By CPA SAM
What Tax Bracket Am I In?
Q. How do I know what tax bracket I’m in? Where does that number come from?
A. This question probably ranks right up at the top of the list of most frequent questions. First of all, you probably meant to ask what is your marginal tax rate. Let me explain. Federal income tax is calculated on a graduated scale. If you look at the image to the left of this post, you will see several numbers under the heading “Tax Rate.” These are the percentages used in calculating your tax liability for a given amount of income. You can see that your income is taxed at different rates as the amount of taxable income increases. To say you are in the 25% bracket, only means that you make at least $67,900 of taxable income (for married people) and that a portion of your income is taxed at that rate. Truly, your marginal or average rate is lower than your bracket in most cases until income gets significantly over $372,950.
To determine your marginal rate, you need to look at last year’s tax return. Take your total tax liability number from line 61 of the 1040 and divide that by the number found in line 38 of the IRS Form 1040. This tells you the percentage of your income that is subject to federal tax. For a total marginal tax rate, simply add up all the taxes you pay and divide by the value in line 38 of the 1040.
I think you will be surprised to see how high that number actually is. Keep in mind that to get this exact, you should include property, sales, income and payroll taxes. Higher income individuals in New York and California for instance, could see their marginal rate rise above 50% Ouch!
