Help me understand "tax brackets"

[iris lily]

I hear so much about "tax brackets."  The tax brackets tables I see commonly when Googling are like this:

Married Filing Jointly or Qualifying Widow(er) Filing Status

[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

    10% on taxable income from $0 to $18,150, plus
    15% on taxable income over $18,150 to $73,800, plus
    25% on taxable income over $73,800 to $148,850, plus
    28% on taxable income over $148,850 to $226,850, plus
    33% on taxable income over $226,850 to $405,100, plus
    35% on taxable income over $405,100 to $457,600, plus
    39.6% on taxable income over $457,600.


The IRS table refers to "line 43" as the taxable amount.

http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

I guess my question is this: do you think everyone means "line 43" when they are talking about "tax bracket?"

I've been puzzled about this for some time. I assumed we were in the 25% tax bracket. But recently I consulted our 2012 Federal income tax documents and our account referred to us being in the 15% bracket. While I like the idea of the govt thinking we are not-high income while simultaneously I feel rich, I don't know what to make of that. But then I heard a financial guy today on the radio talk about his clients in the "30% tax bracket" the income he mentioned was $72,000 annually, but perhaps that was just for one of the married people.

I don't know that the answer to this really matters, but I hear a fair number of financial advisers say "when you retire you will be in a different tax bracket" but ummm no, I think that we will not be in a lower tax bracket. I don't like that assumption.

comments about "tax brackets?"   

[dragoncar]

Note that people with political agendas (like some ratio talk show hosts) might exaggerate tax brackets.  They also play fast and loose with the distinction between "marginal tax rate" and "effective tax rate".  On the other hand, he might have been including state taxes, using the "single" tax schedule, etc.

[Cheddar Stacker]

Yes, line 43 determines your tax bracket.

Your tax bracket is the % of tax attributed to the last $ of income you earned (It's also called the marginal rate). So if you are MFJ, based on the table below if you make $73,800 you are in the 15% bracket, and if you make $73,801 you are in the 25% bracket. This doesn't mean you pay 25% tax on the full amount, you likely would pay about 15.01% tax as a percent of your taxable income.

Most of the time your bracket is irrelevant, meaning earning $1 extra dollar to move into the next bracket will not hurt you. However, there are very, very important times when earning an extra dollar will hurt you very much. I used the 15% and 25% brackets for a reason as this drastically changes how capital gains and qualified dividends are taxed. Stay in the 15% bracket or lower if at all possible.

There are other intervals of income that are very important, but they aren't necessarily always tied to a bracket. These would be things like qualifying for the earned income credit, the savers credit, or AFA subsidies. They can be equally important.

[MustachianAccountant]

... Also social security income is generally not taxable unless you have other earned income, then only up to 80% is taxable so a good chunk of retirement income for many people is not taxed at all.

I think you meant 85%. ;-)

[iris lily]

... Also social security income is generally not taxable unless you have other earned income, then only up to 80% is taxable so a good chunk of retirement income for many people is not taxed at all.

I think you meant 85%. ;-)

That's another thing I've been wondering about, the taxability of SS income. Thank you.

[FuckRx]

I don't know if OP is just referring to "tax bracket" in a very specific way or in total percentage of income. As an example, one person might answer "$75,000" when asked how much they make a year. Their income might be 75,000 but realistically they probably make somewhere in the $50,000 range. Same goes for tax percentage. There is federal + state and then you have other things (medicare, CLAPERS?). So the total percentage might be quite different than the bracket one is in.