Comments on: How do Federal Income Tax Brackets Work?

By: don goddard

don goddard — Sat, 08 Aug 2009 16:44:47 +0000

what is rhe standard deduction for born before jan. 2,1944 for the tax year 2009.last year it was 6,500.

By: Jason

Jason — Fri, 10 Jul 2009 18:48:55 +0000

Just received a raise that puts me in the next bracket. This simple explanation was great and put me at ease! Thanks!

By: walt reyer

walt reyer — Tue, 02 Jun 2009 11:10:58 +0000

I’m going to retire in Dec 2009. I will recieve severance
pay which will put me in the 33% tax bracket by $23,000. Would it make sense to work until Jan 1st and recieve the severance

My wife and I file jointly. She makes $25,000, I make $131,000 would we be better off to file seperatly?

Thanks!

By: Jim

Jim — Mon, 08 Dec 2008 22:36:20 +0000

They’ve been regularly raising the exemptions for AMT. Since they’re raising it there hasn’t been a problem. They should just pass a law to build an automatic increase in the exemption so that it will be fixed long term. From 2005 to 2008 they raised the exemption over 5% a year which is better than peoples rate of pay has gone up.

Most of the fear about AMT is what might happen *if* they didn’t raise the exemption.

Jim

By: Rick Barrett

Rick Barrett — Sat, 06 Dec 2008 17:09:21 +0000

It is interesting how frequent this misconception comes up. Assuming you are married and both work… there is a peak in the taxes at about $204K then as you earn more money. Then your tax rate actually goes down. This is due to Social security tax. Which is 6.2% up to $102,000 this year. And not only do you pay it your employer pays another 6.2%. So if you get a raise after making the SSI limit you get to keep that 6.2% AND BECAUSE YOUR EMPLOYER DOESN’T HAVE TO MATCH IT…you may actually be able to get all or part of that money, too. So you have opportunity at least in theory to get richer…. and pay less in taxes…. when viewed as actual tax rate… So all the income above $102K is an even better deal than the low rates on what you earn up to $102K.

By: Danielle

Danielle — Fri, 05 Dec 2008 17:57:27 +0000

I had lots of fun explaining this to my younger siblings a few years back (when they were in about 4th or 5th grade). I don’t know why more people don’t talk about stuff like this with their kids. My parents sure didn’t.

By: Tim

Tim — Fri, 05 Dec 2008 02:38:54 +0000

@nickel: I in fact got two stimulus checks, although the IRS decided they wanted one of them back…and since i earned enough, i was actually paying myself back, not you…so you still owe me money. and there is still no reason for me to aspire to earn more since you need to redistribute your wealth to me.

yes, i know about the AMT patch. we have patches for everything now.

By: nickel

nickel — Fri, 05 Dec 2008 00:04:46 +0000

Tim: We already missed out on Bush’s stimulus check, so why should this be any different? Oh, and if you got a stimulus check earlier this year, then we did give you some money.

Also, the only reason they need to patch the AMT every year is because they didn’t have the foresight to index it to inflation when they created it.

By: Tim

Tim — Thu, 04 Dec 2008 23:44:09 +0000

@Jim, the low % people paying AMT is due to the AMT relief Act which increased qualifying income levels.

By: Tim

Tim — Thu, 04 Dec 2008 23:37:14 +0000

@nickel: shame on you, we shouldn’t aspire to do any such thing. we’ll miss out on Obama’s tax credit then. we all know that being middle class is the american dream, so there shouldn’t be any aspiring to become wealthier. shame on you. shame on you for making more money and not giving me any of it either.

By: Jim

Jim — Thu, 04 Dec 2008 23:36:05 +0000

AMT isn’t nearly as bad as people seem to think. The only way you hit AMT is if you have certain large deductions and high income. Most people never come close to it.
ONly 3% of people paid AMT in 2005 (newest numbers I found). >90% of the people paying AMT make over $100k. The average tax bill for people paying AMT was $4350. The average tax bill for normal returns was over $10k. THe people paying AMT are paying much less effective tax (as a %) than the rest of us.

Jim

By: nickel

nickel — Thu, 04 Dec 2008 17:10:14 +0000

SanDance: Yes and no. The AMT is a funny thing. We got hit by it last year, and will likely face it again this year. As it turns out, we really have two tax systems, and you are required by law to pay whichever one results in higher taxes. Technically, we’re all subject to the AMT, but for most people the AMT ends up being lower than you ‘normal’ progressive tax bill, so you pay that one instead of the AMT. Anyway, the AMT is another topic entirely (and I’ve written about it in the past). I will tell you this, however… We paid the AMT in 2007 but we still came out well ahead of where we were in 2006 because we made a lot more money. As much as it sucks, the AMT is the sort of thing you should aspire to, because it means you’ll be generating much more income.

By: Mr. ToughMoneyLove

Mr. ToughMoneyLove — Thu, 04 Dec 2008 16:44:08 +0000

I like this topic. If you want to take an interesting ride through tax history, go back and look at the marginal rates that baby boomers like me were paying in the ’70’s and ’80’s before Reagan and then Clinton lowered them. Unfortunately, they may be heading up again.

By: SanDance

SanDance — Thu, 04 Dec 2008 16:41:45 +0000

“Moving to a higher tax bracket will never cause you to take home less money than if your income were lower.”

Until you hit that ceiling and the Alternative Minimum Tax (AMT) kicks in. Not a problem for me yet, but know others who never considered themselves ‘rich’ and were blindsided by this expense come tax time.

By: FlatGreg

FlatGreg — Thu, 04 Dec 2008 15:44:14 +0000

Don’t forget that those rates apply to your taxable income, not your gross income. Subtract all those deductions and your effective tax rate is even lower.

By: gm

gm — Thu, 04 Dec 2008 15:30:40 +0000

Good explanation. I have often argued with people who claim that they don’t want to just go over a certain figure in earnings because the net tax effect is a loss in income.

But in a progressive situation like you explained that will never happen. Of course it helps to maximize pre-tax deductions too.

By: j

Thu, 04 Dec 2008 11:51:36 +0000

Wow! A wonderfully simple explanation to an awkwardly complex tax system. j