John Bullis: Do you really know your tax rate?
May 22, 2012
There seems to be some confusion about the income tax rates.
I heard someone say on the radio “… I paid tax at the 35 percent rate. …”
Perhaps they meant to say “As a single person, my taxable income (after itemized deductions or the standard deduction and after my personal exemption) was taxed:
• $8,500 was taxed at 10 percent;
• $26,000 was taxed at 15 percent;
• $49,100 was taxed at 25 percent;
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• $90,800 was taxed at 28 percent;
• $204,750 was taxed at 33 percent
• And income greater than $379,150 was taxed at 35 percent.”
Each “layer” of taxable income is taxed at different rates.
The last bit of income in the example above was some income taxed at 35 percent, but some income was taxed at the other rates: 10 percent, 15 percent, 25 percent, 28 percent and 33 percent.
That means the last bit of deductions, such as non-cash charitable contributions, deductible retirement plan contributions, etc., saved tax at the 35 percent rate.
That’s why it can be a good idea to make some elections, such as doing a contribution to a regular IRA or other retirement savings account. If you save $3,000 at work by having your paycheck reduced by contributing to the retirement plan at work, the taxable wages are reduced. With lower taxable wages, it reduces the taxable income and saves tax at your maximum tax rate.
All tax rules have a general rule and then the exceptions.
Like the TV commercial, “Wait, there’s more,” the Alternative Minimum Tax that is figured on Form 6251 may change your tax. That is a different set of rules (no deductions for sales tax, property tax, miscellaneous deductions, items of tax preference, etc). First you get an exemption (for a single person, it is $48,500) – but that is only if the Alternative Minimum Taxable Income is not over $112,500.
If the income after the exemption, Line 30 of Form 6251 (Alternative Minimum Taxable Income less the exemption), is $175,000 or less, you have a single tax rate of 26 percent.
If the income is more than $175,000, you have a tax rate of 28 percent but you get to deduct $3,500 from the result. You pay the higher tax of regular tax or the Alternative Minimum Tax. It’s sort of like a “flat” tax.
Did you hear, “Diplomacy is the art of letting someone else have your way.”
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.