Calculating Your Federal Income Tax - Mayberry Island



Calculating Your Federal Income Tax

U.S. Federal Income Tax Brackets 1993-2000

|Marginal tax rate |On income above |But not above… |

|15% |$0 |$26,250 |

|28% |$26,250 |$63,550 |

|31% |$63,550 |$132,600 |

|36% |$132,600 |$288,350 |

|39.6% |$288,350 + | |

If you earn $350,000/year, you are said to be in the 39.6% tax bracket. However, you do NOT owe 39.6% of $350,000 (.396 * $350,000 = $138,600).

The tax rates in the chart above are marginal rates – the rates you pay on the portion of your income that falls between the ranges listed. Some who earns $350,000 will have their income divided up into 5 stacks, each taxed at the corresponding rate.

1. 26,250 – 0 = 26,250 26,250 * .15 = $3,937.50

2. 63,550 – 26,250 = 37,300 37,300 * .28 = $10,444

3. 132,600 – 63,550 = 69,050 69,050 * .31 = $21,405.50

4. 288,350 – 132,600 = 155,750 155,750 * .36 = $56,070

5. 350,000 – 288,350 = 61,650 61,650 * .396 = $24,413.4

Adding up the taxes owed on each individual stacks gives you the total amount owed. $116,270.40

As you can see, this is less than paying 39.6% on the entire amount. They actually paid 33.22% [($116,270.40 / $350,000) x 100]. This is called the “effective tax rate”.

Deductions and credits can lower your tax obligation.

A tax deduction lowers your taxable income. For instance, if you contribute $10,000 to your 401(k), your taxable income becomes $340,000. You must re-do the last stack:

5. 340,000 – 288,350 = 51,650 51,650 * .396 = $20,453.40

The total amount of taxes owed has decreased by $3,960 to $112,310.40. ($24,413.4 – $20,453.40 = $3,960)

Now that you know this, you will do it right the first time (

A tax credit reduces your tax obligation. For instance, if you earn a $1,000 tax credit, you subtract this from the amount that you owe. $112,310.40 - $1,000 = $111,310.40

Common mistakes:

• If someone’s taxable income is $100,000, the 3rd bracket should look like:

o $100,000 – $63,550 = $36,450

o $36,450 x .31 = $11,299.50

o NOT $132,600 - $63,550! Don’t tax them on $$ they don’t earn.

• Don’t forget to multiply the amount of money they make in a bracket by the tax rate. For the example above, don’t stop at $36,450 and add that to the amount of taxes owed. $36,450 is the portion of their income that falls in that bracket.

• Once you have done their last bracket, don’t forget to add that amount to the taxes owed on all the brackets below. You must pay taxes on all of your income – not just the amount that falls in the last bracket.

Example #2: $100,000 income, $5,000 tax deduction, $250 tax credit

• $100,000 - $5,000 tax deduction = $95,000 in taxable income

• $95,000 is in the 3rd tax bracket (the 31% bracket)

• $95,000 - $63,550 = $31,450

• $31,450 x 0.31 = $9,749.50

• YOU ARE NOT DONE! You have to add this amount to the taxes owed on the brackets below the 3rd bracket. You must pay taxes on ALL of your income.

• $3,937.50 + $10,444 + $9,749.50 = $24,131

• YOU ARE NOT DONE! You must subtract their tax credit.

• $24,131 - $250 = $23,881

If you had taxed their entire income at 31%, they would have owed $31,000 ($100,000 x 0.31). Their actual taxes owed are less due to deductions, credits, and the fact that they only pay 31% on income over $63,550. They pay lowers percentages on the money that they earned below $63,550.

Effective tax rate= ($23,881 / $100,000) x 100 = 23.88%

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