A question I receive a lot from clients is “what’s my tax bracket”. We already know that tax language and the tax code is confusing, so I’ve learned to understand what the client is really asking. Typically what they’re really want to know by asking that question is “what’s my tax percentage” or “what’s my tax as a percentage of income”. And of course, even there, it’s not quite that simple.
What’s A Tax Bracket?
Tax brackets are the levels at which tax percentages change in the tax system. Said differently, they are cut-off values for taxable income meaning income at each increase in level is taxed at a higher rate.
As an example, let’s say there are three tax brackets of 10%, 20%, and 30%. Let’s say 10% applies to a person’s first $10,000 of income, 20% to the amount of their income from $10,001 to $20,000, and lastly of course 30% to any income over $20,000. So if a person has $30,000 in taxable income, they’ll pay tax of $1,000 on the first $10,000 (10% x $10k), $2,000 on the amount from $10,001 to $20,000 (20% x $10k), and $3,000 on the amount over $20,000 (30% x $10k).
What’s My Tax as a Percentage of Income?
In the above example, our individual is in the “30% tax bracket”. But while he’s in the 30% bracket, he paid 20% of taxable income to taxes ($6,000 in tax divided by $30,000 in taxable income).
What’s It Matter?
Most individuals want to know the percentage of taxable income they paid in taxes (20% in the above example), but knowing your tax bracket is helpful for planning and strategy.
Other Topics of Interest:
Just Relax! How to Contact Us
Am I Taxed on Home Sale Gain?
When Can the IRS Audit You?
Do I Need to File a Tax Return?
Retirement Contribution Limits 2014 & 2015