SEPTEMBER 2ND, 2009
By CPA SAM
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!
NOVEMBER 26TH, 2008
By CPA SAM
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.
JUNE 25TH, 2008
By CPA SAM
Q. I received a payment on my last check for the year for my unused sick pay as required in my union contract. My employer took out 25% for federal taxes. My tax bracket is 11%. Are they ripping me off?
A. Whoa! There are several things we must clear up before going on. First of all, there is no such thing as a tax bracket like you quoted. 11% is your average tax rate and is a combination of withholding at several percentages on an increasing scale. Federal taxes (and withholding) are calculated using Read more »
