Tax Brackets

[ladonnarosso]

I have often heard the term "tax brackets" but I really don't quite understand what that means. I'm sure that I could find out this information on the IRS website, but I'd much rather hear it from you guys. Do you know what the dollar amount cutoffs are for the percentage amount of tax? It can't be quite that simple though, I'm sure there are many other factors. I guess I'm just trying to figure out if, since my husband and I made a bit more this year than last, if we are going to have to pay more in taxes for 2014. And if I should try and reduce my liability before the end of the year. Thanks so much in advance!

[LittleMissSplendid]

This website provides a general explanation of tax brackets in fairly simple language and also links the tax rate schedules.

[disneysteve]

I guess I'm just trying to figure out if, since my husband and I made a bit more this year than last, if we are going to have to pay more in taxes for 2014.

Well yes, if you earned more, you will pay more in taxes. The question is if the additional earnings push you into a higher tax bracket. If it did, then the money earned above that cut off will be taxed at the higher rate, but all of the other income will be taxed the same as before.

My father, an accountant, always told me it's better to earn more income and pay more taxes.

I used to have friends when I was a medical resident who refused to take extra jobs because it meant they'd pay more in taxes. That made no sense at all. I, on the other hand, jumped at every extra job I could find and earned thousands of dollars. Yes I paid more in taxes but who cares.

[Petunia 100]

Some tax credits do have "cliffs". You make one dollar over the limit, you lose the credit completely.

So it is true that $1 more income could cost you much more than $1 in taxes.

[corn18]

Life in the 39% tax bracket with AMT and greatly reduced deductions is interesting. Making more money has limited impact. If I make an extra dollar, I get to keep 48 cents of it. I am grateful for my first world problem. Since joining these fora, I have found that reducing spending is way more effective than increasing my income. For every dollar I don't spend, I can save a dollar vs. the extra dollar I make equals $0.48 in savings.

To the OP, if you use turbotax, you can use it for free to enter all your info and run different scenarios. I use it to plan for next year as well. They don't make you pay anything until you file.

Tom

[moneybags]

Some tax credits do have "cliffs". You make one dollar over the limit, you lose the credit completely.

So it is true that $1 more income could cost you much more than $1 in taxes.

I thought most of the tax credits were phased out so you wouldn't lose the credit 100% at the cut off amount. Are there some that you do lose entirely at a set dollar amount?

[ladonnarosso]

Thanks for the replies! I am looking at the website posted earlier, and it looks like our tax bracket won't change this year if we file jointly. But this brings me to another question. We have always filed jointly, but when I look at those brackets, it looks like if we file seperately, my husband would only pay in the 15% instead of the 25% bracket that we would have been in when we file jointly. What are the pros and cons of jointly/seperately?

[Petunia 100]

I thought most of the tax credits were phased out so you wouldn't lose the credit 100% at the cut off amount. Are there some that you do lose entirely at a set dollar amount?

Some are phased out, some have "cliffs". For example, the retirement saver's credit.

[Petunia 100]

Thanks for the replies! I am looking at the website posted earlier, and it looks like our tax bracket won't change this year if we file jointly. But this brings me to another question. We have always filed jointly, but when I look at those brackets, it looks like if we file seperately, my husband would only pay in the 15% instead of the 25% bracket that we would have been in when we file jointly. What are the pros and cons of jointly/seperately?

MFS typically ends up being more expensive, but not always. You should run your returns both ways and see which is better for you.

[doingitallwrong]

A lot of the credits are not available if you file married separately. I agree, prepare the returns both ways and see which is to your best advantage -- don't forget to factor in the state returns, as well.

Even many of the phased out credits have a dollar limit at which the phase-out ends and you don't get any of the credit.