You’ve probably heard a lot about the recent tax hikes and which payers have been hit the hardest. But you may not know which tax bracket you fall into, and that makes it tough to understand how these changes affect you. Here’s how to figure it out. (Don’t worry, mathphobes. It’s easy.)
First calculate your taxable income. This is the amount you’ll list on your tax form come April 15. It consists of your gross income (including your salary and investment earnings) minus contributions to your 401(k) and deductions, such as mortgage interest and personal exemptions. (This year you get a break of $3,800 for each dependent.)
Then go to the next page to look up the Internal Revenue Service’s tax-rate schedule. There you’ll find the percentage that corresponds to your income. If you and your husband file jointly, with a taxable income of, say, $100,000, you’re in the 25 percent tax bracket. That percentage is your marginal tax rate—the highest percentage of tax you will owe.
That may sound steep, but take comfort: You won’t actually have to pay out a quarter of your earnings in taxes. The United States has what is called a graduated tax system (as opposed to a flat tax), in which your income is taxed at various rates according to the levels of the schedule, says Edward Karl, the vice president of taxation at the American Institute of CPAs. Or, in English: “The first dollar you earn is taxed at a lower rate—starting at 10 percent—than the last dollar,” says Brian Wendroff, a certified public accountant in Arlington, Virginia.