Taxes

Can someone explain how tax brackets work?

For instance, I went from making 15k a year to 95k a year so I know I'm in a different tax bracket but I don't know what that entails for me.

Depends on your filing status, but you get taxed a certain percent on the amount that falls into that bracket.

For a single filer,
$0 to $8,700 is taxed at 10%, so a max of $870.
$8,701 to $35,350 is taxed at 15%, so a max of $3,997.50 (plus the $870 from the previous bracket, $$4,867.50)
$35,351 to $85,650 is taxed at 25%, so a max of $12,575 (plus the two previous brackets, $17,442.50)
etc...

That's why a pay raise will never decrease the amount of money you make due to paying more taxes. Once you hit the top of the tax bracket, you're not getting taxed anything additional on that bracket. The tax brackets are also on adjusted gross income minus deductions, not gross. Which means you can decrease your taxable income with deductions so you fall into a lower tax bracket.

So you making $95,000, can reduce your gross to somewhere in the 25% bracket.

Or, if you have an army of accountants (like Mitt Romney), you can reduce your millions of dollars in income so much that you're only paying 13% or whatever (that also includes the fact that capital gains, which are in the first section of income on the 1040, are taxed at 15%).

Noodleface_sl said:

Can someone explain how tax brackets work?

For instance, I went from making 15k a year to 95k a year so I know I'm in a different tax bracket but I don't know what that entails for me.

Click to expand...

FYI I you had any other changes at the same time like kids, marriage, buying a house that could significantly lower your income and put you into a lower tax bracket. I think it is possible to a actually get more money back sometimes if you can get yourself into a lower tax bracket by paying more into your retirement fund.

No, getting married in August though so we'll see how that works out. I think that's the only change I'll see this year as the house will take some time.

Elurin_sl said:

Depends on your filing status, but you get taxed a certain percent on the amount that falls into that bracket.

For a single filer,
$0 to $8,700 is taxed at 10%, so a max of $870.
$8,701 to $35,350 is taxed at 15%, so a max of $3,997.50 (plus the $870 from the previous bracket, $$4,867.50)
$35,351 to $85,650 is taxed at 25%, so a max of $12,575 (plus the two previous brackets, $17,442.50)
etc...

That's why a pay raise will never decrease the amount of money you make due to paying more taxes. Once you hit the top of the tax bracket, you're not getting taxed anything additional on that bracket. The tax brackets are also on adjusted gross income minus deductions, not gross. Which means you can decrease your taxable income with deductions so you fall into a lower tax bracket.

So you making $95,000, can reduce your gross to somewhere in the 25% bracket.

Or, if you have an army of accountants (like Mitt Romney), you can reduce your millions of dollars in income so much that you're only paying 13% or whatever (that also includes the fact that capital gains, which are in the first section of income on the 1040, are taxed at 15%).

Click to expand...

It's easier to explain it by saying "Taxable income", just throwing out those numbers people think of that as gross. Here's a link to the chart we use.http://www.irs.gov/pub/irs-pdf/i1040tt.pdf. It's also 14 pages long.

I've worked for the IRS for 5 years doing all 1040 stuff until a medical leave kicked in, but I still use the free turbotax or taxact. Depends on how much information I have to sync in is the only reason I'd use Turbo.

Also, As long as you owe less than $1,000 come April 15, you don't get any additional penalties of late payments, etc. I've kept our refunds under $25 and only owed more than $100 once in the last 7 years. (This is the short explanation, I could write a novel explaining this) My goal is to let the government earn as little interest off my money as possible.

For the last 18 months I've gotten permission to file returns for individuals instead of working the government side of things. (On top of about a dozen small business book keeping jobs) I rarely charge more than $50, but this is because it's all lower income people asking for help getting crazy benefits from earned income credit. I can't take advantage of any welfare refundable credits that are paid out of social security, it makes me feel dirty. I don't advertise this service either, I only do it because I can help more people than I was when the Treasury Department paid 100% of my bills.

edit. Fixed link

Noodleface_sl said:

Can someone explain how tax brackets work?

Click to expand...

You're always taxed on marginal income. So let's say you've determined your taxable income.

The first $8,700 you make is taxed at 10%. Now let's say you make $9,000 and are now in the 15% tax bracket. This doesn't mean you're entire $9,000 income is now taxed at 15%. Rather, the first $8,700 are still taxed at 10%, and only the additional $300 are taxed at 15%.

The same applies as you go up into higher brackets.

So I use H&R Block to efile my taxes. I've used them almost exclusively over the past 5 or 6 years. I feel they cover the bases pretty well, and I am getting back all I should be. That being said, this year is really starting to piss me off. I did my taxes, double checked them, and filed them.. back on Feb 8th. I received an email notice on Feb 9th saying that the IRS has accepted my filing, and I should be receiving my direct deposit in 7-10 business days. Needless to say, I've not received it.
Some ladies at my work filed before me. They've received their returns in about a week. A buddy of mine filed about a week and a half after me. He's received his return also. Somewhere in the middle, my taxes got held up. There's no information on them, no reason why that I can see. The 'Find my Refund' link tells me the same thing every day ..."Your taxes are still being processed. Please check back later."
There's nothing terribly complicated by my taxes. I file single, don't make absurd amounts of money, and I own my own house. The house part adds some minute level of difficulty I suppose, but not much. I've always done my own taxes, and even with worrying about Interest Paid and Mortgage Premiums, I've never struggled getting through them.

The only thing i can think of is the Free Obama Loan. I purchased my house when the real estate market was just gaining stride with it's plummet. At the time, the government was offering a tax-free loan of 1200 or so, to be paid back over the next X years. Every year, they automatically withhold a portion of my tax returns for this. That's fine, I understand what it's for, and I'm completely cool with it. I wish there was better information on how to just 'pay' it on the IRS site, but it's really not that important to me. I'm OK letting them take it back little by little over the course of time. Is it possible this would be slowing down the process though? It never has in the past... but it's the only thing I can think of.

Anyways, maybe one of you accounting-type folk have some insight into wtf is going on at the IRS this year (Vlett?). I know they've had a splurge of people wanting their returns back the last month, and they've had a difficult time keeping up with them. But I think a month is getting a tad on the long side. I'm willing to listen to any good tips or suggestions for expediting the process.
/rant
Thanks!

Do you have one of the numerous forms that cause a delay in processing? There were a couple lists of forms which, if you used one, would cause your return to be delayed. Mine took a month because I had the Lifetime Learning Credit.

I didn't mean to if I did McCheese. I suppose that's as likely a reason as any, but damn. I think a month is more than enough time to kick back a return. Hell, they've already had my money for a year...

Without knowing exactly what you filed I can only speculate. I recommend you calling 1-800-829-1040. If there is a math error (a letter will be generated) then you can authorize a fix over the phone. If nothing is wrong they'll tell you exactly what date your refund will hit. Don't call on a Monday.

Thanks for the quick reply Vlett. I was just about to give that phone number a try, when I checked online for one last 'just in case'. Turns out they FINALLY have a date on there, and I should be receiving my refund next week. So I'll spare them the angry phone call, as really I just wanted to know where my money was.

Cool. I'm glad it worked out.

I wish I could get money back...
Owned a few K this year... >.<

I'd much rather end up on the refund side of things than the owing side of things, just not a lot. I have everything pretty dialed in to where we get between $0-$500 back each year.

Well, unless you're making $6mil a year. I'd gladly pay taxes if that was my annual income.

Yes it is "smart" to get as close to 0 as possible but out of how many millions out there who get a tax refund would have actually saved up that same amount of money if they weren't over-taxed? I am guessing about 3.

Fedor_sl said:

I don't think you understand how taxes work if you're actually wishing for a refund like it's a good thing.

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Ohh I am fully aware of how taxes work. It's just one of those illogical wishes that comes every year at Tax time when you hear idiots talking about getting a refund.

Anyone know how you report a Roth IRA re-characterization :| Made over 125K this year in taxable income so I had move all my contributions into a Traditional IRA. This is the only thing keeping me from completing my taxes... bleh

Question: If you get a $3,000 refund what could you have instead done with the money if you invested $250/mo over a year? Assume there are no additional bills or (non-recreational) expenses to be paid with the money?

Getting back as much money as you can definitely is a good idea but I am curious as to when the marginal benefit of pinching every penny is outweighed by just getting a lump sum every year.