Tax Brackets Made Easy

June 28, 2012 by  Filed under: Taxes 

Taxation as a concept has been around since governments first formed. It is a contribution to your government that must be paid or one would be subject to some form of punishment. The Federal Government of the United States regularly imposes taxes on its individuals, along with state, property and other forms of taxation.

Defining Tax Brackets for Income Tax
Your tax bracket defines how much of your income can legally be taxed yearly by the Federal Government. In many cases, it really simply depends on how much declared income you earn during the tax year. The more money you make, the more taxes you pay. This applies to your income after deductions and exemptions have been made. However, it can be a lot trickier than that.

Currently, there are six ways to classify your tax brackets when it comes to your income. You can be classified under single, married (joint-filing or single-filing), as a widow or widower or as a head of household. This affects the percentage deducted from your overall income.

The percentages of the tax brackets are as follows: 10%, 15%, 25%, 28%, 33% and 35%.

Income tax surpasses all the income you have earned throughout the year by any means. This includes rent, alimony, wages, pensions, fees from freelance work and additional income earned from selling goods. The official definition states that this is any income realized in any form. In many cases, this means you have to declare all income legally.

The taxation and deduction may depend on your state and county, as federal tax brackets operate along with state and other taxes. Personal exemptions (such as for your children, who are considered dependent) against your income are included when calculating your bracket.

So, a basic calculation for your income tax would look like this:

[Income earned] – [Deductions + Exemptions] x [bracket percentage]

Here is where it gets tricky. Every individual is taxed to the dollar. So for someone who earns $100,000 a year, he would get taxed 10% for every dollar from $0 to $8,700, then 15% to 25% for every dollar after until the $100,000 dollar limit. This actually means that you pay a little less than you would if they taxed you for the full 25%.

Taxation Limits
In general, the uppermost taxation limit is 35% for people who earn more than $373,000 yearly except in the case of married persons filing tax separately. In this case the ceiling amount is $186, 476 per spouse. The minimum amount is 10% for individuals filing an income of $0 to $8,700 as of 2012.

Taxable income in this context means any tax that applies to your income.
Keep in mind Payroll Taxes (which apply to state services such as Social Security and Medicare), Qualified Dividends (which are your dividends that meet a certain criteria that qualify them to be taxed at a lower rate) and Long Term Capital Gains (income derived from long term investment, such as that of stocks and bonds) are taxed at a separate and lower rate.

In a nutshell,think of your tax bracket as the main aspect of the taxes you pay. This can really affect your overall income, as taxes tend to be applied at the highest possible amounts.

Understanding how you pay your taxes can help you reduce debt and create significant savings when it comes to pay taxes without incurring the wrath of the IRS. This means watching your deductions and exemptions, filing your taxes on time and creating a good debt background.

You can learn more about tax brackets here, check it out!

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