Federal Tax Brackets

Federal tax brackets and tax rates are in the news lately, since tax season is here, but also because President Obama is calling for a 30% tax rate on millionaires.

That doesn’t mean that millionaires will be paying 30% of their entire income to the Federal Government.  Because of our tax bracket system, that figure refers only to the percentage paid on a portion of income.

Income is taxed at different rates for different portions of a salary.  The first eight to ten thousands dollars are taxed at 10%.  Then the rest, up to around $34,000 is taxed at a rate of 15%.  The the chunk of money from $33,951 up to $80,000 is taxed at 25%.  You get taxed at a higher rate for those bits of you salary that put you in higher federal tax brackets.

Now, those brackets for 2009 were $8,350, $33,950, and $80,000, marking the cutoffs for tax rate jumps.  Your 2012 Federal tax bracket will be the highest level (or bracket) your salary reaches: your top bracket is your tax bracket.

If you want to identify your 2012 Federal tax bracket, find the highest bracket into which your salary reaches, and there you are.  By the way, it’s also called your marginal tax rate.

When it comes to paying taxes, we all know it’s a complicated business.  There are adjustments and varying levels of tax rates, making it difficult to estimate just how much money you’ll be handing over to the federal government each year.

It would be easy if say you could just take the percentage listed for your federal tax bracket -set’s say it would be 15%- and apply it to your salary.  But did you know that you don’t actually pay the full percentage listed for your income level in the federal tax brackets?  That is, if you hear someone say “I’m in the 28% tax bracket”…don’t be fooled because that person isn’t paying 28% on the full salary.  He or she is only paying 28% on a portion of the salary.

For example, if you make $90,000 a year, your federal tax bracket is 28%… but if you look closely at the tax tables, you’ll notice that in the  federal tax brackets for 2011, it reads like this:

If taxable income is over $83,600 but not over $174,400, the tax is $17025 plus 28% of the excess over $83,600

That means you’re only paying 28% on $6,400 of your income.  The rest is taxed at a lower rate.

And you won’t even be paying federal taxes on the full $90,000.  You will have at least a few deductions, meaning you may fall into a lower federal tax bracket after the adjustments are made.  That could bring your taxable income down below the $83,600 mark, at which point your tax rate would be $4,750 plus 25% of the excess over $34,500.  Big difference.

2010

The Federal tax brackets for 2011 are different from 2010.  If you are in the lowest federal tax bracket you will see a dramatic increase in the amount of income taxes witheld from your paycheck.

In 2010, you could make up to $6050 during the year and not pay any income taxes at all.  The amount witheld would have been $0.  Now, the Federal tax brackets 2011 indicate you can only make up to $2100 to avoid paying income taxes.  So, for those making between $2100 and $6050 annually, it’s time to get used to the idea of paying income tax. Any single person making roughly $2100 to $6050 has now moved up a Federal tax bracket.  Congratulations!

There are other changes in Federal tax brackets 2011 that may affect you as well.  For those single people making  $67,700 to $84,450 you have also moved a few percentage points in the 2011 Federal Tax brackets.  Only for you, the move is downwards and therefore a good move.  In 2010 you paid $12,193 plus 27% of your income towards federal income tax.  For 2011, it’ll be $4750 plus 25%.

As you move up the Federal tax brackets and compare 2010 to 2011, there are slight changes but nothing as dramatic as the changes described above.  For example, If you made $84,450 to $87,700 both years, your tax changes from roughly $16,716 plus 30% in 2010 to $17,025 plus 28% in 2011.  That’s roughly $1500 less overall.

It’s hard to get a handle on your net worth or do a personal budget is you don’t know which of the federal tax brackets you fall into.  The amount of money the federal government takes out of your earnings can vary so widely it’s hardly worth using a general all-purpose percentage to estimate how much money you’ll have after taxes.  It can be anywhere from 10% to 35%, so yes it’s very important to know which of the federal tax brackets is yours.

The IRS will only take out 10% of your income for taxes if you make $8,500 or less per year.  That’s a pretty low cutoff amount for having that nice low percentage take out.  And that figure is for 2011.  It changes each year, so if you need to be precise, consult a federal tax brackets chart from the IRS.

The media lately is reporting that more and more people are either very poor or very rich…meaning that more and more people will fall into that lowest of federal tax brackets, 10%.  The next level up is anyone whose earnings fall between $8,501 and $34,500 (for 2011).  This is a very large segment of the population these recession-era days, and the rate is 15%.

Make more than $34,500 and you’re getting into the higher percentages where it really hurts.  It’s a quarter of your earnings taken out at this stage.  You’ll add another 3% if you make between $83,601 and $174,400, putting you into the middle of the range of  federal tax brackets.

A third of your salary gets taken by the IRS if you make $174,401 to $379,150.  The for those above that level they add another nice 2% for the highest of federal tax brackets, for a total of 35%.

Keep in mind that this is for single tax filers only.  Everything is different if you are married and you’re filing your taxes jointly (together on one form).

If you want a visual of this: