Planning Basics: The Number We All Need to Know

I'm not talking about Mom and Dad's home number for birthday greetings, anniversaries wishes or, if you are in college, the occasional request for advice and money. (Not that you don't need that occasionally too!) I'm talking about the number we all need to know for planning purposes: our marginal tax rate! Exciting eh?

Individuals can use the tax rate schedules in a number of ways to help plan their finances. You can use these tax rates to figure out how much tax you will pay on extra income you earn. For a taxpayer in the 25% tax bracket, extra income will be taxed at that rate until the taxpayer reaches the next tax bracket. Useful if you are trying to figure out whether to take that part time job, pay the sitter, tolls, wardrobe upgrade and meals out or just continue as Mr. Mom. Alternatively, you can use these tax rates to figure out how much tax you will save by increasing your deductions, such as those given for mortgage interest, contributions to charities or any number of deductible items.

Your top marginal tax rate is 10%, 15%, 25%, 28%, 33%, or 35%, depending on your taxable income, as shown in the tables below. If your top bracket is 25%, for example, this means that each additional dollar of ordinary income (such as salary or interest income) will be taxed at 25% for regular income tax purposes.

The most favorable tax brackets apply to married persons filing jointly and qualifying widow(er)s who also use the joint return rates. The least favorable brackets are those for married persons filing separately, but filing separately is still advisable for married couples in certain situations.

2009 federal tax tables are divided into four sections based on your filing status: single, married filing jointly, married filling separately, head of household.

Filing status: SINGLE

*10% on income between $0 and $8,350
*15% on the income between $8,350 and $33,950; plus $835.50
*25% on the income between $33,950 and $82,250; plus $4,675.00
*28% on the income between $82,250 and $171,550; plus $16,750.00
*33% on the income between $171,550 and $372,950; plus $41,754.00
*35% on the income over $372,950; plus $109,216.00
(Tax Rate Schedule X)

Filing status: MARRIED FILING JOINTLY

* 10% on the income between $0 and $16,700
* 15% on the income between $16,700 and $67,900; plus $1,670.00
* 25% on the income between $67,900 and $137,050; plus $9,350.00
* 28% on the income between $137,050 and $208,850; plus $26,637.50
* 33% on the income between $208,850 and $372,950; plus $46,741.50
* 35% on the income over $372,950; plus $100,894.50
(Tax Rate Schedule Y-1)

Filing status: MARRIED FILING SEPARATELY

*10% on the income between $0 and $8,350
*15% on the income between $8,350 and $33,950; plus $835.00
*25% on the income between $33,950 and $68,525; plus $4,675.00
*28% on the income between $68,525 and $104,425; plus $13,318.75
*33% on the income between $104,425 and $186,475; plus $23,370.75
*35% on the income over $186,475; plus $50,447.25
(Tax Rate Schedule Y-2)


Filing status: HEAD OF HOUSEHOLD


* 10% on the income between $0 and $11,950
* 15% on the income between $11,950 and $45,500; plus $1,195.00
* 25% on the income between $45,500 and $117,450; plus $6,227.50
* 28% on the income between $117,450 and $190,200; plus $24,215.00
* 33% on the income between $190,200 and $372,950; plus $44,585.00
* 35% on the income over $372,950; plus $104,892.50
(Tax Rate Schedule Z)

Please note: The tax rate on qualified dividends and net capital gains is generally lower than your top bracket rate on ordinary income. Qualified dividends are subject to a rate of 15% or are tax free, depending on your top bracket, and net capital gains are also generally subject to a rate of 15% or are tax free (depending on your top bracket), but the rate can be higher if you have 28% rate gains or unrecaptured Section 1250 gains.

For those of you who are sticklers on this subject of marginal tax rates, we are ignoring Alternative Minimum Tax effects, which will be discussed in a later article.

To actually compute your 2008 regular income tax, you will either look up your tax in the Tax Table, use the Tax Computation Worksheet, or if you have net capital gains or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax Worksheet.

The next is in all caps so the author-ME-must think it is important. THESE TAX SCHEDULES ARE PROVIDED FOR INFORMATIONAL (PLANNING) PURPOSES ONLY. If necessary,please see your tax professional or trusted advisor when making important decisions regarding your taxes.