Understanding Your Tax Bracket

The more you make, the more you pay in taxes. Tax planning is essential. Learning about deferring taxes and what tax bracket you are in can help you achieve your goals.

The more you make, the more they take. Our tax system is based on a graduated tax, but moving into the next tax bracket does not mean that all of your income is how taxed at the higher rate. Only the additional income you earn above your current base will be affected by the higher bracket.

Your marginal tax bracket is the percentage in taxes you pay on each additional dollar earned above your base  bracket. This is the rate you pay on the last dollar you earned for the year. If your new raise pushes you into the 31 percent tax bracket, don't turn down the raise because you don't want to pay the extra taxes. If your new raise puts you into the 31 percent bracket, only income above the 28 percent base will be taxed at the higher tax rate of 31 percent. Also remember that some of your income is taxed at the 15 percent rate. Currently our tax rates are, 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent.

The more money you make, the more you pay in taxes---this is a sorry fact of life. Some of this is due to the fact that the tax brackets increase as your income increases. In addition, you lose some of your tax advantages, such as exemptions for dependents, that are phased out as your income increases.

Now, if the state you live in also taxes your income---and most stats do---add that tax rate in when you're planning. And you do need to do tax planning because, if you do not have enough taxed withheld from your paycheck or pay enough in estimated taxes, the IRS will penalize you, as will your sate income tax division. There are seven tax-free states: Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming.

If you are in the 28 percent marginal tax bracket for federal taxes and you live in a state that has a 5 percent income tax, your combined marginal tax rate is 33 percent. If your certificate of deposit has earned $1,000 for the year, your tax liability for the CD will be $330. So don't run out and spend your $1,000 because Uncle Sam has his hand out fort his share, leaving you just $670 to spend.

The dollar amounts at which tax brackets occur change every year because they are indexed for inflation. As a taxpayer, you should at least understand what you are paying in taxes. You don't have to be able to quote tax code here; just know where to find the information when your need it. As you earn more income, your taxes may become too taxing (that's a pun!) to handle yourself, and you'll need to hire someone or take them to the local H&R Block office. You should still understand what you are signing, however, when the tax preparer hands you the completed 1040. More important, you should be able to review it and see if there are mistakes in it.