A Question From a Reader: How to Calculate Taxes

One of my old tax posts received a comment about how taxes are calculated using tax brackets so here goes:

First off, here’s a look at the 2007 tax brackets:

 Married Filing Jointly TAXRATE 2007 TAXABLEINCOME 2006 TAXABLEINCOME 10% Not over \$15,650 Not over \$15,100 15 15,650 – 63,700 15,100 – 61,300 25 63,700 – 128,500 61,300 – 123,700 28 128,500 – 195,850 123,700 – 188,450 33 195,850 – 349,700 188,450 – 336,550 35 Over \$349,700 Over \$336,550

First a little clarification. There seems to be a misunderstanding about tax brackets. When you read something that says someone is in the 28% tax bracket, it doesn’t mean they pay taxes of 28% on all their income. Instead, they pay a 10% tax on the first \$15,650 of their income, 15% tax on the next \$48,050, 25% tax on the next \$64,800. Only the income between \$128,501 and \$195,850 is actually taxed at 28%.

Now that we have that straight, let’s look at how taxes are calculated for someone who has a taxable income of \$349,700. We’ll have to assume that they aren’t subject to the AMT. Here’s how the math works out:

So, although this family is in the 35% tax bracket, their actual tax (again, assuming they aren’t subject to the AMT) is 27.05%. So, when the government widens the lower income tax brackets, it also helps those in the higher brackets.

For more on taxes, check out these posts:

Tax Stuff You Need to Keep In Your Records

50 of the Most Easily Overlooked Tax Deductions

2007 Federal Income Tax Brackets

401(k) Contribution Limits for 2007

What is Modified Adjusted Gross Income?

How to Calculate Tax-Equivalent Yield

Social Security Wage Base for 2007

It’s Getting Tougher to Make Money From Blogging

Lately there’s been a lot of chatter about Google lowering the boom on websites that sell text links. The penalty for selling text links could be a drop in the seller’s page rank (AFM is currently a PR5), which will impact the amount of traffic sent to the site via Google search. I get quite a bit of traffic from Google search – way more than I get from any other search engine. If the rumors are true (who knows if they are really true or not since Google won’t come right out and say) and I continue to sell text links, Google could theoretically punish AFM. In other words, my hands are tied and Google knows this.

Bottom line for AFM: I’m discontinuing text links for the time being. I have a few that are long-term contracts that I’ll let expire. The rest will be gone soon.

I read an interesting editorial by Laura Tyson in today’s Wall Street Journal about different ways to get Americans to start saving for retirement. The article mentioned the automatic 401(k) and something new called an automatic IRA, which would work similar to the auto 401(k) but for small companies. From the editorial:

To help the 75 million workers who don’t have access to an employer-sponsored 401(k), a bipartisan group of legislators — led by Sens.Jeff Bingaman (D., N.M.) and Gordon Smith (R., Ore.) and Reps. Phil English (R., Pa.) and Richard Neal (D., Mass.), have introduced a bill to create an Automatic IRA. This would be a standard IRA account, but funded through payroll deductions. It would also offer automatic 401(k)-like features such as an automatic investment choice, level of contribution and enrollment. Under the proposal, employers with 10 or more employees that have been in business for at least two years would enable employees to save their own money in an IRA by using the employer’s payroll system.

The Automatic IRA allows employers to facilitate employee saving without having to sponsor a formal, ERISA-regulated retirement plan, or make matching contributions. Firms would receive a temporary tax credit to offset any initial administrative costs; either the employer or the employee could choose which financial institution would hold the money. The Retirement Security Project estimates that the Automatic IRA could increase IRA participation rates significantly from the current rate of one in 10, and could ultimately increase net national savings by nearly \$8 billion annually.

I like this idea a lot. Especially when you consider the fact that there are lots of small employers who may not have the resources to set up a 401(k). Of course all this assumes that the employees can afford to save in the first place.

Do You Have a Financial Confidant?

OneFrugalGirl asks: Do you have a financial confidant? In her post, One Frugal Girls wondered why one of her friends was comfortable telling her the price of a home she was thinking about buying while another friend wouldn’t divulge the information. It’s an interesting question. Could modesty play a part? Maybe her friend felt that talking about the price might come across as bragging. Or, maybe the price was low and she didn’t want to give the impression that she was strapped? Who knows.

I’m pretty open about our finances with my dad only because we talk fairly often. I don’t blog about the miute details of our finances here on this blog because I’m not anonymous. I’ll just tell you that we are in the middle of the middle class.

Other than my dad (and of course my wife), I don’t talk specifics about our finances.

Rather than comment here, why don’t you head over to OneFrugalGirl and comment there (I don’t want to steal her topic).

Cable vs. Direct TV – Your Thoughts

There’s one bad thing about HD TVs (or at least the one I have): while HD channels look awesome, MOST regular channels look like crap. This is disappointing since Time Warner Cable only offers 12 HD channels (and one of those is off the air most of the time).

Yesterday I was looking through the paper and noticed a flyer for Direct TV. They offer 71 HD channels! I could have watched my beloved Red Sox on HD! That said, I do have reservations about satellite TV. I have heard that thunderstorms can knock out service, which is the time when I really want to watch TV! Of course Direct TV says that’s not so but I would expect them to say that since they sell satellite systems. This leads me to the following questions:

Do you have Direct TV? If so, what are the positives and negatives to the service?

Oh, and I’m not sure if this still matters or not, but my family only has one TV so we would only need one box. I’m definitely considering making the switch but not before I get some more information.

Kitchen Remodel Update – More Pictures

The kitchen/family room renovation is basically complete. We’re still waiting on our GE Café Duel-Fuel range, which should be in by next week (at least that’s what they tell me). I bet you guys are getting tired of all these kitchen posts. I’m sorry about that but this has been a significant part of my life for the last few weeks.

Anyway, here are some new pictures of the kitchen and family room:

Notice the gaping hole where the range should be.

The countertop isn’t as black as I thought it would be. I like it but it does look different that what I imagined. Of course it is hard to imagine an entire countertop from a 2 X 2 inch sample piece.

I’m VERY happy with the bookcases and TV. The HD channels look awesome on the TV. I just wish there was more of them.

Both my wife and I are very pleased with the outcome. I would highly recommend our contractor! The entire project took about 6 weeks, which is pretty good in my opinion.

JLP’s Weekly Roundup (Week of October 22, 2007)

Nickel has some words of wisdom from Alan Greenspan. – I bet Bernake wishes Greenspan would keep quiet – especially when he talks about the state of the economy.

FMF highlights some mortgage advice from the Mole. – Normally the Mole is on the money. However, I HATE this advice! I like the mole and have highlighted several of his columns here on AFM but it doesn’t ALWAYS make sense to pay off your mortgage as quickly as possible. Longtime readers of this blog already know how I feel about this issue.

JD takes a look at how much CFLs really cost. – I’m still not a big fan of CFLs (compact florescent lightbulbs) but I’m still buying them.

MBH with 8 ways to invest in yourself.

NCN blogs about how he and his wife bought their “new” family van.

Flexo criticizes the idea that we should’t tell teens too much about credit cards.

Jim with a guest post on 8 job tips for new graduates.

Meg highlights financial females. – It’s quite a list!

The Digerati Life with the worst mortgage in the world. – I simply do not understand why people would go for some of these mortages.

Lazy Man shows us how to save money by making our own beer. – This is something I might have to investigate if the price of beer keeps rising!

Single Ma lists some her goals for the next five years. – This is a good exercise. I need to do the same!

Lastly, Jeremy highlights some bad advice he heard in a radio commercial: you don’t need to save money – just use the equity in your home – My rule of thumb is if it is a commercial telling you something is a good idea, it’s usually NOT!