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What’s My Tax Bracket?

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In personal finance, you have to make a lot of decisions with imperfect information. You contribute to a Roth IRA because you like the tax free growth and you believe that you will be taxed at a greater rate in retirement (otherwise it may be better to contribute to a Traditional IRA). You buy a house because you want to hedge against inflation by fixing your housing costs, both of which you assume will go up in the future. You take on a new job with more responsibility and more pay because, well, it’s better to have more of both, right?

At the core of many of these decisions, as sad as it may be, are taxes. It’s obvious in the case of the Roth IRA and Traditional IRA and less obvious in the housing (interest, property taxes, and such are tax deductible), but it’s present in many money decisions. Do I take that new job? Well, how much do I really get to take home? That will, in part, depend on taxes.

In the same way that it’s important for you to know the value of your time, it’s important for you to know your tax bracket.

Answering “What’s My Tax Bracket?”

You can see your federal income tax brackets here but you’ll have to go to your state’s Department of Taxation (or similarly named department) website to find your state income tax rate.

With the federal tax brackets, you have to do more than find the range your salary falls in. You need to also take into account deductions you may be taking, because that will give you a more accurate marginal tax rate, which you can use to help make decisions. For example, if John earns $35,000 a year, he appears to be in the 25% tax bracket. However, he can take the standard deduction of $5,700, putting him in the 15% tax bracket.

It’s important to know which tax bracket your in because you can use that information to help make decisions. For example, if you were planning on selling a stock you own, knowing your bracket will help you understand what you will pay on the gains. For long term capital gains, you pay 0% if you’re in the 10%/15% brackets and 15% in the higher brackets. You might want to sell a long term holding if you’re in the 15% bracket to lock in tax free gains.

I wouldn’t spend too much time calculating your exact effective tax rate, you won’t need that much detail unless you are making a very large decision and the decision hinges on knowing your exact rate. Usually a ballpark figure is good enough to help you make decisions.

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10 Responses to “What’s My Tax Bracket?”

  1. WR says:

    Good Stuff!

    The key is to reduce your income and raise your deductions. You want your AGI to be as low as possible.

    Easiest and best way to reduce your income is to contribute to retirement plan. This has the added benefit of giving you some folding money for your retirement.

    If John, from the example, reduces his AGI (Modified Adjusted Gross Income) by turning his passion into a home based biz and/or makes the max contribution to his 401(k), his tax bracket falls.

    Startup Expenses, Operating Expenses and losses from a business are applied to your entire haul as are your 401(k)

    You could also clean out your garage and give your stuff to Goodwill (Get a receipt and make a tax claim)

    There are lots of other tax credits: Child, Education, Energy efficiency, Mortgage Interest Deduction…

    • Chris says:

      Yes. But it is hard to reduce your income enough to drop your tax bracket through a home biz yet still be able to make up for that difference in needed cash flow. At least for me. I need more ideas.

  2. I second everything in this post. I cringe when I think of how much money Uncle Sam has at my expense because I was ignorant of the impact of taxes and many times treated found money casually. Many times people do this with inheritances etc. In my case, I was granted stock options years ago and sold them willy nilly without thinking of the tax impact.

  3. BibleDebt says:

    Always a confusing topic. The bracket you are actually in is only marginal, meaning only the last dollars are charged at that rate. So, if you are in the 25% tax bracket by $1, only that last dollar is taxed at 25%.

  4. Ryan says:

    Jim, in regards to the capital gain tax. Using your example of John who makes $35K a year, but falls into the 15% tax braket after the standard deduction. That means his long term capital gains are not taxed, correct? Software like TurboTax accounts for this right? Or does it calculate your capital gains bracket before taking the standard deduction (which would then leave John in the 25% bracket and 15% capital gains braket)?

  5. jsbrendog says:

    well, i’m firmly ensconced in the 25% regardless of deductions so time to put it on cruise control and check back at a later date. i had no idea what tax bracket i was in. This is probably a good thing to know and keep in mind going forward. thanks.

  6. eric says:

    I’m always surprised to find out how many of my friends don’t know anything about their tax rates. Definitely something to keep in mind.

  7. Judy says:

    My husband and I are retired and make 35 thousand a year we have a 1000 dollar morgage, we recently sold 10 acres of our 40 acre which our home sits on…we sold the 10 acres to help pay down the morgage pymt and pay off some bills…..will we have to pay capital gains on the 60 thousand we got for the land, we owned it for 3 years we have no other income only social security and husbands pension thank you


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