« It’s Getting Tougher to Make Money From Blogging | Main | Index Mutual Funds or Exchange-Traded Funds? How About Both! »
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 |