Are you a 15 percenter like Mitt Romney, or are you a 28 percenter? Have you taken steps to avoid becoming a 35 percenter?
As the April 17 filing deadline draws closer, many taxpayers will be wondering which of six tax brackets they fall into and whether they did enough things correctly last year to position themselves into as low a tax bracket as possible.
"Everybody is going to have a different bracket depending on how you live your life," said Rex Decker, a tax partner at the firm of Sobb Roberts & Pribus in Sylvania Township.
There are six tax brackets this tax season: 10, 15, 25, 28, 33, and 35 percent. Each has a specific income range.
Which bracket taxpayers fall into will depend on income, whether they are filing single or jointly with a spouse, are married but filing separately, or are head of a household.
A single person, therefore, would be in the 25 percent bracket if income was between $34,500 and $83,600 in 2011. However, it is important to remember that tax brackets are marginal rates and don't apply to one's entire income.
So, for example, a single person with a taxable income of $65,000 would find that his or her first $8,500 of income falls into the 10 percent bracket. The next $26,000 is taxed at 15 percent, and the final $30,500 is taxed at 25 percent, for a final average rate of about 12.4 percent.
But that's just a starting point. Other factors can shift that person to a higher or lower bracket.
Whether someone gets income from working or from investments would make a big difference because working income is taxed according to how much one makes in wages or salary, but much of investment income is taxed at 15 percent.
Contributing to a retirement account, using flexible spending accounts, and maximizing your tax deductions also can help.
"There are all sort of hidden traps in the codes that, as your income goes higher, kick in and cause your bracket to go higher," Mr. Decker said. "You might think you're in the 28 percent bracket but find you got kicked into the 33 percent bracket because the itemized issues you previously used have disappeared."
That is why, Decker added, avoiding a higher bracket requires smart decision making in the year before you file. "It takes planning, and for most people to do planning, you either have to be knowledgeable about the tax law or hire someone who is knowledgeable," he said.
For example, he said, one might expect two auto-assembly line workers to be in the same tax bracket. "Two guys working on Jeeps - that's probably predictable. Similar lifestyles, similar money," he said.
Both buy expensive motorcycles. One finances his through the dealership, the other uses a home-equity loan for the purchase. "The guy who financed through the Harley-Davidson dealership might have got kicked up into the next tax bracket, while the guy with the home-equity loan didn't because you can deduct interest on the home-equity loan," Decker said.
"You can have two people both making the same amount of money, and one will be in a higher bracket because one has the kinds of deductions or income that might otherwise be tax-free and the other doesn't," he said.
Decker said he often sees tax-planning mistakes with investors. Investing in stocks or municipal bonds, which have smaller or no tax burden, should be preferred over regular bonds or annuities, which are highly taxable.
That is how presidential candidate Mitt Romney managed to keep his overall tax burden below 15 percent while having a 2010 income of $21.6 million, Decker said.
"Most of his income came from investments. He's moved beyond being a wage earner," Decker said. "If Mitt Romney were to have invested more in bonds, he would have been closer to the 35 percent bracket. But he's in stocks with dividends, and that will be at the 15 percent bracket."
Capital gains from dividends or the sale of stocks are taxed at 15 percent, rather than the regular rate of up to 35 percent.
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