Saturday, March 3, 2012

Is Your Tax Bracket Higher Than Mr. Burns?

What is your tax bracket? What percentage of your income do you pay in taxes? Even those who know that a certain presidential candidate paid 13.9% of his income in taxes, don't know their own effective tax rate or their tax bracket.

Your tax bracket is the percentage of tax you pay on the last dollar you earned. Your effective tax rate is the percentage of your total income that you pay in tax.

Here are three example of how much tax is paid by hypothetical taxpayers with different types of income.

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M. Burns (Nuclear Power Plant Owner) – single
Income: $100,000 capital gains dividends plus $100,000 in tax-free interest
Federal Income Tax: $8,400
Social Security & Medicare Tax (0%): $0
Total Tax: $8,400
Marginal Tax Rate: 15%
Effective Tax Rate: 4%
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H. Simpson (employee of M. Burns) - married with three children.
Income: $100,000 employee wages
Federal Income Tax: $9,731
Social Security & Medicare Tax (@ normal 7.65% rate): $7,650
Total Tax:$17,381
Marginal Tax Rate:25%
Effective Tax Rate: 17%
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M Szyslak (self-employed proprietor, Moe's Tavern) - single
Income: $100,000 self-employment profit
Federal Income Tax: $16,981
Social Security & Medicare Tax (@ normal 15.30%): $15,300
Total Tax:$32,281
Marginal Tax Rate:25%
Effective Tax Rate: 32%

So, how much you pay in taxes is based not just on how much you earn, but on what type of income you receive. Most people don't know how much they paid in taxes. They just know if they got a refund or paid the IRS or state taxing agency. You can find out how much you actually pay in income taxes by checking your 1040 Form. SS and Medicare taxes are on your W-2. Ask your tax advisor what your tax rate is.