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WHAT’S YOUR REAL TAX BRACKET?

By: Julian Block

THE TAX ADVISER

For 2009, there are six federal income brackets — 10, 15, 25, 28, 33 and 35 percent. Moreover, the brackets are indexed, that is, they are adjusted annually to reflect inflation, same as the dependency exemptions and standard deduction amounts.

This year, the 10 percent bracket applies to taxable income of up to $8,350 for singles and $16,700 for married couples filing jointly. Taxable income — the amount on line 43 of 2008’s 1040 form — means what is left after wages, pensions and other kinds of reportable income are offset by all allowable deductions and before any credits are claimed.

The next three brackets are: 15 percent (income between $8,350 and $33,950 for singles and between $16,700 and $67,900 for joint filers); 25 percent (income between $33,950 and $82,250 for singles and $67,900 and $137,050 for joint filers); and 28 percent (income between $82,250 and $171,550 for singles and $137,050 and $208,850 for joint filers).

The 33-percent bracket kicks in only when income surpasses $171,550 for singles and $208,850 for joint filers. Finally, there is the 35-percent bracket on incomes above $372,950 for singles and joint filers.

To illustrate how to figure your top bracket, let's look at joint filers Patrick and Nadine Vennebush. For simplicity, assume they declare a gross income of $130,000 solely from wages. Patrick and Nadine receive no other income taxed at reduced rates, such as dividends and long-term capital gains, and are not subject to the alternative minimum tax. Their personal exemptions and itemized deductions aggregate $30,000, leaving them with taxable income of $100,000. So their top federal tax bracket is 25 percent.

Surveys continually disclose that most persons mistakenly believe that because Patrick and Nadine are in the 25-percent bracket, the law entitles the IRS to siphon off 25 cents of every dollar of income they declare. Actually, just the dollars that fall in the 25-percent bracket are taxed at that rate.

The part of their income that falls into the 10- and 15-percent brackets — the first $67,900 — is taxed at 10 percent on the first $16,700 and 15 percent on income between $16,700 and $67,900. Only the part between $67,900 and $100,000 is taxed at 25 percent.

The couple's taxable income can go as high as $137,050 before Patrick and Nadine are nudged into the next bracket, where each added dollar of income is dunned at a 28-percent rate. They are able to ease themselves into the 15-percent bracket only if their taxable income drops below $67,900.

Patrick and Nadine need to crunch more numbers when they are liable for both federal and local taxes. Their combined top bracket is not the sum of their federal, state and city brackets. Rather, it is their top federal bracket, plus the state and city brackets, minus the federal tax savings that becomes available because they can claim the local taxes as itemized deductions on Schedule A of the 1040 form.

Let's say Patrick and Nadine are in a four-percent bracket for state taxes. To determine their top tax bracket, they multiply their 25-percent federal bracket by their state rate and subtract the result (one percent) from their state rate. Then they add the result (three percent) to their federally imposed rate to arrive at a combined rate of 28 percent.
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