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.
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[edit] 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%.
[edit] Tax brackets in the United States
In the United States, the dollar amounts of the Federal income tax standard deduction and personal exemptions for the taxpayer and dependents are adjusted annually to account for inflation. This results in yearly changes to the personal income tax brackets even when the Federal income tax rates remain unchanged.
For 2009, the standard deduction is $5,700 for single individuals and married individuals filing separately (up $250 from 2008), $8,350 for heads of household (up $350), and $11,400 for married couples filing a joint return (up $500). The dollar amount of each personal and dependency exemption is $3,650 (up $150 from 2008).[1] 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. [2] The Federal income tax brackets for 2009 are as follows:
| Marginal Tax Rate[3] | Single | Married Filing Jointly or Qualified Widow(er) | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $8,350 | $0 – $16,700 | $0 – $8,350 | $0 – $11,950 |
| 15% | $8,351– $33,950 | $16,701 – $67,900 | $8,351 – $33,950 | $11,951 – $45,500 |
| 25% | $33,951 – $82,250 | $67,901 – $137,050 | $33,951 – $68,525 | $45,501 – $117,450 |
| 28% | $82,251 – $171,550 | $137,051 – $208,850 | $68,525 – $104,425 | $117,451 – $190,200 |
| 33% | $171,551 – $372,950 | $208,851 – $372,950 | $104,426 – $186,475 | $190,201 - $372,950 |
| 35% | $372,951+ | $372,951+ | $186,476+ | $372,951+ |
Two higher tax brackets (36% and 39.6%) were added 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% |
[edit] Internal Revenue Code Terminology
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.
[edit] Sample tax calculation
Given the complexity of the United States' income tax code, individuals often find it necessary to consult a tax accountant or professional tax preparer. For example, John, a married 44-year old who has two children, earned a gross salary of $100,000 in 2007. He contributes the maximum $15,500 per year to his employer’s 401(k) retirement plan, pays $1,800 per year for his employer’s family health plan, and $500 per 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, and a $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[4] 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 of the use of the tax tables in the first determination, and these tables are in $50 increments. John’s taxable income was at the bottom of the increment. If his taxable income had been $56,675, 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.
Most states also levy income tax, exceptions being Alaska, Florida, Nevada, South Dakota, Texas, Washington, New Hampshire, Tennessee and Wyoming.[5]
[edit] Tax brackets in the UK
[edit] Tax Brackets in Switzerland
Personal income tax is progressive in nature. The total rate does not usually exceed 40%.
The Swiss Federal Tax Administration website [1] 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.
[edit] Tax brackets in New Zealand
New Zealand has the following income tax brackets (as of 1 October 2010). All values in New Zealand dollars, with the ACC Earners' levy not included[6].
- 10.5% up to $14,000
- 17.5% from $14,001 to $48,000
- 30% $48,001 to $70,000
- 33% over $70,000
- 45% when the employee does not complete a declaration form (IR330)
ACC Earners' Levy for the 2010 tax year is 2.0%, an increase from 1.7% in the 2008 tax year.
[edit] Tax brackets in Canada
Canada's federal government has the following tax brackets for the 2009 tax year (all in Canadian dollars). Note that the "basic personal amount" of $10,320 effectively means that income up to this amount is not subject to tax, although it is included in the calculation of taxable income.[7]
| Taxable income | Tax on this income |
|---|---|
| $0 - $10,320 | Nil |
| $10,321 - $40,726 | 15% |
| $40,727 - $81,452 | 22% |
| $81,453 - $126,264 | 26% |
| Over $126,264 | 29%[8] |
Each province adds their own tax on top of the federal tax.
Provincial / Territorial Tax Rates for 2009: [2]
[edit] 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 here: [3].
[edit] 2007–2008
The Federal budget in May 2007 [4] announced new tax rates for the 2007-2008 financial year. They are as follows :[9]
| 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.
[edit] 2008–2009
The Federal budget in May 2008 [5] announced new tax rates for the 2008-2009 financial year. They are as follows :[9]
| 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.
[edit] 2009–2010
The Federal budget in May 2009 [6] announced new tax rates for the 2009-2010 financial year. They are as follows :[9]
| Taxable income | Tax on this income |
|---|---|
| $0 – $6,000 | Nil |
| $6,001 – $35,000 | 15c for each $1 over $6,000 |
| $35,001 – $80,000 | $4,350 plus 30c for each $1 over $35,000 |
| $80,001 – $180,000 | $17,850 plus 38c for each $1 over $80,000 |
| Over $180,000 | $55,850 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.
[edit] Tax brackets in the Netherlands
[edit] Tax brackets in Singapore
[edit] 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.
[edit] Tax brackets in Malta
[edit] 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% |
[edit] 2009
Single Rates:
| Taxable income | Tax on this income |
|---|---|
| €0 – €8,500 | Nil |
| €8,501 -€14,500 | 15% |
| €14,500 -€19,500 | 25% |
| €19,500 &over | 35% |
Married Rates:
| Taxable income | Tax on this income |
|---|---|
| €0 – €11,900 | Nil |
| €11,900 -€21,200 | 15% |
| €21,200 -€28,700 | 25% |
| €28,700 &over | 35% |
[edit] References
- ^ "2009 Inflation Adjustments Widen Tax Brackets and Expand Tax Benefits". Internal Revenue Service, United States Department of the Treasury. http://www.irs.gov/newsroom/article/0,,id=187825,00.html.
- ^ 2008 Inflation Adjustments Widen Tax Brackets
- ^ http://www.irs.gov/pub/irs-drop/rp-08-66.pdf
- ^ "2007 Federal Tax Rates Schedule". IRS. Archived from the original on 2007-09-11. http://web.archive.org/web/20070911030055/http://www.irs.gov/formspubs/article/0,,id=164272,00.html. Retrieved 2007-09-17.
- ^ http://www.taxadmin.org/fta/rate/ind_inc.html
- ^ http://www.ird.govt.nz/income-tax-individual/itaxsalaryandwage-incometaxrates.html
- ^ http://www.cra-arc.gc.ca/E/pbg/tf/5000-s1/5000-s1-08e.pdf See line 1 "Basic Personal Amount"
- ^ http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
- ^ a b c "Individual income tax rates". Australian Tax Office. http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htm&mnu=5464&mfp=001/002. Retrieved 2006-08-30.
