How to determine your income tax bracket

Elizabeth Rosen
by Elizabeth Rosen, Contributor

 

In order to properly file your federal income tax return and pay any tax that you owe, it is necessary to understand your income tax bracket, your filing status, and which income tax rate(s) apply to you. There are currently six marginal income tax brackets and five federal filing statuses. The amount of tax you owe will depend on your filing status and how much taxable income you earn.

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This article discusses marginal income tax brackets, federal filing statuses, and income tax rates, so you can start preparing for the 2013 filing season and developing a tax strategy.

Marginal Income Tax Brackets

Your marginal income tax bracket basically represents the highest tax rate that you must pay on your income. There are currently six marginal income tax brackets for each federal filing status: 10, 15, 25, 28, 33, and 35 percent.

The marginal tax bracket system is a gradual tax schedule, which essentially means the more you earn, the more tax you pay. The amount of taxable income that you earn determines which tax bracket(s) you fall into. It is important to realize that only the money you earn within a certain tax bracket is taxed at that rate. In other words, if you earned more in 2012 than you did in 2011 and thus moved into a higher tax bracket, only the money that falls within that higher tax bracket is taxed at the higher rate.

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So, for example, if you move from the 25 percent tax bracket to the 28 percent tax bracket, you may make the mistake of believing that all of your income is now taxed at that higher rate. However, only the money that you earn within the 28 percent bracket is taxed at that rate.

The structure of federal income tax brackets was first implemented by the IRS in the early 1900s in an attempt to create a progressive tax system that would demand less from lower-income individuals. This system, plus a series of tax credits and tax deductions, have allowed nearly half of Americans to avoid owing federal income tax altogether [Source: The Tax Foundation].

Federal Filing Statuses

Your filing status determines your filing requirements (whether or not you are required to file a tax return and which return to file), your standard deduction amount, your eligibility for certain tax credits and tax deductions, and your income tax. There are five federal filing statuses based on marital status and other conditions: single, married filing separately, married filing jointly, head of household, and qualifying widow(er) with dependent child.

When you fill out your federal income tax return, you must specify what your filing status is on the tax form. Review each filing status carefully and choose the one that best fits your situation. If you qualify for more than one filing status, you are allowed to choose the one that offers you the lowest tax.

Single
You can file as “single” if you are unmarried, divorced, legally separated, or widowed as of the last day of the calendar year (Dec. 31). Individuals who have dependents, but who were not the primary caregiver for more than half of the year, must also use this filing status. The IRS generally requires a taxpayer to file as “single” if you do not meet the criteria for the other filing statuses.

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Married Filing Separately
A married couple may choose to file a joint income tax return or to file separate returns. Married couples who file separately usually do so because they have separate high incomes and/or large itemized deductions. It is important to note that there are restrictions on certain tax breaks for married couples filing separately, and that this status is usually considered less beneficial because it can result in a higher overall tax for a married couple. It is highly recommended that spouses calculate their tax liability under both “separate” and “joint” statuses to see which will work best for them.

Married Filing Jointly
Married couples who use this filing status must turn one combined tax return and jointly take responsibility for the income reported and taxes owed. To be eligible, the couple must be legally married as of the last day of the applicable tax year. Most married couples file jointly because it offers them more tax benefits.

Head of Household
You can file as “head of household” if you are unmarried as of the last day of the year (Dec. 31). To qualify for this filing status, you must also be paying for more than half the costs of maintain your home and have a qualifying dependent (such as a child or relative) who has lived in your home with you for at least 6 months. Note that special exceptions may apply for dependent parents. The head of household status is typically used by single parents who have custody of their children. Filing as “head of household” tends to offer more benefits than the “single” or “married filing separately” statuses, including lower tax rates and higher standard deductions.

Qualifying Widow/Widower with Dependent Child
This status can only be used by a widow(er) who lives with a dependent child and has not remarried. It may apply for the year in which your spouse passed away, and it can be used for up to two years after your spouse’s death. To be eligible for this status, you must have been entitled to file a joint return with your spouse in the year that he/she passed away, regardless of whether that return was actually filed. This filing status basically allows individuals to use the same tax rates as those who are “married filing jointly” as well as the highest standard deduction (provided they do not itemize deductions).

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2012 Federal Individual Income Tax Rates

These are the tax rates for the 2012 tax year, listed by filing status. Remember that 2012 income tax returns are due by Monday, April 15, 2013.

Single

If your taxable income is over…

…but not over

Your tax is…

…of the amount over

Plus

$0

$8,700

10%

$0

$8,700

$35,350

15%

$8,700

$870.00

$35,350

$85,650

25%

$35,350

$4,867.50

$85,650

$178,650

28%

$85,650

$17,442.50

$178,650

$388,350

33%

$178,650

$43,482.50

$388,350

35%

$388,350

$112,683.50

 

Married Filing Separately

If your taxable income is over…

…but not over

Your tax is…

…of the amount over

Plus

$0

$8,700

10%

$0

$8,700

$35,350

15%

$8,700

$870.00

$35,350

$71,350

25%

$35,350

$4,867.50

$71,350

$108,725

28%

$71,350

$13,867.50

$108,725

$194,175

33%

$108,725

$24,332.50

$194,175

35%

$194,175

$52,531.00

 

Married Filing Jointly or Qualifying Widow/Widower

If your taxable income is over…

…but not over

Your tax is…

…of the amount over

Plus

$0

$17,400

10%

$0

$17,400

$70,700

15%

$17,400

$1,740.00

$70,700

$142,700

25%

$70,700

$9,735.00

$142,700

$217,450

28%

$142,700

$27,735.00

$217,450

$388,350

33%

$217,450

$48,665.00

$388,350

35%

$388,350

$105,062.00

 

Head of Household

If your taxable income is over…

…but not over

Your tax is…

…of the amount over

Plus

$0

$12,400

10%

$0

$12,400

$47,350

15%

$12,400

$1,240.00

$47,350

$122,300

25%

$47,350

$6,482.50

$122,300

$198,050

28%

$122,300

$25,220.00

$198,050

$388,350

33%

$198,050

$46,430.00

$388,350

35%

$388,350

$109,229.00

 

For More Information

IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information)

IRS Tax Form 1040 Instructions

IRS Online Tool: What is My Filing Status?