Explaining The Federal Tax Brackets

Answers To Your Questions.

Federal tax rates, sometimes referred to as “tax brackets”, are established each year by the Internal Revenue Service (IRS). In some years, these rates may change only slightly or not at all. Rates for the 2014 tax year, meaning calendar year 2014, were released in October of 2013.

Tax Year Rates

Applicable rates are determined by income amount and filing status. Taxes in the U.S. are progressive, meaning that the more an individual earns, the more they pay in taxes.

There are four main filing statuses: married filing jointly, married filing separately, heads of household, and individual taxpayer, meaning an unmarried individual.Individual taxpayer rates are:

Amount of Taxable Income

Tax Owed

$0-$9,075

10% of taxable income

$9,075-$36,900

$907.50 (10% of taxable income on first $8,925) plus 15% of excess over $9,075

$36,901-$89,350

$5,081.25 plus 25% of excess over $36,901

$89,351-$186,350

$18,193.75 plus 28% of excess over $89,351

$186,351-$405,100

$45,353.75 plus 33% of excess over $186,351

$405,101-$406,750

$117,541.25 plus 35% of excess over $405,101

$406,750 and higher

$118,75 plus 39.6% of excess over $406,750

 

Using the Brackets

So, what does this information mean and how do you use these brackets?

  • First, identify your amount of taxable income. Taxable income is the amount of income upon which you owe taxes, which is your income after credits and deductions. For this example, lets say your taxable income is $70,000.
  • Second, identify the range in which your taxable income falls. In this example, you would fall in the third bracket: $36,901-$89,350.
  • Third, determine the base tax you owe. According to the bracket, you automatically owe $5,081.25 in taxes.
  • Fourth, calculate the additional percentage you owe. To do so, subtract $36,901 from $70,000 ($70,000 - $36,901 = $33,099) and then multiple that amount ($33,099) by 25% (.25): $33,099 x .15 = $8,274.75. Add together the result of this calculation and the basic tax you owe: $5,081.25 + $8,274.75 = $13,356. The result is the total amount of taxes you owe.

Bordering On A Bracket

Generally, moving a bracket lower means owing less tax and moving a bracket higher means owning more tax. If you find yourself bordering on a bracket, you might be forced to use the higher bracket. For example, a taxable income of $87,900 is just $49 above the third tax bracket, and yet you must use the fourth bracket to calculate your owed tax. The result of this is that you owe much more tax than if you were in the third bracket.

But guess what? Having a low income and bordering on a lower bracket may not guarantee that you pay less. In fact, the Alternative Minimum Tax (AMT) is a rate that all taxpayers must pay. Under the AMT, taxpayers pay the larger of the AMT or their calculated owed tax. Therefore, if according to the brackets you owe only $2,000 in taxes, but the AMT is higher, you must pay not only the amount you owe ($2,000), but also the difference between the amount you owe and the AMT. For 2014, the AMT for single taxpayers is $52,800. This amount adjusts yearly for inflation.

How Tax Rates are Determined

Tax rates are established by the Laffer Curve. In this curve, a 0% tax rate means that the government earns no revenue, while a 100% tax rate means that the government earns all income the economy generated over the year. Since neither meets government goals, the ideal rate lies somewhere in the middle.

However, the curve does not provide a mathematical equation for determining the ideal rate, but rather only suggests that such a rate exists. It is up to the government, therefore, to select the ideal rate for the year that will encourage spending but allow the government to acquire revenue.

Alternatives to Tax Bracket Models

Critics of the current bracket system say that this “progressive tax” (called that because the rate progressively increases with higher incomes) unfairly taxes higher earners. The alternative these critics propose is that of a flat tax in which all taxpayers pay the same rate.

Supporters of a flat tax rate say it will equalize the tax obligations of all taxpayers. However, opponents of the idea point to the fact that, to guarantee the government its needed funds, the rate would have to be raised, resulting in individuals with lower incomes paying huge percentages in tax.

Your Taxes

The amount you owe in taxes depends on your taxable income and how your tax obligation measures up to the AMT. Ensure that you take all available deductions and credits prior to determining your owed tax.