ACP Member Ed Fulbright, CPA, CGMA, PFS, wrote Why Knowing Your Tax Rate Is Important for the Spring 2015 Financial Focus. There is a lot of information to digest in his article so we have split it up into four blog posts. Please continue reading to learn Ed's step one of simplifying and lowering your taxes.
Why Knowing Your Tax Rate Is Important
By Ed Fulbright, CPA, CGMA, PFS
Durham, NC
Step One: Understand your filing status.
Step Two: Understand what tax bracket you are in now and will be in the future.
Federal tax brackets change as taxable income goes higher. (Taxable income is your adjusted gross income minus your deductions and exemptions.) The seven brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The highest rate you pay is your tax bracket (marginal rate). Every additional dollar of income is taxed at your highest rate, except for capital gains income (Step Four). Levels of taxable income for each filing status are summarized at http://www.tax-brackets.org/federaltaxtable.
The average rate you pay is lower than your bracket rate because some of your income is taxed at lower percentage rates. For example, a married couple with taxable income of $100,000 would be in the 25% bracket. However, their average tax rate would be 17%. This is how their tax is figured:
|
2015 tax bracket for
MFJ taxable income
|
Tax bracket rate
|
Tax computation for couple with $100,000 taxable income
|
Tax on each
bracket’s income
|
|
$0-$18,450
|
10%
|
Pay 10% of $18,450
|
$1,845
|
|
$18,450-$74,900
|
15%
|
Pay 15% of $56,450
($74,900 less $18,450)
|
$8,468
|
|
$74,900 - $151,200
|
25%
|
Pay 25% of $25,100
($100,000 less $74,900)
|
$6,275
|
|
$151,200 and up
|
28%,33%,35%,
and 39.6%
|
|
|
|
Total taxes due
|
|
|
$16,588
|
|
Average or effective tax rate
|
17%
|
$16,588/$100,000
|
|
|
Tax bracket
(marginal rate)
|
25%
|
Highest rate paid
|
|
Stay tuned for Steps Three and Four!