What Tax Bracket Am I In?

Q. I had a question about my W-4 form. I received my paycheck and it seems that I am paying almost 30% of taxes and since I am making only 30K a year, the taxes seem ridiculously high. I was wondering what I should fill out in the W-4 form that would lower my taxes. I am claiming myself as a dependant on my domestic partner. So please let me know what information I should fill out to make sure that I am taxed in the right bracket (which should only be 15-20%).

A. This is another very common question.  Your tax bracket or marginal rate is a fictional number arrived at by dividing total taxes paid by total income.  To correctly determine your tax bracket though, you need to look at what taxes go into that number to get an accurate picture.  First, Social Security and Medicare are part of the taxes that everyone pays until they reach $102,000 of taxable income (for 2008).  These taxes together account for 7.65% of your income.  The tax bracket that you speak about does not include these taxes normally.  Now we are left with around 22% for federal and state taxes.  You did not identify your state so there is no way to figure out this number.  However, for federal purposes, domestic partners can be classified as dependents only if you provide the majority of the support for them. Someone who is single making around $30,000 per year with one dependent would pay around $3600 of taxes.  This equates to about 12%.  Your state income tax will add to this. If you live in Maryland, Pennsylvania, New York, Ohio, Kentucky, Michigan or Indiana (plus a few others), you also are required to pay local taxes.  Other states have similar additional taxes.  When you add them all up, the combination of Federal, Social Security, Medicare, State and potentially local taxes, the number gets to be quite high.  This could be as much as 30% or more!

There is a second part to your question though.  The object is to match your payments (withholding) with your liability (calculated on the 1040 form).   If you find that every year you continue to get large federal and/or state tax refunds, you may wish to adjust your W-4 accordingly.  Claiming more allowances on the W-4 reduces federal withholding.  Claiming less allowances increases withholding.  Keep in mind that you will need to sign a statement before handing the form to your payroll rep that declares you are entitled to the number of allowances claimed.

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