Posted: 4/2/2012 6:59:26 AM EDT
| I think that if you are in, say, the 25% tax bracket, all of your net income is taxed at 25%. That's the way TurboTax does it. But a tax-related website that gives a rough tax estimate seems to say that the net income that falls under the first bracket ($0-8,500) is taxed at that bracket, the net income that falls into the next bracket n($8,50-$34,500) is taxed at that bracket, and finally the rest of it is taxed at the 25%. That would make a hell of a lot more sense since it would not cause some people to simply stop working at the end of the year in order not to be bumped up to the next bracket, but I'm kind of doubtful that's how it does work. |
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My understanding is that it is graduated. That is, you are only taxed a higher percentage on the income that exceeds the threshold for that percentage.
Thus, the saying "I don't want to get bumped into a higher tax bracket" is really not much of a issue. ETA: An individual pays tax at a given bracket only for each dollar within that bracket's range. For example, a single taxpayer who earned $10,000 in 2009 would be taxed 10% of each dollar earned from the 1st dollar to the 8,350th dollar (10% × $8,350 = $835.00), then 15% of each dollar earned from the 8,351st dollar to the 10,000th dollar (15% × $1,650 = $247.50), for a total of $1,082.50. Notice this amount ($1,082.50) is lower than if the individual had been taxed at 15% on the full $10,000 (for a tax of $1,500). This is because the individual's marginal rate (the percentage tax on the last dollar earned, here 15%) has no effect on the income taxed at a lower bracket (here the first $8,350 of income taxed at 10%). This ensures that every rise in a person's pre-tax salary results in an increase of their after-tax salary. However, it does occur for some wage earners that their marginal tax rate goes down once they have reached the taxible limit for the FICA or social security tax which in 2012 was paid at a rate of 4.2% on earned incomes up to $110100, after which point the wage earners marginal tax rate decreases by 4.2% until the next income tax bracket is reached.
http://en.wikipedia.org/wiki/Income_tax_in_the_United_States |
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I think that if you are in, say, the 25% tax bracket, all of your net income is taxed at 25%. That's the way TurboTax does it. No, that isn't how Turbotax does it. The amount it's quoting me is for a full 25%. Using a calculator to figure out what it would be with the graduated system, I'd have about $3500 taken off. |
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But a tax-related website that gives a rough tax estimate seems to say that the net income that falls under the first bracket ($0-8,500) is taxed at that bracket, the net income that falls into the next bracket n($8,50-$34,500) is taxed at that bracket, and finally the rest of it is taxed at the 25%. This is correct. Tax brackets are marginal, which means that you only pay that tax rate for the portion of your income that falls into that bracket. Every additional dollar earned is taxed at the corresponding bracket according to your total income. Turbo Tax does not calculate it incorrectly. If you are getting different numbers on Turbo Tax vs your own calculations, you are doing something wrong. Do you really think that a major tax software used by millions of people would overlook such a simple detail? |
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I think that if you are in, say, the 25% tax bracket, all of your net income is taxed at 25%. That's the way TurboTax does it. But a tax-related website that gives a rough tax estimate seems to say that the net income that falls under the first bracket ($0-8,500) is taxed at that bracket, the net income that falls into the next bracket n($8,50-$34,500) is taxed at that bracket, and finally the rest of it is taxed at the 25%. That would make a hell of a lot more sense since it would not cause some people to simply stop working at the end of the year in order not to be bumped up to the next bracket, but I'm kind of doubtful that's how it does work. This is correct. It's called a Progressive tax system. People can be a little bit of a drama queen when they are in the higher tax braket and almost imply that when you hit 34,501 you all of the sudden get taxed on all 34,501 at 100%. Simply not true. The $1 is taxed at the higher bracket. People also toss around the term "write off" and that somehow a write off is a good thing. If you are in a 25% tax bracket and you have a $50,000 write off, well that sort of means you were dumb enough to loose $50,000 at one time. At 25%, that means you get a tax credit of 12,500 but you are still 37,500 lower than you would have been. |
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There are a few tax cliffs in the system - the graduated brackets are not one of them. Cliff is when a 1 dollar change causes a huge tax effect. Suppose you were at the very upper dollar of the 15% bracket, and made one dollar more - other than rounding due to tables - that extra dollar would only cost you .25 more tax. The Cliffs happen when 1 dollar more income disqualifies you for something w/o a phase out. Take the earned income credit. If you have $3100 of interest income you may be eligible for the credit. If you have $3101 - no credit. That $1 of interest income could cost you several thousands of dollars of tax credit. |
| I'm so confused at how the tax system works. I have all the info necessary and all I do is plug them in, but I don't know how the taxes are calculated. I guess the extra that's showing up after the graduated fed tax is coming from self-employment taxes, but at that rate (15%), it would have brought my taxes far above what it's calculating, so does the self-employment tax partially take over the regular federal taxes? |
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I'm so confused at how the tax system works. I have all the info necessary and all I do is plug them in, but I don't know how the taxes are calculated. I guess the extra that's showing up after the graduated fed tax is coming from self-employment taxes, but at that rate (15%), it would have brought my taxes far above what it's calculating, so does the self-employment tax partially take over the regular federal taxes? Half of you SE tax gets deducted from income. You pay SE in addition to your federal taxes. I highly recommend seeing a CPA/EA before you file your taxes. If you have SE tax, its more than likely worth the cost. |
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I'm so confused at how the tax system works. I have all the info necessary and all I do is plug them in, but I don't know how the taxes are calculated. I guess the extra that's showing up after the graduated fed tax is coming from self-employment taxes, but at that rate (15%), it would have brought my taxes far above what it's calculating, so does the self-employment tax partially take over the regular federal taxes? Half of you SE tax gets deducted from income. You pay SE in addition to your federal taxes. I highly recommend seeing a CPA/EA before you file your taxes. If you have SE tax, its more than likely worth the cost. To make sure i understand that, you mean that the net (fed taxable) income is reduced by half of the calculated SE tax? Or the total fed taxes are reduced by half of the SE tax? Ugh, I hate taxes. DAMNIT, everyone should have to cut a check for every cent of tax they owe. We'd have a goddamn tax revolution! Withheld taxes is just a ruse to make people not realize just how much they're losing. When you have to cut a check, it feels like a 2x4 across the head. |
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I'm so confused at how the tax system works. I have all the info necessary and all I do is plug them in, but I don't know how the taxes are calculated. I guess the extra that's showing up after the graduated fed tax is coming from self-employment taxes, but at that rate (15%), it would have brought my taxes far above what it's calculating, so does the self-employment tax partially take over the regular federal taxes? Half of you SE tax gets deducted from income. You pay SE in addition to your federal taxes. I highly recommend seeing a CPA/EA before you file your taxes. If you have SE tax, its more than likely worth the cost. To make sure i understand that, you mean that the net (fed taxable) income is reduced by half of the calculated SE tax? Or the total fed taxes are reduced by half of the SE tax? Ugh, I hate taxes. DAMNIT, everyone should have to cut a check for every cent of tax they owe. We'd have a goddamn tax revolution! Withheld taxes is just a ruse to make people not realize just how much they're losing. When you have to cut a check, it feels like a 2x4 across the head. One half of the SE tax is a "front page" deduction, meaning you deduct it while coming up with your adjusted gross income (AGI). You then use your AGI to figure taxable income. Simple version: Gross income: 100,000 1/2 SE: 7500 –––––––––––––––––––––––––––––––––––– AGI: 92500 You would then use the 92500 to figure your taxable income. |