With all the attention on Occupy Wall Street tax protests, which Americans make up the richest 1 percent and growing income disparity, the timing of the Internal Revenue Service's annual inflation adjustments couldn't be better.
Each year about this time, the IRS looks at official inflation data and then calculates how increases, if any, in the cost of living will apply to a wide variety of tax provisions that affect almost every taxpayer.
The changes include standard deduction and personal exemption amounts, how much money we can sock away in retirement accounts, the value of popular tax credits and, of course, how much of our income will fall into what income tax brackets.
Since, as I mentioned, income is a major focus right now, today's Weekly Tax Tip is a preview of how your 2012 earnings will be taxed.
| Tax Rate |
Single |
Head of Household |
Married Filing Jointly or Surviving Spouse |
Married Filing Separately |
| 10% |
up to $8,700 |
up to $12,400 | up to $17,400 |
up to $8,700 |
| 15% | $8,701 to $35,350 | $12,401 to $47,350 | $17,401 to $70,700 | $8,701 to $35,350 |
| 25% | $35,351 to $85,650 | $47,351 to $122,300 | $70,701 to $142,700 | $35,351 to $71,350 |
| 28% | $85,651 to $178,650 | $122,301 to $198,050 | $142,701 to $217,450 | $71,351 to $108,725 |
| 33% | $178,651 to $388,350 | $198,051 to $388,350 |
$217,451 to $388,350 |
$108,726 to $194,175 |
| 35% | $388,351 or more | $388,351 or more | $388,351 or more |
$194,176 or more |
Marginal vs. effective taxes: It's always fun to look at tax tables — hey, you're the one reading a tax blog! — but remember that just because your overall income falls into a certain tax bracket, you won't end up paying taxes at just your top rate.
Despite all the talk about flat taxes by Republican presidential nominee wannabes, right now our tax system still is progressive. That means the amount of income taxes you pay increases as you make more money.
These increases occur in steps. So even if a single taxpayer makes $50,000 in 2012, she's not going to owe the IRS $12,500, or 25 percent of her income since her top earnings amount is in the 25 percent income tax bracket.
Her first $8,700 as a single taxpayer is taxed at 10 percent. The next $26,650 at 15 percent and then the final $14,650 of her income taxed at her top rate of 25 percent.
That makes her tax bill $8,530 instead of $12,500. Here's the down-and-dirty math:
$8,700 x 10 percent = $870
$26,650 x 15 percent = $3,997.50
$14,650 x 25 percent = $3,662.50
And $870 + $3,997.50 + $3,662.50 = $8,530
The progressive tax brackets mean our hypothetical taxpayer's IRS bill is $3,970 less that it would have been if all her money was taxed at her final 25 percent rate.
And that makes her actual, effective or average (pick your term) tax rate on the $50,000 just 16.7 percent even though her marginal tax rate, which is the rate applied to the last dollar of income she earned, is 25 percent.
Remember, too, that my very simple, for-illustration-purposes-only example uses our fake filer's $50,000 gross earnings, not her final taxable income amount.
She'll owe even less once her total income amount is reduced by adjustments, deductions and exemptions that she can claim.
More numbers on the way: Keep in mind that these income tax tables apply to your 2012 income. They have no bearing on your 2011 tax return that you will file next year. My earlier post on the 2011 tax brackets will help you with that task.
But they are useful for tax planning. So if you're one of those annoyingly organized and obsessive taxpayers, have fun.
As for the rest of the IRS inflation figures — and there are a lot of them; 21 printed pages to be precise, plus a separate announcement on pension plans — I'm working on putting that data into special blog pages and will post them as soon as I finish.
You also might find these items of interest:
Kay
Thanks, Joe, for the elaboration on my basic example. But watch out — keep this up and you’ll soon be inundated with folks wanting you to do their taxes!
JoeTaxpayer
And yours is more fun than most.
For this gal above, the std deduction and exemption add to $9,750, which leaves $4900 at the 25% rate. What’s cool about this is that she can use the traditional (deductible) IRA to wipe this out completely. And if she wishes to save more than the 10% this represents, go Roth 401(k) for any other savings. (If her company does have Roth 401(k) obviously she can flip this, using the 401(k) pretax to put in 10% of her income, but further savings use Roth IRA).
It’s this type of strategizing that makes the new numbers so interesting each year.