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The Take Home Pay Brackets
Posted By Jim On 11/17/2006 @ 3:30 pm In Taxes | 17 Comments
I want to introduce something I call the Take Home Pay Brackets, which isn’t going to be some mind blowing concept and likely it’ll have been discussed before elsewhere and I just haven’t seen it yet, but it refers to how the various taxes (income, social security, medicare) affect your take home pay. Oftentimes people make decisions with regards to their income (such as how much another $1 into their 401(k) will affect their take home pay) and the marginal tax rate, I recommend that you include social security and medicare payments into the equation because what you’re really looking at is how your take home pay is affected by your decision.
Here are the 2006 marginal tax brackets (single filers):
So if you’re making exactly $74,200, every extra dollar you earn will be taxed at 28% and not at the 25% rate. While in most cases this is “good enough” for comparative purposes, I think it doesn’t capture enough information because it excludes how much is taken away from your pay by Social Security, also known as FICA (Federal Insurance Contributions Act), and Medicare.
Here are the 2006 take home pay brackets:
Social Security is a funny little creature and that’s what explains the take home pay dip when you move from #4 to #5, and why #6 is still, percentage-wise, lower than #4. Social security payments are capped at $5,840.40 which is 6.2% of $94,200. Medicare has no such cap.
Anyway, the purpose of this post was just to illustrate the difference between the income tax brackets and the “take home pay” brackets (ignoring other individual specific paycheck deductions like health care benefits, disability benefits, etc.). Isn’t it somewhat surprising to see that dip?
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