What's Your Real Tax Bracket?
As a result of a 2001 revamping of the Internal Revenue Code, there are six federal income tax brackets for 2003 - 10, 15, 27, 30, 35 and 38.6 percent. The brackets are indexed, that is, they are automatically adjusted each
What indexing is supposed to accomplish is to provide relief from bracket creep, which enriches Uncle Sam at the expense of individuals who get pushed into higher brackets, even though their incomes merely stay even with inflation, and whose actual, after-tax incomes are, therefore, eroded.
The bottom bracket of 10 percent applies to taxable income of up to $6,000 for singles and $12,000 for married couples filing jointly. Taxable income means what is left after wages and other kinds of reportable income are offset by "above-the-line" deductions like contributions to traditional IRAs or alimony payments, plus "below-the-line" deductions like dependency exemptions, and either the standard deduction or itemized deductions.
The next three brackets are: 15 percent (income between $6,000 and $28,400 for singles and between $12,000 and $47,450 for joint filers; 27 percent (income between $28,400 and $68,800 for singles and $47,450 and $114,650 for joint filers); and 30 percent (between $68,800 and $143,500 for singles and $114,650 and $174,700 for joint filers).
The 35-percent bracket kicks in only when income surpasses $143,500 for singles and $174,700 for joint filers. Finally, there is the 38.6 percent bracket on incomes above $311,950 for singles and joint filers.
Let's look at joint filers Kevin and Karen Boyle. They declare a gross income of $70,000 (have no long-term capital gains), and then offset that amount by $20,000 through personal exemptions and itemized deductions. Their taxable income of $50,000 places them in a top federal tax bracket of 27 percent.
Contrary to what many persons mistakenly believe, their being in the 27-percent bracket does not mean that the IRS grabs 27 cents of every dollar of income the Boyles declare. Just the dollars that fall in the 27-percent bracket are taxed at that rate. The part of their income that falls into the 10- and 15-percent brackets -- the first $47,450 -- is
The couple's taxable income can go as high as $114,650 before the Boyles are nudged into the next bracket, where each added dollar of income is dunned at a 30-percent rate. To ease themselves into the 15-percent bracket, their taxable income must drop below $47,450.
But when the Boyles are liable for both federal and local taxes, they have more numbers to crunch, as 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 become available because they can claim the local taxes as itemized deductions on Schedule A of Form 1040.
Let's say the Boyles are in a 6-percent bracket for state taxes. To determine their top tax bracket, they multiply their 27-percent federal bracket by their state rate and subtract the result (about 2 percent) from their state rate. Then they add the result (about 4 percent) to their federally imposed rate to arrive at a combined rate of about 31 percent.
Julian Block, a former IRS agent and a tax attorney, is the author of "The Stock Photographer's Tax Guide." For details on how to purchase this important 32-page publication: http://www.photosource.com/taxtips.php
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