New tax rates 1/1/2013

[Colonel_Buck]

When newspaper articles talk about the new tax rates going into effect on 1/1/2013, they always talk about households that make over X amount or under Y amount. Are they talking gross income or taxable income?

[AndyK]

Irrespective of gross versus taxable, it's important to remember that the higher rates only apply to income above the cutoff for the next lower level.

Most people assume that if the top tax rate goes up to, for example sake, 50%; they will be paying 50% on ALL of their taxable income.

Not true.

The 50% rate only applies to income above the cutoff for the current maximum.

Illustration: My family's taxable income last year was well into the top bracket (for which I'm thankful). However, our actual tax rate was at least 10% below the top rate since a lot of our income was taxed at the lower rates.

This concept is one fine detail which almost everyone doesn't comprehend.

[rogfulton]

This concept is one fine detail which almost everyone doesn't comprehend.

And the one which is most often obfuscated by someone with an axe to grind or wealth to protect.

[Famspear]

When newspaper articles talk about the new tax rates going into effect on 1/1/2013, they always talk about households that make over X amount or under Y amount. Are they talking gross income or taxable income?

The tax rates are imposed on "taxable income", which of course is a "net" figure, determined by starting with gross income and deducting, from gross income, all the deductions to which one is entitled.

The rate structure would be something like it was for the tax year 2000.

So, for example, for an unmarried individual with no dependents, filing as "single," with, say $100,000 of taxable income for the year 2000, the tax would have been computed as follows (I'm showing just the first three brackets, which are the ones that would apply in my example):

Taxable income range
$0 - $26,250.00: the 15% bracket
$26,250.01 - $63,550.00: the 28% bracket
$63,550.01 - $132,600.00: the 31% bracket

The tax on $100,000 of taxable income would not be $31,000 (i.e., $100,000 x 31%). The tax would be $25,681.00.

That's computed as follows:
Tax on the first bracket: ($26,250 less $0) x 15% = $3,937.50
Tax on the second bracket: ($63,550 less $26,250.01) x 28% = $10,444.00
Tax on the third bracket: ($100,000 less $63,550.01) x 31% = $11,299.50

Thus: $3,937.50 + $10,444.00 + $11,299.50 = $25,681.00

[Famspear]

FYI - For the year 2000, the other tax brackets for a single (unmarried) individual were as follows:

Taxable
income
range
Fourth bracket: $132,600.01 - $288,350.00: 36% rate
Fifth bracket: $288,350.01 and higher: 39.6% rate