How to figure out your tax bracket, taxable income and tax rate

Tax time has come and gone in 2012 for most of us, but it’s never a bad time to learn more. This is particularly true if you earn a raise at work during the year, as you may be in a new tax bracket. Here’s some background on the various tax brackets that the IRS certainly knows. You should know it, too.

Tax bracket basics

The tax bracket in which you the taxpayer falls is based upon your taxable income, rather than annual salary. Your bracket is also highly dependent upon your filing status with the IRS, whether it is single, married, married filing jointly or head of household. The percentage attached to your specific tax bracket is called your marginal tax rate, which is not the same as your effective tax rate. The latter is

It is possible to lower one’s tax bracket via contributions to tax-deferred investments like IRAs and 401(k) programs, through charitable donations, or by selling stock at a loss. Stock must be sold at a loss, or it is possible that you will jump to a higher tax bracket. This is true even if your earned income doesn’t increase.

IRS tax bracketology

Bracketology – it’s not just for the NCAA Basketball Tournament. When you’re talking income levels associated with IRS tax rates, tax brackets are where it’s at. Here is the 2012 income level and percentage breakdown, according to IRS Publication 505, Tax Withholding and Estimated Tax –

Single status:

• 10 percent – under $8,700
• 15 percent – between $8,700 and $35,350
• 25 percent – between $35,350 and $86,650
• 28 percent – between $86,650 and $178,650
• 33 percent – between $178,650 and $388,350
• 35 percent – in excess of $388,350

Married, joint filing status:

• 10 percent – under $17,400
• 15 percent – between $17,400 and $70,700
• 25 percent – between $70,700 and $142,700
• 28 percent – between $142,700 and $217,450
• 33 percent – between $217,450 and $388,350
• 35 percent – in excess of $388,350

The rate you pay

In essence, what you pay in taxes is based upon a combination of tax rates. It isn’t simply your taxable income multiplied by your marginal tax rate. Only a portion of your income is taxed in this way. Your average tax rate is calculated based upon how much your taxable income is taxed at each level. WiseBread gives the example of a taxpayer being single, with a taxable income of $50,000. The tax calculation from Publication 505 is $4,867.50 plus 25 percent, multiplied by the difference between your taxable income ($50,000) and $35,350. The total amount is $8,530.

Take this total tax amount, and divide it by taxable income to calculate the average rate. The tax

Then take the total tax amount and divide by taxable income to calculate the average rate. In this case, the average tax rate is 17.06 percent, or $8,530 divided by $50,000. The decimal is converted into the percentage.

What the IRS uses to determine your taxable income

In total, the IRS looks at the following categories when determining your taxable income:

• Income
• Qualifying expenses/contributions
• Exemptions and deductions
• Capital gains and tax brackets

How tax brackets work

Sources

CNN

$weating the Big Stuff

WiseBread