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Plan Well, Retire Well

Saving and investing your money
marginal tax rates color slide

What's Your Income Tax Bracket?

"I'm in the 15% tax bracket." Most taxpayers have heard those words – you may have even said them – but most people don't really know what it means. As a result, they believe comments like this:

"I got a teeny little raise. It put me in a higher tax bracket, and the increase in my income taxes was bigger than the raise." That's a myth. Here's why.

Take a look at the graphic above. See the boxes for 0% income tax, 10%, 15% etc.? Think of those as buckets. If you have too much income to fit in the first bucket, the additional income flows up to the next bucket. If that bucket fills up, the additional income flows up to the next one. But only the additional income gets taxed at the higher rate.

The dollar amounts along the left side are the points at which you move into the next tax bracket. These numbers are for married filing jointly for 2011. You can find the numbers for other filing statuses (single, head of household, etc.) in this chart.

Say you're married-filing-jointly and have $69,000 in taxable income.

  • You and your spouse earned $89,000, but you don't owe any income tax on the first $20,000 (an estimate) because of deductions and exemptions (based on the number of people covered by your tax return). That $20,000 is represented by the pink box (0%).
  • The next $17,000 is taxed at 10%, which is the lavender box.
  • The remaining $52,000 is taxed at 15%, which is the blue box. You've reached $69,000 of taxable income, so that bucket is completely full.
You are in the 15% marginal tax bracket. But that does not mean that you paid 15% taxes on all your income. You paid no tax on some of it, 10% on some, and 15% on the last $52,000.

What would happen if you had another $1000 of income? Since the 15% bucket is full, that $1000 would go into the 25% bucket. You would owe an additional $250 in taxes (25% of $1000). But only that $1000 is taxed at 25%; the rest of your income is still divided between 0%, 10%, and 15% brackets. It's a myth that this $1000 in additional income could cause so much additional tax that you lost money.

In the spring when you do you income taxes, picture these buckets to remind you of how your taxes are calculated.

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This was nice to know. I always through you were taxed the same amount on your entire income.
by Carolyn Brumfield on Sunday 12/25/2011