Debt Free

It's that time of year again; time to start looking at all things tax, like your federal tax bracket. In the United States, we use a graduated income tax system, where the income tax rate rises with income, so the people who can ostensibly afford it will shoulder a larger amount of the federal tax burden, freeing up those in the lower socio-economic strata to pay for such niceties as food, clothing, and shelter.

The very lowest income earners fall into the lowest federal tax bracket. If that describes you, you can temper your disillusion with your low income with the fact that at least you'll probably be paying no federal income taxes for 2007. You may even be getting more money back than you paid in. A pretty nice deal, that. So much for those “Tax cuts for the wealthiest Americans”, not that they didn't see one.

For the rest of us, stuck somewhere in the middle, between the wealthiest Americans, and those that get back more than they paid in taxes, we will have to look at how much the IRS will demand from us in this yearly rite of homage to government finance. Where it gets really important is for those who fall right on the brink of jumping up to the next higher bracket. If this is you, you will have to pay the higher rate for all marginal income over the bracket cutoff. You do not have to pay the increased rate on your entire income for the year.

For example, a few years ago I got caught in this exact situation. I earned a hair over $59,000 that year, putting me in the 28% tax bracket. That does not mean that I had to pay 28% on all my income for federal tax purposes. I had to pay the 28% only on the income that was above the cut off for the lower bracket. That is why the IRS publishes tax tables, otherwise you could just apply the bracket percentage across the board. It would be a fairly simple calculation. I'd bet Turbo Tax, Quicken, and H&R Block would probably find far fewer customers if taxes were simplified.

The fact is that everything does get pretty complicated by the time you add in your deductions (which of my deductions are valid, anyway?), investment income, capital gains, and depreciated assets. If you are the sole proprietor of, or partner in a business, all bets are off. You best either find a good tax preparrer or get some tax software. You don't have the time to accurately do your taxes to ensure you are paying as little as possible.

Make sure that your income and your tax brackets line up such that you are not earning just enough to actually make less, after taxes. There are cases where a small increase in income can produce a smaller post tax income. That's why we have tax software and accountants. In the aforementioned case, you will want to see if you can find a few more deductions or defer any income to get your income down a bit.

To find out your federal tax bracket, download federal tax forms (or one of the myriad schedules the IRS delights in conjuring up), or e-file your tax forms, see the IRS web site here:
http://www.irs.gov/individuals/article/0,,id=118506,00.html

For the rest of us, we'll just take our grocery bag of forms, receipts and statements to our accountant and have them wade through it, in the hopes we won't have to write too large a check to Uncle Sam this year.