Author Topic: How do you determine your tax bracket? (US taxes)  (Read 15732 times)

KatieSSS

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How do you determine your tax bracket? (US taxes)
« on: March 15, 2013, 12:25:56 PM »
I've been trying to figure this out for a while now, but can't seem to wrap my head around it. How do I determine what tax bracket I am in? Do I take my total paid taxes and divide by my gross income? That doesn't seem correct since you are taxed at a certain percent up to a certain amount for federal taxes. Is that the same for state taxes? I have already filed for this year and so I could refer to my tax returns for exact amounts, if need be.

Teach me, mustachians!

mlipps

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Re: How do you determine your tax bracket? (US taxes)
« Reply #1 on: March 15, 2013, 12:50:33 PM »
Hi Katie! Your tax bracket is determined by the total of your taxable income, like wages and interest, less any deductions, like 401k and traditional IRA contributions. Using your tax forms, (assuming you filed a 1040), on page two there is a line that says "taxable income" (I believe around line 42 or 43 but don't quote me). This is the number you could use to look up your tax bracket. Here's a reference for 2012 brackets:

http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2012-Tax-Year.htm

Taking your total tax paid and dividing by your AGI (adjusted gross income) gives you a number that is sometimes much more interesting, known as your effective tax rate.

State taxes should be similar, but deductions vary a little from federal. If you tell us what state you live in I'm sure someone can help you figure that out as well.

mpbaker22

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Re: How do you determine your tax bracket? (US taxes)
« Reply #2 on: March 15, 2013, 01:32:25 PM »
Why do you want to know?  I ask because your tax bracket doesn't really mean that much.  And I think the real info you're looking for is probably found with a different question.

But the tax bracket could be found by looking at your adjusted gross income and comparing it to the brackets in mlipps links.

Assuming that I am correct in guessing that you are trying to ask a different question, you should look into what the marginal tax rates mean, or perhaps, some mustachians could help you out.

KatieSSS

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Re: How do you determine your tax bracket? (US taxes)
« Reply #3 on: March 15, 2013, 01:55:37 PM »
Thanks for the links, mlipps. I also live in the District of Columbia.

I ask because I want to know what percentage of my income is going to taxes. It is more a matter of me understanding how much of my income is for "me". I'd like to understand this in the event that I want to put my money elsewhere to reap some tax benefits.

Crash87

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Re: How do you determine your tax bracket? (US taxes)
« Reply #4 on: March 15, 2013, 03:47:46 PM »
I ask because I want to know what percentage of my income is going to taxes. It is more a matter of me understanding how much of my income is for "me". I'd like to understand this in the event that I want to put my money elsewhere to reap some tax benefits.

You might find a better answer to how much of your income is for "you" by looking at your pay stub. More than just federal income tax is withheld (state tax, SS, health ins, etc.). Then add in your tax refunds or subtract the additional tax you owed.

DK

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Re: How do you determine your tax bracket? (US taxes)
« Reply #5 on: March 15, 2013, 04:53:32 PM »
One thing to remember too on which tax bracket you are in, is that just because your income is in a certain bracket, that's not the rate you pay on all your income. Even if your in the 25% bracket, the first part of your income is only taxed at 10%, then the next at 15%, and only what's above that limit, at 25%. So you might only actually be paying 12% total taxes on your income, even if you are in the 25% bracket.

bogart

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Re: How do you determine your tax bracket? (US taxes)
« Reply #6 on: March 15, 2013, 08:23:42 PM »
One thing to remember too on which tax bracket you are in, is that just because your income is in a certain bracket, that's not the rate you pay on all your income. Even if your in the 25% bracket, the first part of your income is only taxed at 10%, then the next at 15%, and only what's above that limit, at 25%. So you might only actually be paying 12% total taxes on your income, even if you are in the 25% bracket.

This is exactly right.  As the OP writes, "I'd like to understand this in the event that I want to put my money elsewhere to reap some tax benefits," it's really that last dollar taxed that is of interest if you're contemplating reducing your income by $1 ... if you're contemplating reducing it by $10K e.g. by contributing to a 401K then it's the rate at which the last $10K is taxed that's relevant.  Of course part of the $10K (or whatever amount) may be taxed at one rate, and part at another.  And other mandatory witholdings (besides federal income tax, which is what the tax bracket concept refers to) also affect the value of any strategy that reduces taxable income.

KatieSSS

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Re: How do you determine your tax bracket? (US taxes)
« Reply #7 on: March 18, 2013, 10:54:19 AM »
One thing to remember too on which tax bracket you are in, is that just because your income is in a certain bracket, that's not the rate you pay on all your income. Even if your in the 25% bracket, the first part of your income is only taxed at 10%, then the next at 15%, and only what's above that limit, at 25%. So you might only actually be paying 12% total taxes on your income, even if you are in the 25% bracket.

This is exactly right.  As the OP writes, "I'd like to understand this in the event that I want to put my money elsewhere to reap some tax benefits," it's really that last dollar taxed that is of interest if you're contemplating reducing your income by $1 ... if you're contemplating reducing it by $10K e.g. by contributing to a 401K then it's the rate at which the last $10K is taxed that's relevant.  Of course part of the $10K (or whatever amount) may be taxed at one rate, and part at another.  And other mandatory witholdings (besides federal income tax, which is what the tax bracket concept refers to) also affect the value of any strategy that reduces taxable income.

This is the part that confuses the crap out of me. My salary is 45k a year. So according to http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2012-Tax-Year.htm, my first $8,700 is taxed at 10%, then the next $26, 650 at 15%, and the remaining $9,650 at 25%. What I don't understand is that my paychecks don't reflect this. It isn't like I get a paycheck that tells me some of my income was taxed at 5% then 10%, then 15%. The same amount is taken out every month. My guess is there is some complicated algorithm involved that calculates this that I'm not privy to. I've never taken a class on how this works or had it explained to me in a way that makes sense. Forgive my ignorance on this!

And yes, I know how much money is for "me" from my pay stub. I base my budget on my take-home pay, not my gross income. I guess what I really want to understand is how I can tell if I need to owe more taxes come April 15. I never have a clue until I get my report from the accountant. They then tell me to either up my withholding or lower it. I just do what they say, but now I'd like to actually understand why it is that I either owe or don't owe, and to me, that means understanding my tax bracket and how my income is taxed.
« Last Edit: March 18, 2013, 11:23:12 AM by KatieSSS »

mlipps

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Re: How do you determine your tax bracket? (US taxes)
« Reply #8 on: March 18, 2013, 11:11:09 AM »
I'm not sure where you're getting 5% from. And you should use the 2013 tax brackets for this year; I just linked to 2012 since I thought looking at your return would be easier, because then you could see how your deductions and exemptions affected how much of your salary is actually subject to taxes.

You're right though that it's hard to see a correlation here between your paycheck & your tax brackets. There are lots of different ways companies can calculate how much they withhold, based in some fashion on how many exemptions you enter on the W-4 form. You probably completed this when you were hired & you can change it at any time if you got a large refund or owed a large sum when you did your taxes last year.

However, your paycheck withholdings don't affect how much tax you actually end up paying, which is why you need to look at your actual tax return to understand this a little better. Your company is just trying to estimate how much you will owe based on your salary for the year. It's great that you're trying to understand the taxes! I think the place to start is your return, go through line by line to see why you owe what you do for the year. Based on this, you can then go back to the paycheck and think about what should be withheld each pay period so you get a small or no refund at the end of the year.

KatieSSS

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Re: How do you determine your tax bracket? (US taxes)
« Reply #9 on: March 18, 2013, 11:22:43 AM »
However, your paycheck withholdings don't affect how much tax you actually end up paying, which is why you need to look at your actual tax return to understand this a little better. Your company is just trying to estimate how much you will owe based on your salary for the year. It's great that you're trying to understand the taxes! I think the place to start is your return, go through line by line to see why you owe what you do for the year. Based on this, you can then go back to the paycheck and think about what should be withheld each pay period so you get a small or no refund at the end of the year.

Thanks mlipps! The 5% was a typo - I was just reading it wrong. I'll go back and edit that.

I will take a look at my returns, which will hopefully make it easier for me to understand. I didn't realize that the withholdings my company does are simply estimates. I think I'm okay for now with regards to how I filled out my W-4, but I do have a side job as a waitress that sort of screws up my income flow (not in a bad way, it just makes it more complicated).

justchristine

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Re: How do you determine your tax bracket? (US taxes)
« Reply #10 on: March 18, 2013, 12:41:27 PM »
I would recommend sitting down with your tax info from last year and filling out a 1040 form by hand.  I always found taxes confusing until I actually sat down and did my taxes by hand.  For me, it all made more sense when I filled out each line myself and saw where things got credited and deducted rather than just punching the numbers into some software and having that do all the calculations.

Nothlit

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Re: How do you determine your tax bracket? (US taxes)
« Reply #11 on: March 18, 2013, 02:45:38 PM »
I guess what I really want to understand is how I can tell if I need to owe more taxes come April 15. I never have a clue until I get my report from the accountant. They then tell me to either up my withholding or lower it. I just do what they say, but now I'd like to actually understand why it is that I either owe or don't owe, and to me, that means understanding my tax bracket and how my income is taxed.

You should check out the IRS Withholding Calculator, which will help you forecast that type of information.

DK

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Re: How do you determine your tax bracket? (US taxes)
« Reply #12 on: March 18, 2013, 07:50:10 PM »
Hopefully this doesn't confuse you further, but you don't pay federal taxes on your total salary, you pay it on your taxable income. At a high level, once you take your standard deduction (around 6k i think) and you get one exemption for yourself (around 3k i think), so even though your salary is 45K, once you take off those deductions, you're down to paying taxes on only around 35K.

the fixer

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Re: How do you determine your tax bracket? (US taxes)
« Reply #13 on: March 18, 2013, 08:30:06 PM »
Your 401(k) contributions and any insurance deductions are also not income-taxed (but some get taxed for medicare/SS, to be honest I can't remember which are taxed for what). I agree with the others, it's not worth trying to understand your paycheck. Look at your tax return for income taxes. But for the other taxes, just take the Social Security and Medicare deductions and multiply them by either 24 or 26, depending on how many pay periods per year you have.

mlipps

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Re: How do you determine your tax bracket? (US taxes)
« Reply #14 on: March 18, 2013, 09:08:07 PM »
Your 401(k) contributions and any insurance deductions are also not income-taxed (but some get taxed for medicare/SS, to be honest I can't remember which are taxed for what). I agree with the others, it's not worth trying to understand your paycheck. Look at your tax return for income taxes. But for the other taxes, just take the Social Security and Medicare deductions and multiply them by either 24 or 26, depending on how many pay periods per year you have.

401k is taxed for SS and Medicare but not federal (or state anywhere that I know of). Health insurance and the like is exempt from both federal and SS/Medicare