Income tax bracket
Tax bracket is a method of grading taxable income. Taxable income is the total income less (a) tax-free interest on municipal bonds, (b) above-the-line adjustments, (c) itemized deductions/standard deduction, and (d) personal exemptions. Tax bracket is the range of income that attracts a uniform tax rate. Thus each bracket has an upper and a lower dollar limit or cut off point.
Tax bracket depends on the filing status of the person(s). In other words the brackets are different for (a) single individual, (b) married persons filing jointly with wife, (c) married persons filing separately, (d) head of household.
Tax brackets are decided by the Congress. The brackets have been changing from year to year.
Tax brackets are available in the relevant published tax rate schedules (TRS) . These schedules should not be confused with tax table. The latter is a table that gives the amount of tax one pays on a given amount of taxable income. The different TRSs are TRS X, TRS Y-1, TRS Y-2, and TRS Z.
Tax bracket is used to estimate the amount of tax a person pays. The higher ones income, the higher ones tax bracket, and the higher the tax one pays. If a person is in the 25% tax bracket and if he has $1,000 additional taxable income he has to pay additional tax of $250.
Knowing the tax bracket helps in making sensible investment decisions. For example, you may determine the amount of deductible contribution to charities so that on its strength you slide down from an upper to the immediately lower tax bracket.
The concept of tax brackets is beneficial to the tax payer. Take this hypothetical example: The upper cutoff point for 15% tax bracket is $1,000. From 1,001 onwards 20% bracket begins. If your taxable income is $1,000 you pay $150 as tax. If your income is $1,100, you do not pay 20% of $1,100, i.e., $220. Up to $1,000 you still pay $150 at 15% rate as previously, and for the extra $100 you pay at 20%, i.e. an extra of just $20; in all you pay $150 + $20 or $170. This $170 in relation to $1,100 works out to be 15.4% only. The foregoing can be rephrased thus: the tax for an amount x in the 20% bracket is $150 plus 20% of $(x-1,000).
Federal Tax Brackets
These are shown below:
Single Filing Status (Tax Rate Schedule X)
10% Arial on income between $0 and $7,825
15% on the income between $7,825 and $31,850; plus $782.50
25% on the income between $31,850 and $77,100; plus $4,386.25
28% on the income between $77,100 and $160,850; plus $15,698.75
33% on the income between $160,850 and $349,700; plus $39,148.75
35% on the income over $349,700; plus $101,469.25
Married Filing jointly or Qualifying Widow(er) Filing Status (Tax Rate Schedule Y-1 )
10% Arial on the income between $0 and $15,650
15% on the income between $15,650 and $63,700; plus $1,565.00
25% on the income between $63,700 and $128,500; plus $8,772.50
28% on the income between $128,500 and $195,850; plus $24,972.50
33% on the income between $195,850 and $349,700; plus $43,830.50
35% on the income over $349,700; plus $94,601.00
Married Filing Separately Filing Status (Tax Rate Schedule Y-2)
10% Arial on the income between $0 and $7,825
15% on the income between $7,825 and $31,850; plus $782.50
25% on the income between $31,850 and $64,250; plus $4,386.25
28% on the income between $64,250 and $97,925; plus $12,486.25
33% on the income between $97,925 and $174,850; plus $21,915.25
35% on the income over $174,850; plus $47,300.50
Head of Household Filing Status (Tax Rate Schedule Z)
10% Arial on the income between $0 and $11,200
15% on the income between $11,200 and $42,650; plus $1,120.00
25% on the income between $42,650 and $110,100; plus $5,837.50
28% on the income between $110,100 and $178,350; plus $22,700.00
33% on the income between $178,350 and $349,700; plus $41,810.00
35% on the income over $349,700; plus $98,355.50
Short-term capital gains are taxed as ordinary income rates as listed above. Long-term capital gains have lower rates corresponding to an individuals ordinary income tax rate, with special rates for a variety of capital goods.
Tax brackets in different states
Colorado, Illinois, Indiana, Massachusetts, Michigan, and Pennsylvania have a single flat rate of income tax.
In case of Connecticut there are two income brackets. Kansas, Minnesota, Mississippi and Oregon have three income brackets. Arkansas, California, Georgia, Kentucky and New Jersey have 6 income brackets. Iowa and Hawaii have 9 whereas New Hampshire has the maximum 10 brackets.
Following states do not levy state income tax :
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming In the case of Tennessee and New Hampshire state income tax is limited to dividends and interest income only. Rhode Island charges 25.0% of what a person pays as federal tax as state income tax.
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