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

[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.