Even before completing the forms, you probably have an idea of whether you’ll owe money or can expect a refund when you file your federal income tax return. But do you know your top tax bracket?If not, you might want to find out. Knowing the rate assessed on your last dollar of taxable income can help you make better financial decisions.
Illustration: You’re wondering how much you’ll save by increasing the pretax contribution to your retirement plan. The additional amount invested times your top tax rate provides a quick estimate.
For your personal return, your taxable income will fall into one of six brackets: 10%, 15%, 25%, 28%, 33%, and 35%. The highest rate that applies to any of your income is called your top tax bracket.
Example: For 2007, a married couple filing a joint federal return with taxable income of $130,000 has a top tax bracket of 28%.
Keep in mind, however, that this couple would not owe $36,400 in taxes ($130,000 multiplied by 0.28). That's because this rate only applies to the income in that bracket. Since the 28% bracket starts at income of $128,501 for 2007, the rate is applied to $1,499 of income ($130,000 minus $128,501). Their income below $128,501 is taxed in the three lower brackets — some at 10%, some at 15%, and some at 25%.
Why should you care? Because planning might allow you to cut your tax bill. For instance, in the above example, strategies such as bunching itemized deductions to reduce your taxable income could save you about $420 ($1,499 multiplied by 0.28) by keeping you out of the 28% tax bracket.
Contact us for more information on how to manage your taxable income in order to cut your 2007 taxes.
Questions for our Financial Expert?
E-Mail us at: finance@ClevelandSeniors.Com
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