is simply tax due divided by taxable income, and the effective rate will be lower than the top or marginal rate.
As an example, a head of household filer with 2007 taxable income of, say, $97,500 from her salary as an accountant (and no capital gains or dividends, both of which are taxed according to different schedules than ordinary income), the first $11,200 will be taxed at a rate of 10% ($1,120 in taxes for this bracket), the next $31,450 ($42,650 - $11,200) at 15% ($4,717.50 in taxes for this bracket); the next and final increment of $54,850 ($97,500 - $42,650) represents this taxpayer’s top bracket and will be taxed at a marginal tax rate of 25% ($13,712.50 in taxes for this bracket). Her tentative total tax liability is $19,550. But for filers with 2007 taxable income under $100,000, the IRS requires the use of its 2007 Tax Table and, according to this table, our head of household filer will pay taxes of $19,556 because her income is at least $97,500 but less than $97,550. The 2007 Tax Table (pdf file) is graded in increments of $50, and the calculation takes the tax due for the high point in the increment, adds this to the tax due for the low point, and then divides by two, rounding to the nearest dollar. So, the tax due for our head of household filer reporting $97,500 in taxable income would be $19,562.50 (tax due for high point in increment, $97,550) plus $19,550 (tax due for low point in increment, $97,500, which also happens to be our filer’s unfortunate location in this interval) or $39,112.50. Next, we divide this subtotal by two and round to the nearest dollar and arrive at the 2007 Tax Table amount of $19,556. Her effective tax rate is 20.1% (tax due of $19,556 divided by taxable income of $97,500) and lower than her marginal tax rate of 25%.
Additional resources for those interested in tax brackets are listed below:
Many happy returns, Roger
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