Tax bracket

Tax bracket

Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate.

Example

Imagine that there are three tax brackets: 10%, 20%, and 30%. The 10% rate applies to income from $1 to $10,000; the 20% rate applies to income from $10,001 to $20,000; and the 30% rate applies to all income above $20,000.

Under this system, someone earning $10,000 would be taxed at a rate of 10%, paying a total of $1,000. Someone earning $5,000 would pay $500, and so on.

Meanwhile, someone earning $35,000 would face a more complicated calculation. The rate on the first $10,000 would be 10%; the rate from $10,001 to $20,000 would be 20%; and the rate above that would be 30%. Thus, he would pay $1,000 for the first $10,000 of income; $2,000 for the second $10,000 of income; and $4,500 for the last $15,000 of income; in total, he would pay $7,500, or about 21.4%.

Tax brackets in the USA

For 2008, the Federal tax brackets for a single (unmarried) person are:

  • 10%: from $0 to $8,025
  • 15%: from $8,026 to $32,550
  • 25%: from $32,551 to $78,850
  • 28%: from $78,851 to $164,550
  • 33%: from $164,551 to $357,700
  • 35%: $357,701 and above

This applies only to amounts above $8,950 (assuming the standard deduction of $5,450 plus one personal exemption of $3,500) for an individual. For example, a single individual without children pays:

  • 0% of the first $8,950 of income,
  • 10% of the income between $8,951 and $16,975,
  • 15% of the income between $16,976 and $41,500,
  • 25% of the income between $41,501 and $87,800,
  • 28% of the income between $87,801 and $173,500,
  • 33% of the income between $173,501 and $366,650, and
  • 35% of the income exceeding $366,650.

For 2008, The value of each personal and dependency exemption, available to most taxpayers, is $3,500, up $100 from 2007. The new standard deduction is $10,900 for married couples filing a joint return (up $200), $5,450 for singles and married individuals filing separately (up $100) and $8,000 for heads of household (up $150). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Two higher tax brackets were added at the top in 1993, and then taxes in all brackets were lowered in 2001 through 2003 as follows:

  1992   1993 -
2000
  2001  2002  2003 -
2007
15% 15% 15% 10% 10%
15% 15%
28% 28% 27.5% 27% 25%
31% 31% 30.5% 30% 28%
36% 35.5% 35% 33%
39.6% 39.1% 38.6% 35%

An example will show how Federal Income Taxes in the United States are calculated.

Definitions first:

Gross Salary is the amount your employer pays you, i.e., John gets paid $50/hour as an electrical engineer. His annual gross salary is $50/hour x 2,000 hours/year = $100,000/year.

W-2 wages are the wages that appear on the employee’s W-2 issued by his employer each year in January. A copy of the W-2 is sent to the Internal Revenue Service (IRS). It is the Gross Salary less any contributions to pre-tax plans. The W-2 form also shows the amount withheld by the employer for federal income tax.

W-2 Wages = Gross Salary less (contributions to employer retirement plan) less (contributions to employer health plan) less (contributions to some other employer plans)

Total Income is the sum of all taxable income, including the W-2 wages. Almost all income is taxable. There are a few exemptions for individuals such as non-taxable interest on government bonds, a portion of the Social Security (SS) income (not the payments to SS, but the payments from SS to the individual), etc.

Adjusted Gross Income (AGI) is Total Income less some specific allowed deductions. Such as; alimony paid (income to the recipient), permitted moving expenses, self-employed retirement program, student loan interest, etc.

Itemized Deductions are other specific deductions such as; mortgage interest on a home, state income taxes or sales taxes, local property taxes, charitable contributions, state income tax withheld, etc.

Standard Deduction is a sort of minimum Itemized Deduction. If you add up all your itemized Deductions and it is less than the Standard Deduction you take the Standard Deduction. In 2007 this was $5,350 for those filing individually and $10,700 for married filing jointly.

Personal Exemption is a tax exemption in which the taxpayer can deduct an amount from their gross income for each dependent they can claim. It was $3,400 in 2007.

The Example:

John is 44, married, has two children and earned a gross salary of $100,000 in 2007. He contributes the maximum $15,500/year to his employer’s 401(k) retirement plan, pays $1,800/year for his employer’s family health plan, and $500/year to his employer’s Flexfund medical expense plan. All of the plans are allowed pre-tax contributions.

Gross pay = $100,000

W-2 wages = $100,000 - $15,500 - $1,800 - $500 = $82,200

John’s and his wife’s other income is; $12,000 from John’s wife’s wages (she also got a W-2 but had no pre-tax contributions), $200 interest from a bank account, $150 state tax refund,

Total Income = $82,200 + $12,000 + $200 + $150 = $94,550.

John’s employer reassigned John to a new office and his moving expenses were $8,000, of which $2,000 was not reimbursed by his employer.

Adjusted Gross Income = $94,550 - $2,000 = $92,550.

John’s Itemized Deductions were $22,300 (he had some big mortgage interest, property taxes, and state income tax withheld).

John had four personal exemptions--himself, his wife and two children. His total personal exemptions were 4 x $3,400 = $13,600.

Taxable Income = $92,550 - $22,300 - $13,600 = $56,650.

The tax on the Taxable Income is found in a Tax Table if the Taxable Income is less than $100,000 and is computed if over $100,000. Both will be used. The Tax Tables can be found in the 2007 1040 Instructions. The Tax Tables list income in $50 increments for all categories of taxpayers, single, married filing jointly, married filing separately, and head of household. For the Taxable Income range of "at least $56,650 but less than $56,700" the tax is $7,718 for a taxpayer who is married filing jointly.

The 2007 Tax Rates Schedule for married filing jointly is:

Over But not over of the amount over
$0 $15,650 10% $0
$15,650 $63,700 $1,565+15% $15,650
$63,700 $128,500 $8,772.50+25% $63,700
$128,500 $195,850 $24,972.50+28% $128,500
$195,850 $349,700 $43,830.50+33% $195,850
$349,700
$94,601+35% $349,700

The tax is 10% on the first $15,650 = $1,565.00

plus 15% of the amount over $15,650 up to $56,650 = $41,000 x 15% = $6,150.00

Total = $7,715.00

The difference is because we used the Tax Tables in the first determination of tax and the tables are in $50 increments. John’s Taxable Income was at the bottom of the increment. If his Taxable Income had been $57,575, in the middle of the increment, then the calculated amount would be $7,718.75.

In addition to the Federal Income tax, John will probably be paying state income tax, Social Security tax, and Medicare tax. The Social Security tax in 2007 for John is 6.2% on the first $97,500 of earned income (wages), or a maximum of $6,045. There are no exclusions from earned income for Social Security so John will pay the maximum of $6,045. His wife will pay $12,000 x 6.2% = $744. Medicare is 1.45% on all earned income with no maximum. John and his wife will pay $112,000 x 1.45% = $1,624 for Medicare in 2007.

To compare how federal tax brackets changed from 1950 to 1980, look at the comparative chart in this link.

Most states also levy income tax, exceptions being Alaska, Florida, Nevada, South Dakota, Texas, Washington, New Hampshire, Tennessee and Wyoming; see

See also Rate schedule (federal income tax)

Tax brackets in the UK

See Taxation in the United Kingdom

Tax Brackets in Switzerland

Personal income tax is progressive in nature. The total rate does not usually exceed 30%.

The Swiss Federal Tax Administration website provides a broad outline of the Swiss tax system, and full details and tax tables are available in PDF documents.

The complexity of the system is partly because the Confederation, the 26 Cantons that make up the federation, and about 2 900 communes [municipalities] levy their own taxes based on the Federal Constitution and 26 Cantonal Constitutions.

With the additional levies, the total tax rate is often in excess of 55%-60% at its highest bracket.

Tax brackets in New Zealand

New Zealand has the following income tax brackets (as of 1 October 2008). All values in New Zealand dollars. (With earner levy not included):

  • 12.5% up to $14,000
  • 21% from $14,001 to $40,000
  • 33% $40,001 to $70,000
  • 39% over 70,001
  • 46.3% when the employee does not complete a declaration form (IR330)

Earners ACC Levy for the 2008 tax year is 1.4%

See http://www.ird.govt.nz/income-tax-individual/itaxsalaryandwage-incometaxrates.html for more details on taxation in New Zealand

Tax brackets in Canada

Canada's federal government has the following tax brackets for the 2007 tax year:

Federal Tax Rates for 2008: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#federal]

15% on the first $37,885 of taxable income, +
22% on the next $37,884 of taxable income (on the portion of taxable income between $37,885 and $75,769), +

26% on the next $47,415 of taxable income (on the portion of taxable income between $75,769 and $123,184), +
29% of taxable income over $123,184.

Each province adds their own tax on top of the federal tax.

Provincial / Territorial Tax Rates for 2007: provincial

Tax brackets in Australia

The income tax is administered by the Federal government in Australia. Australian income tax rates for prior years can be found at:http://www.ato.gov.au/individuals/content.asp?doc=/content/73969.htm

2005–2006

The tax brackets for the financial year 2005-2006 are as follows:

Taxable income Tax on this income
$0 – $6,000 Nil
$6,001 – $21,600 15c for each $1 over $6,000
$21,601 – $63,000 $2,340 plus 30c for each $1 over $21,600
$63,001 – $95,000 $14,760 plus 42c for each $1 over $63,000
Over $95,000 $28,200 plus 47c for each $1 over $95,000

These tax brackets are for Australian residents, and do not include the 1.5% Medicare levy or 1% Medicare levy surcharge (for individuals without private health insurance). All figures are in Australian Dollars.

2006–2007

The Federal budget in May 2006 announced new tax rates for the 2006-2007 financial year. They are as follows :

Taxable income Tax on this income
$0 – $6,000 Nil
$6,001 – $25,000 15c for each $1 over $6,000
$25,001 – $75,000 $2,850 plus 30c for each $1 over $25,000
$75,001 – $150,000 $17,850 plus 40c for each $1 over $75,000
Over $150,000 $47,850 plus 45c for each $1 over $150,000

Again, the tax brackets do not include the 1.5% Medicare levy. All figures are in Australian Dollars.

2007–2008

The Federal budget in May 2007 announced new tax rates for the 2007-2008 financial year. They are as follows :

Taxable income Tax on this income
$0 – $6,000 Nil
$6,001 – $30,000 15c for each $1 over $6,000
$30,001 – $75,000 $3,600 plus 30c for each $1 over $30,000
$75,001 – $150,000 $17,100 plus 40c for each $1 over $75,000
Over $150,000 $47,100 plus 45c for each $1 over $150,000

Again, the tax brackets do not include the 1.5% Medicare levy. All figures are in Australian Dollars.

2008–2009

The Federal budget in May 2008 announced new tax rates for the 2008-2009 financial year. They are as follows :

Taxable income Tax on this income
$0 – $6,000 Nil
$6,001 – $34,000 15c for each $1 over $6,000
$34,001 – $80,000 $4,200 plus 30c for each $1 over $34,000
$80,001 – $180,000 $18,000 plus 40c for each $1 over $80,000
Over $180,000 $58,000 plus 45c for each $1 over $180,000

Again, the tax brackets do not include the 1.5% Medicare levy. All figures are in Australian Dollars.

Tax brackets in the Netherlands

See income tax in the Netherlands.

Tax brackets in Singapore

2007 & 2008

Taxable income Tax on this income
$0 – $20,000 Nil
$20,001 – $30,000 3.5c for each $1 over $20,000
$30,001 – $40,000 $350 plus 5.5c for each $1 over $30,000
$40,001 – $80,000 $900 plus 8.5c for each $1 over $40,000
$80,001 – $160,000 $4300 plus 14c for each $1 over $80,000
$160,001 – $320,000 $15,500 plus 17c for each $1 over $160,000
Over $320,000 $42,700 plus 20c for each $1 over $320,000

All figures are in Singapore dollars.

There will be a personal tax rebate of 20% granted for 2008, up to a maximum of $2,000.

Tax brackets in Malta

2008

Single Rates:

Taxable income Tax on this income
€0 – €8,150 Nil
€8,151 -€14,000 15%
€14,001 -€19,000 25%
€19,001 &over 35%

Married Rates:

Taxable income Tax on this income
€0 – €11,400 Nil
€11,401 -€20,500 15%
€20,501 -€28,000 25%
€28,001 &over 35%

References

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