Basics To Figuring Out Your Tax Bracket

tax bracket

When talking about taxes, the issue of tax bracket often comes up and it’s an important factor in deciding what tax options are best for your situation. The problem is that the average person probably doesn’t know which tax bracket they are in. Knowing your tax bracket can be useful when trying to make decisions that affect your taxable income each year. For example, if you work a second job, sell some stock, or do a ROTH IRA conversion, how much will you be taxed on these different scenarios? You will have no clue unless you have know what tax bracket your fall under.

The easiest way to figure out your tax rate is to grab last year’s tax return. Assuming you filed the standard Form 1040, look at line 43 of the form. The number you see on that line is your taxable income. Of course the big assumption here is that your tax situation is quite similar this year as to last year. However, if you expect a difference, you can add more income to the number, or subtract new deductions you expect, to arrive at an estimate of your taxable income for 2007.

Now that you have an idea about your taxable income, next you just need to look at the tax tables to see what rate you are at. Federal income taxes are graduated, meaning, you pay 10% tax on the first x amount you earn, and 15% on the next y amount you earn, etc. If your tax bracket is 25% it means the highest tax rate you are hit by is the 25% tax rate, but your entire income is not taxed at that rate.

So, let’s look at the tax tables. Assume you are single – then you would look at the first table – labeled “single”. If your taxable income was $77,100, you will see you are in the 25% tax bracket. However, if you made any more money, it would be subject to the 28% tax rate. This is because you are at the very upper end of the 25% tax bracket. Likewise, if your taxable income was $50,000, you would be well into the 25% tax bracket, but could easily make another $27,000 in taxable income before becoming subject to the higher 28% tax rate.

The highest tax bracket you are in is usually called your “marginal tax rate.” If your tax return is prepared professionally, or if you did it with tax software, often you will get a summary sheet that will show your marginal tax rate. This may be an easier way to figure out where you stand, though not as informative as you won’t know if you perhaps may be at the lower end or the higher end of the tax bracket.

There is just one other caveat to this. If you are single and rent without a lot of investments, your payroll will mirror more closely your taxable income than say someone with a large mortgage and four kids. For someone with a large mortgage and kids, they will get some significant write-offs and their taxable income can be vastly different from their paycheck. As with anything when it comes to taxes, it can quickly becomes very complicated. But hopefully this can shed a little more light on your own tax situation.

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10 Responses to Basics To Figuring Out Your Tax Bracket

  1. Dy says:

    First year out of college and I’m already in the 28% tax bracket. It only gets worse from here right?

  2. Teri says:

    Not necessarily, but I have to say you are making a SUPER wage for right out of college then. 😉

    But have some kids and get a mortgage, it ain’t so bad.

    Setting aside money for retirement can help too.

    & if you continue to make a lot of money, well that is the downside. It will definitely get worse…

  3. Amy F. says:

    Yes, if you’re already making that much money, it doesn’t seem like things are too bad!

    Teri, thanks for explaining this issue so simply and clearly.

  4. Andy says:

    I will be doing some work on the side that is un-related to my job. It will only be for a week. I understand that earning less that $2,000 for anything unrelated to your income is not taxable. Is this true, or what is the maximum amount you can make and not need to claim it on taxes?

  5. Joseph says:

    All income is taxable, no matter where it came from. Even if it is from illegal things.

  6. Andy says:

    No, not all is taxable. I guess it depends onhow income is defined. If I sell my shoes for money, then that is not taxable income. If I sell shoes for a living then it is. If my neighbor pays me to watch her cat, that is not taxable, if I watch cats for a living, then it is… So, somewhere there is a definition of what constitutes taxable income. And, I think it is a dollar figure. This job I am doing for only one week is not my source of income, and will pay right around $2,000. I remember something that income not related to your regular vocation which is less than $2,000 is not considered taxable income. If so,then I dont want to exceed that limit (too much of a hassle to do taxes).

  7. Paulito says:

    Andy, Joseph’s comment is accurate, in that all income must be reported:

    – if your shoes suddenly increased in value, and you sold them for a hefty profit, the IRS would come knocking
    – cat-sitting is reportable income (just like babysitting, income from hobbies, etc)

  8. Teri says:

    Oh I thought I already replied – but don’t see it. Sorry Andy. If you make $1, sorry to say, it is taxable. Paulito’s comment is right on. There is no thresshold here. If you have expenses relating to this work though, you can use the expenses to offset the income. Sorry to say though any side income is subject to self-employment tax too, for the most part.

  9. Andy says:

    ahh. thanks.

  10. Phil says:

    Yeah Dy, quit complaining and pay your fair share :) Haha, just razzing ya.

    I’m in the 25% bracket, but I come from a family that never made out of the 15% rate.

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