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A Question From a Reader: How to Calculate Taxes
By JLP | October 31, 2007
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 |
||
|
TAX |
2007 TAXABLE |
2006 TAXABLE |
|
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 |
The reader asked how to calculate taxes on $349,700.
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.
I hope this answers the reader’s question.
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?
Tax Links: Online Tax Resources
How to Calculate Tax-Equivalent Yield
Social Security Wage Base for 2007
Topics: Taxes | 17 Comments »
October 31st, 2007 at 7:01 pm
Awesome post. I admit I’m not the most knowledgeable when it come to taxes. I would normally assumed a 28% tax rate as well if someone said that to me. Thanks for the post.
October 31st, 2007 at 7:36 pm
And for those of us not fortunate enough – at least taxwise – to be Texicans, you’ll have to add your state taxes as well as the federal taxes, and potentially deduct them from your federal taxes if applicable.
One other item: if this is a windfall of some kind, the person may want to talk with a tax lawyer about how to receive it.
October 31st, 2007 at 9:09 pm
I can’t tell you what it was like to explain this in an undergraduate Economics class at a technical college. It was shear amazement, they had no idea whatsoever that it was done that way. Still, half the class missed the simple calculation on the quiz.
November 1st, 2007 at 9:56 am
Accountants have their own formula for estimating a client’s effective tax rate based on their marginal tax rate.
It’s called the Rule of 8.
You simply take the marginal tax rate of the client (35%) and subtract 8 for your effective tax rate (27%). It’s just a rule of thumb but for the general population it works quite well even with deductions.
November 1st, 2007 at 9:58 am
Great post. I have was always been confused by the tax table and now it all makes a lot more sense.
November 2nd, 2007 at 5:19 am
Star Money Articles for the Week of October 29
Here are some recent interesting posts from the MoneyBlogNetwork and beyond: No Credit Needed suggests keeping things simple. Get Rich Slowly advises to know how your accounts work. Consumerism Commentary says NYC transportation costs are going up. All…
November 2nd, 2007 at 10:13 am
Don’t forget that that just covers federal income tax — most of us will also be paying medicare, social security, state taxes… plus capital gains taxes on investments.
November 2nd, 2007 at 10:26 am
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November 3rd, 2007 at 8:41 pm
[...] At All Financial Matters, JLP explains how to calculate taxes if you live in the U.S. [...]
November 4th, 2007 at 6:29 am
Oh wow..I never knew how taxes were calculated either. I tried figuring it out multiple times and my numbers never came out right. Now I know.
The rule of 8 is cool too. Thanks for posting this.
I’m here from GetRichSlowly.
November 4th, 2007 at 10:04 am
[...] All Financial Matters: Even though this may be furthest from your mind right now, here’s a nice primer on how to calculate your taxes. Quick and easy. [...]
November 4th, 2007 at 8:56 pm
Just a quick reminder: you calculate taxes only on your taxable income. So if you start from your gross income, first subtract your deductions (e.g. the standard deduction for married filing jointly of $10,700) and exemptions (e.g. 2 x $3400 for a married couple) to get to your taxable income. Then calculate your taxes on that amount.
November 4th, 2007 at 9:34 pm
I’m so dumb when it comes to taxes but this was straight and to the point, great post!
November 4th, 2007 at 9:37 pm
[...] JLP put together a nice illustration on how to calculate taxes. [...]
November 5th, 2007 at 1:33 am
very nicely laid out. Of course, it would be even easier if we had a flat tax. Oh well.
January 4th, 2008 at 1:06 pm
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June 10th, 2008 at 7:03 pm
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