Tax Tips: What tax bracket are you in?

One of the questions most asked of us is, “What tax bracket am I in?” We often hear media and other sources the term “Tax bracket”. But what does that term mean, and more importantly, what do you do with it once you know it? There are two so called brackets that you should be familiar with; Marginal tax bracket and Effective tax bracket.

Marginal tax bracket is the highest of the graduated tax rate percentages which you are subjected to when calculating your tax. Of course, this is a direct product of the size of your income and the amount of your deductions, referred to as your taxable income. The Federal tax rates are graduated, meaning that the lower the taxable income, the lower the percentage rate; the higher the taxable income, the higher the percentage rate.

Effective tax bracket is simply an arithmetic result derived by dividing your total Federal income tax by your taxable income. It is more or less an average of the various graduated tax rates which encompass your tax calculation.

Once armed with the knowledge of your marginal tax bracket and your effective tax rate, what do you do with it? First, it will allow you to do tax planning if you suspect changes in tax brackets between two years. For instance, suppose your income is such that in 2013 you calculate that you will be in a 15% bracket, and in 2014, because you expect to receive additional income, you suspect you will be in the 28% bracket. That would mean that your last dollar of income in 2014 will be taxed at 28 cents on the dollar, and inversely, your last dollar of deduction will reduce your tax by 28 cents. This is contrasted to the 15 cents in 2013. Thus, your planning objective would be to push as many deductions into 2014 as you can to reduce your taxes by 28 cents (on the dollar), and pull income into 2013 to be taxed at only 15 cents. But, watch out for rules of constructive receipt and constructive payment to be certain you remain in compliance.


Another use of knowing your bracket pertains to business people and making a decision on a large expense, or the purchase of a piece of equipment. That is, how much is the expense or purchase really going to cost me after income tax considerations? If the self-employed person is in a 28% income tax bracket, plus pays self-employment tax at a rate of 15.3%, Pennsylvania income tax at 3.07%, and local at 1%, the total taxes would equate to around 47%. So, for example, an expenditure or purchase of say $1,000, after tax considerations would be $530 versus the $1,000 outlay. Of course, any smart business person should never make a disbursement predicated on tax savings alone. The practicality and economics have to make sense first, with consideration to the tax reductions.

Disclaimer – Bruce Baer is a CPA with Baer & Company, CPAs, which advertises with Journal Register Co. publications.

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