Tax Bracket Clarification

[chargirlgenius]

Seems a lot of people don’t understand how tax brackets work. I completely understand. I didn’t understand until I researched it about 6 months ago. I’m reposting something that I just posted elsewhere, thought it was worth pointing out:

Here’s how tax brackets work.

2008 tax brackets:

$0 - $15,650: 10% of the amount over $0
$15,651 - $63,700: $1,565 plus 15% of the amount over $15,650
$63,701 - $128,500: $8,772.50 plus 25% of the amount over $63,700
$128,501 - $195,850: $24,972.50 plus 28% of the amount over $128,500
$195,851 - $349,700: $43,830.50 plus 33% of the amount over $195,850
$349,701 - No limit: $94,601 plus 35% of the amount over $349,700

What does this mean? This means that if I make more than the next guy, I’m not being taxed more on the same amount of money. I’m only being taxed more on the amount that I make above and beyond him. If Joe the bus driver and his wife make $63,700, and my hubby and I make $100k, we’re paying the exact same tax rate on that $63,700. I’m only paying a higher percentage on the last $36,300 of my income. That’s not even taking into account the fact that I can likely hire a better accountant with that additional income.

I’ll admit, I haven’t delved into the details of the small business changes, but I’m not a small business owner. But if it works out the same as regular tax brackets, the person making $251k will still be taxed exactly the same percentage on the first $250k of that. Only the 1k over and above 250k will be taxed an additional 3%.

Google how tax brackets work for more info.

Comments

[greta-k.livejournal.com]

Thank you for the information. It has helped me to understand this issue.

[chargirlgenius.livejournal.com]

I think the complexity and confusion contributes to a lot of unnecessary anger.

[jljonsn.livejournal.com]

Joe is a Plumber, Dear.

[chargirlgenius.livejournal.com]

No, no. Joe the plumber is much richer than we are. :-D

[grieve-not.livejournal.com]

This is what we refer to at the IRS as a "progressive tax system".

Not 'progressive' in the political sense (of course).

[chargirlgenius.livejournal.com]

There are a lot of people who think that if you're in the 33% bracket, ALL of your income is taxed at 33%.

[grieve-not.livejournal.com]

this is true.

[greta-k.livejournal.com]

I thought so, but now I know that is not the case.

[glasseye.livejournal.com]

Can a person making $64k even afford to hire an accountant?

I often wonder if it works like this: the richer you are, the lower effective tax rate you pay, since you can afford to hire a really savvy accountant, versus doing your taxes yourself.

The number of loopholes and exceptions in the tax code is simply staggering, and I know there are people who are paid very very well to exploit those holes for the rich.

[chargirlgenius.livejournal.com]

Depends on the person. My ex and I hired an accountant to do our taxes when we were making less than that. He was a cheap accountant, but he saved us more than we paid him. A small business owner, at *any* level, can't afford to NOT have an accountant, unless they're well versed in tax law.

[spikywheel.livejournal.com]

Agreed. The first year we had the morgage I paid "Liberty Tax" to do my taxes for $60.

Well they screwed up royal.

Had my currant accountant fix them (approx $200) and he saved me $600 in taxes owed.

I (heart) my accountant...

[glasseye.livejournal.com]

Right, I'm curious how that trend continues to those with very large incomes.

My dad ran his own small business for many years, and he did his own taxes. :-)

[cbellfleur.livejournal.com]

These tax brackets are based on your "Taxable Income" which is your AGI (Adjusted Gross Income) minus either standard or itemized deductions and your exemptions. The tax that you actually owe is affected by any credits you are due (such as child tax credit) and by any self-employment tax you owe (among other things).

What you need to watch out for is the AMT (Alternative Minimum Tax). I think Congress just passed something recently to raise the threshold for this tax for the current tax year. The AMT was originally meant to catch those in the higher brackets who had a lot of deductions, but the threshold was never raised as incomes went up, so taxpayers with what is now not considered a very high income are being affected, mainly households with two wage-earners.

(I've worked for JH for the past four tax seasons.)

[thornbury.livejournal.com]

These tax brackets are based on your "Taxable Income" which is your AGI (Adjusted Gross Income) minus either standard or itemized deductions and your exemptions.

Exactly. There's a reason I itemize my deductions every year.

[chargirlgenius.livejournal.com]

Everybody who owns a house should itemize.

[chargirlgenius.livejournal.com]

Thanks!

That's the thing with this "Joe the Plumber". Not that his situation is anything but hypothetical, but if he's pulling down $250k AFTER all of his business deductions, I'm not feeling very sorry for him.

[soucyn.livejournal.com]

It would depend highly on how his business was structured. For example, the company I work for has been through two different structures. First we were just owned by my boss, and his taxes were tied to the company. Now we are an S Corp, which means the comapny and the person who Owens it are different legal entities, and thus file taxes seperately. If Joe the Plumber has a large sub contracting business and doesn't want to risk losing his house over what his dumb employees do, he should probably incorporate.