Finding Your Tax Bracket
Finding your tax bracket is actually pretty easy. First you need to know your taxable income. Taxable income is your adjusted gross income (AGI) minus your standard or itemized deductions.
Let's put this into a working example we'll use throughout the section:
Karen's taxable income is $70,000.
Next you need to know your filing status:
- Head of household
- Married filing jointly or Qualifying widow(er)
- Married filing separately
Karen is single.
Next is the tax bracket. In the 2008 tax year, there are six tax brackets for each filing status. Since Karen is filing single, she would look at IRS Schedule X, which lists the tax rates for people who file single:
Karen's taxable income of $70,000 falls into the third tax bracket, so she has a tax rate of 25 percent.
At first glance, Karen thinks that her $70,000 will be taxed at 25 percent. Fortunately for her, that's not how a progressive tax rate works.
Karen's income will be taxed as it progresses through the tax brackets. So, her first $8,025 is taxed at a rate of 10 percent. Her income that falls in the second bracket will be taxed at 15 percent. Her "last dollar" lands in the third bracket. The portion of her income that falls into that third bracket ($37,450) will be taxed at 25 percent. Here are the calculations:
First Bracket: $8,025 x 0.10 = $802.50
Second Bracket: ($32,550 - $8,025) x 0.15 = $3,678.75
Third Bracket: ($70,000 taxable income - $32,550) x 0.25 = $9,362.50Total Tax: $802.50 + $3,678.75 + $9,362.50 = $13,843.75
Total Tax: $802.50 + $3,678.75 + $9,362.50 = $13,843.75
A Second Example: Let's say Raoul and Gretchen are married. Their combined taxable income is $200,000. They file a joint tax return, so they consult IRS Schedule Y-1:
Married filing jointly
- $0 to $16,050 -- 10 percent
- $16,050 to $65,100 -- 15 percent
- $65,100 to $131,450 -- 25 percent
- $131,450 to $200,300 -- 28 percent
- $200,300 to $357,700 -- 33 percent
- Over $357,700 -- 35 percent [source: IRS]
Raoul and Gretchen's taxable income of $201,000 falls into the fifth income tax bracket. Here are the calculations for their tax:
First Bracket: $16,050 x 0.10 = $1,605
Second Bracket: ($65,100 - $16,050) x 0.15 = $7,357.50
Third Bracket: ($131,450 - $65,100) x 0.25 = $16,587.50
Fourth Bracket: ($200,300 - $131,450) x 0.28 = $19,278
Fifth Bracket: ($201,000 taxable income - $200,300) x 0.33 = $231Total Tax: $1,605 + $7,357.50 +$16,587.50 + $19,278 + $231 = $45,059
Total Tax: $1,605 + $7,357.50 +$16,587.50 + $19,278 + $231 = $45,059
Raoul and Gretchen's taxable income is $700 over the fourth bracket's upper limit. That final $700 is taxed at 33 percent, or 5 percent higher than the next lowest rate. To stay out of the fifth bracket, they might consider looking for additional deductions to decrease their taxable income.
A $45,059 tax bill seems like quite a hit. But imagine being in a 94 percent tax bracket. It's happened to U.S. citizens -- in living memory. Read on to learn about the history of income tax brackets.