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Rate schedule (federal income tax)

From Wikipedia, the free encyclopedia

A rate schedule is a chart that helps United States taxpayers determine their federal income tax for a particular year.[1][2] Another name for "rate schedule " is "rate table."[1]

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  • Basics of US income tax rate schedule | Taxes | Finance & Capital Markets | Khan Academy
  • 2016 Income Tax Brackets and Rates
  • Tax brackets and progressive taxation | Taxes | Finance & Capital Markets | Khan Academy

Transcription

What I want to do in this video is try to get a good understanding of how the US federal income tax rate schedule works, and also what people mean when they say tax brackets, or what does it mean to be in a tax bracket. So let's say that I make $100,000, and I'm single, and I'm not going to go into the deductions or anything fancy like that. So let's say I make $100,000 in a given year. And these numbers will change as the tax code changes, but the general idea is the same thing, although the details might change. So the way the rate schedule works is that the first $8,350 of my $100,000 will be taxed at 10%. So the first $8,350 will be taxed at 10%. So I'll be paying, what, that's pretty easy to calculate-- I'll pay $835 on that first $8,350. Now, the next $25,600, or from $8,350 to $33,950, that will be taxed at 15%. So this amount right over here, I will have to pay 15% on that. And so that the difference between $33,950 and $8,350 is $25,600 times 15%. I'll calculate it all at the end using a calculator. Now, the next $48,300 is going to be taxed at 25%. So let me draw that over here. So the next-- this next slug right over here is going to be taxed at 25%. So this is the difference between $82,250 and $33,950. That's $48,300. So it's going to be $48,300 times 25%. And then finally, the remainder, the amount above $82,250, since I don't get into the next bracket above that, this part right here is going to be taxed at 28%. And let me get my trusty calculator out to figure out what that is. So, if that's going to be taxed at-- so the difference between $100,000 and $82,250. So $100,000 minus $82,250 is $17,750. So it is $17,750 times 28%. And now I could use the calculator to calculate all of these. So it's going to be-- let's do it all at once-- 17,750 times 28%-- so I'll say that its 0.28-- plus 48,300 times 25%, 0.25, plus $25,600 times 15%, 0.15. Finally, plus $835. I'm going to pay $21,720. So the sum of all of these, in total, I'm going to pay-- I already forgot the number-- $21,720. And I want to make sure you don't have the misconception-- notice, you only pay the 28% on the incremental amount when you enter that bracket. You don't pay this 28% on the entire $100,000, just on the increment above $80,250. You don't pay the 25% on the entire amount, just on the increment between $33,000 and $82,000.

Contents

Origin

The origin of the current rate schedules is the Internal Revenue Code of 1986 (IRC),[2][3] which is separately published as Title 26 of the United States Code.[4] With that law, the U.S. Congress created four types of rate tables, all of which are based on a taxpayer's filing status (e.g., "married individuals filing joint returns," "heads of households").[2][5][6]

Each year the United States Internal Revenue Service (IRS) updates rate schedules in accordance with guidelines that Congress established in the IRC.[7][8] In general, the IRS bases such adjustments on inflation and cost of living increases in the previous year.[9]

Application

The tax rate schedules give tax rates for given levels of taxable income. There is a complex relationship between taxable income and actual income, making it difficult to draw conclusions from the tables. Even the marginal tax rates are misleading because there are various laws that relate taxable income to actual income such that an increase of a dollar of actual income results in an increase of more than a dollar in taxable income, thus making the marginal tax rate greater than what is suggested by the table.

These schedules apply only to regular US income tax, whereas there is a second income tax, the Alternative Minimum Tax, that uses a different schedule. A taxpayer's tax obligation is the higher of those two income taxes, which makes drawing conclusions from the table even more difficult.

Format

All rate schedules have an identical format, containing four columns and seven rows (called "brackets").[2] The first two columns indicate the range of taxable income that a taxpayer must have to qualify for a particular tax rate. The third column indicates the tax rate itself.[2] The fourth column gives the range of income to which the current marginal rate applies.

Given that Congress has prescribed a system of progressive taxation, all but the lowest-earning taxpayers pay distinct rates for different parts of their income.[10]

The following are the IRS rate schedules for 2014:[11][12]

Schedule XSingle

If taxable income is over-- But not over-- The tax is: of the amount over--
$0 $9,075 10% $0
$9,075 $36,900 $907.50 + 15% $9,075
$36,900 $89,350 $5,081.25 + 25% $36,900
$89,350 $186,350 $18,193.75 + 28% $89,350
$186,350 $405,100 $45,353.75 + 33% $186,350
$405,100 $406,750 $117,541.25 + 35% $405,100
$406,750 no limit $118,118.75 + 39.6% $406,750

Schedule Y-1Married filing Jointly or Qualifying Widow(er)

If taxable income is over-- But not over-- The tax is: of the amount over--
$0 $18,150 10% $0
$18,150 $73,800 $1,815.00 + 15% $18,150
$73,800 $148,850 $10,162.50 + 25% $73,800
$148,850 $226,850 $28,925.00 + 28% $148,850
$226,850 $405,100 $50,765.00 + 33% $226,850
$405,100 $457,600 $109,587.50 + 35% $405,100
$457,600 no limit $127,962.50 + 39.6% $457,600

Schedule Y-2Married Filing Separately

If taxable income is over-- But not over-- The tax is: of the amount over--
$0 $9,075 10% $0
$9,075 $36,900 $907.50 + 15% $9,075
$36,900 $74,425 $5,081.25 + 25% $36,900
$74,425 $113,425 $14,462.50 + 28% $74,425
$113,425 $202,550 $25,382.50 + 33% $113,425
$202,550 $228,800 $54,793.75 + 35% $202,550
$228,800 no limit $63,981.25 + 39.6% $228,800

Schedule ZHead of Household

If taxable income is over-- But not over-- The tax is: of the amount over--
$0 $12,950 10% $0
$12,950 $49,400 $1,295.00 + 15% $12,950
$49,400 $127,550 $6,762.50 + 25% $49,400
$127,550 $206,600 $26,300.00 + 28% $127,550
$206,600 $405,100 $48,434.00 + 33% $206,600
$405,100 $432,200 $113,939.00 + 35% $405,100
$432,200 no limit $123,424.00 + 39.6% $432,200

Caution: These tables shown above are accurate for 2014 only and do not apply for any other year. For 2013 and 2015.

Use of rate schedules

To use a rate schedule, a taxpayer must know their filing status and amount of taxable income.[13] Definitions related to one's filing status can be found in IRC § A.2(a-b), and general guidelines regarding taxable income are described in IRC § A.63(a-b).[14] Once a taxpayer has made these determinations, he (1) references the pertinent rate schedule, (2) finds the appropriate bracket (based on her taxable income), and (3) uses the formula described in the third column to determine his federal income tax.

Assume, for example, that Taxpayer A is single and has a taxable income of $175,000 in 2014. The following steps apply the procedure outlined above:

(1) Because he is single, the pertinent rate table is Schedule X.[2]
(2) Given that his income falls between $89,350 and $186,350, he uses the fourth bracket in Schedule X.[2]
(3) His federal income tax will be "$18,193.75 plus 28% of the amount over $89,350."[2] Applying this formula to Taxpayer A, one arrives at the following result:
$18,193.75 + (0.28 * ($175,000 - $89,350)) =
$18,193.75 + (0.28 * $85,650) =
$18,193.75 + $23,982 = $42,175.75.

Accordingly, Taxpayer A must pay $42,175.75 in federal income taxes for 2014. Since his income is in the fourth bracket, his marginal tax rate for each additional dollar he earns is 28%, but his effective tax rate is 24% ($42,175.75/$175,000 is .241).

See also

General:

References

  1. ^ a b Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 8-9.
  2. ^ a b c d e f g h Internal Revenue Service, United States Department of the Treasury, "2007 Federal Tax Rate Schedules," https://www.irs.gov/pub/irs-prior/i1040tt--2007.pdf.
  3. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 2.
  4. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 2; 26 U.S.C.
  5. ^ 26 U.S.C. § A.1(a-e)
  6. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 5-9.
  7. ^ 26 U.S.C. § A.1(f)
  8. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 8-9 (citing Revenue Procedure 2006-53, 2006-48 I.R.B. 996).
  9. ^ 26 U.S.C. § A.1(f).
  10. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 10; Internal Revenue Service, United States Department of the Treasury, "2007 Federal Tax Rate Schedules," https://www.irs.gov/pub/irs-prior/i1040tt--2007.pdf.
  11. ^ 2014 Tax Brackets | Tax Foundation
  12. ^ USA Income Tax Rates 2014
  13. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 5; Internal Revenue Service, United States Department of the Treasury, "2007 Federal Tax Rate Schedules," https://www.irs.gov/pub/irs-prior/i1040tt--2007.pdf.
  14. ^ 26 U.S.C. §§ A.2(a-b), 63(a-b); Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 5-6, 26-27.
This page was last edited on 14 July 2018, at 17:37
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