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The Federal income tax is referred to as a “progressive tax.” Of course, it’s not progressive in the same way that a social movement could be said to be progressive. What the term means in this case is that, as your taxable income increases, so does the rate at which you are taxed.
People will often make statements such as “I’m in the 25% tax bracket.” For example, as you can see on the next page, a single person with a taxable income of $40,000 would be in the 25% tax bracket. People frequently misunderstand this to mean that all of the person’s income is taxed at a rate of 25%. In reality, the person’s overall tax rate will be much lower. Single (2008)
| | If taxable income is over: | But not over: | The tax is: | $0
| $8,025 | 10% of the amount over $0 | | $8,025 | $32,550 | $802.50 plus 15% of the amount over $8,025 | | $32,550 | $78,850 | $4,481.25 plus 25% of the amount over $32,550 | | $78,850 | $164,550 | $16,056.25 plus 28% of the amount over $78,850 | | $164,550 | $357,700 | $40,052.25 plus 33% of the amount over $164,550 | | $357,700 | no limit | $103,791.75 plus 35% of the amount over $357,700 |
EXAMPLE: Samantha’s 2008 taxable income is $40,000. This puts her in the 25% tax bracket. If that meant that all of her income was taxed at 25%, she would be paying $10,000 in income taxes. Instead, she’ll be paying much less. Samantha will actually end up paying $6,343.75 calculated as follows:
1) Her first $8,025 of taxable income is taxed at 10%. ($802.50 in tax)
2) From $8,025 to $32,550 she’s taxed at 15%. ($3,678.75 in tax)
3) From $32,550 to $40,000 Sam is taxed at 25%. ($1,862.50 in tax)
4) $802.5 + $3,678.75 + $1,862.50 = $6,343.75
Filing Status
Your tax bracket depends upon two things: your taxable income and your filing status. The options for filing status are:
1. Single
2. Married Filing Jointly
3. Married Filing Separately
4. Head of Household
5. Qualifying Widower with Dependent Child (This can apply to widows as well as widowers.)
Your filing status is based upon your marital and family situation on the last day of the tax year. If on the last day of the tax year, multiple filing statuses apply to you, you are allowed to choose between them. Single(see above tax bracket) For unmarried taxpayers.
Married Filing Jointly
For married couples who file a joint return that will include all of their combined income and deductions. Married Filing Jointly (2008) | | If taxable income is over: | But not over:
| The tax is:
| | $0 | $16,050 | 10% of the amount over $0 | | $16,050 | $65,100 | $1,605.00 plus 15% of the amount over $16,050
| | $65,100 | $131,450 | $8,962.50 plus 25% of the amount over $65,100 | | $131,450 | $200,300 | $25,550.00 plus 28% of the amount over $131,450 | | $200,300 | $357,700 | $44,828.00 plus 33% of the amount over $200,300 | $357,700
| no limit | $96,770.00 plus 35% of the amount over $357,700 |
Married Filing SeparatelyFor married couples who file separate returns. For the most part, this isn’t a beneficial thing to do. Generally, married couples who file separate returns are doing so because they are, in fact, separated (though still married), not because of any tax benefit to be gained. Married Filing Separately (2008)
| If taxable income is over:
| But not over: | The tax is:
| | $0 | $8,025 | 10% of the amount over $0 | | $8,025 | $32,550
| $802.50 plus 15% of the amount over $8,025 | | $32,550 | $65,725 | $4,481.25 plus 25% of the amount over $32,550 | $65,725
| $100,150 | $12,775.00 plus 28% of the amount over $65,725 | | $100,150 | $178,850
| $22,414.00 plus 33% of the amount over $100,150 | | $178,850 | no limit | $48,385.00 plus 35% of the amount over $178,850 |
Head of HouseholdUnmarried taxpayers who support one or more dependents may be able to file as Head of Household. To qualify to file as Head of Household, you must: - Be unmarried on the last day of the year,
- Pay more than half the cost of keeping up a home for the year, and
- Have had a “qualifying dependent” live with you for more than half of the year.
| | Head of Household (2008)
| | | If taxable income is over: | But not over: | The tax is:
| | $0 | $11,450 | 10% of the amount over $0 | | $11,450 | $43,650 | $1,145.00 plus 15% of the amount over $11,450 | | $43,650 | $112,650
| $5,975.00 plus 25% of the amount over $43,650
| | $112,650 | $182,400 | $23,225.00 plus 28% of the amount over $112,650 | | $182,400 | $357,700 | $42,755.00 plus 33% of the amount over $182,400 | | $357,700 | no limit | $100,604.00 plus 35% of the amount over $357,700 |
Qualifying Widower with Dependent ChildIf you are eligible to file as a Qualifying Widower with Dependent Child, you can use the married filing jointly tax brackets and the married filing jointly standard deduction rate (explained in Chapter 3). To be eligible to file as a qualifying widower in 2008, you must meet all of the following requirements: - You were eligible to file a joint return with your spouse in the year of his/her death.
- Your spouse died in 2008, 2007, or 2006 and you did not remarry before the end of 2008.
- You have a child or stepchild for whom you can claim an exemption.
- The child lived in your home all year.
- You paid more than half of the cost of keeping up the home over the course of the year.
What’s a “Marginal Tax Bracket?”Sometimes when reading about taxes, you’ll come across the term “marginal tax bracket.” While it sounds complicated, all the term is really referring to is the highest tax bracket that your taxable income reaches. The significance of knowing your marginal tax bracket is explained best with an example.
EXAMPLE: Lauren is single, and her taxable income is $40,000. Therefore, her marginal tax bracket is 25%. This allows her to determine the real, after-tax value of an increase in her income. Her employer offers her an $8,000 raise in exchange for accepting an additional responsibility at work. Because Lauren’s marginal tax rate is 25%, she knows she’ll only get to keep 75% of the extra income. The after-tax value of the proposed raise is only $6,000.
Simple Summary- The Federal income tax is a progressive tax, meaning that the more you earn, the higher your tax rate.
- In total, a person’s income will be taxed at a lower rate than would seem to be indicated by the statement, “I’m in the __% tax bracket.”
- Your tax rate depends not just upon your taxable income, but also upon your filing status (single, married filing jointly, etc.).
- Your marginal tax bracket is simply the highest tax bracket that applies to you.
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