Tax Bracket

 

Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate.

Example

Imagine that there are three tax brackets: 10%, 20%, and 30%. The 10% rate applies to income from $1 to $10,000; the 20% rate applies to income from $10,001 to $20,000; and the 30% rate applies to all income above $20,000.

Under this system, someone earning $10,000 would be taxed at a rate of 10%, paying a total of $1,000. Someone earning $5,000 would pay $500, and so on.

Meanwhile, someone earning $35,000 would face a more complicated calculation. The rate on the first $10,000 would be 10%; the rate from $10,001 to $20,000 would be 20%; and the rate above that would be 30%. Thus, he would pay $1,000 for the first $10,000 of income; $2,000 for the second $10,000 of income; and $4,500 for the last $15,000 of income; in total, he would pay $7,500, or about 21.4%.

Tax brackets in the USA

For 2007, the Federal tax brackets for a single (unmarried) person are:^[1]

• 10%: from $0 to $7,825
• 15%: from $7,826 to $31,850
• 25%: from $31,851 to $77,100
• 28%: from $77,101 to $160,850
• 33%: from $160,851 to $349,700
• 35%: $349,701 and above

This applies only to amounts above $8,750 (standard deduction of $5,350 plus the one personal exemption of $3,400) for an individual. For example, a single individual would actually pay 0% on the first $8,750 of income, 10% on the amount of income between $8,751 and $16,575, 15% on the amount of income between $16,576 and $40,600, 25% on the amount of income between $40,601 and $85,850, and so on.

Two higher tax brackets were added at the top in 1993, and then taxes in all brackets were lowered in 2001 through 2003 as follows:

1992   1993 - 2000   2001   2002   2003 - 2007 15% 15% 15% 10% 10% 15% 15% 28% 28% 27.5% 27% 25% 31% 31% 30.5% 30% 28% 36% 35.5% 35% 33% 39.6% 39.1% 38.6% 35%

An example will show how Federal Income Taxes in the United States are calculated.

Definitions first:

Gross Salary is the amount your employer pays you, i.e., John gets paid $50/hour as an electrical engineer. His annual gross salary is $50/hour x 2,000 hours/year = $100,000/year.

W-2 wages are the wages that appear on the employee’s W-2 issued by his employer each year in January. A copy of the W-2 is sent to the Internal Revenue Service (IRS). It is the Gross Salary less any contributions to pre-tax plans. The W-2 form also shows the amount withheld by the employer for federal income tax.

W-2 Wages = Gross Salary less (contributions to employer retirement plan) less (contributions to employer health plan) less (contributions to some other employer plans)

Total Income is the sum of all taxable income, including the W-2 wages. Almost all income is taxable. There are a few exemptions for individuals such as non-taxable interest on government bonds, a portion of the Social Security (SS) income (not the payments to SS, but the payments from SS to the individual), etc.

Adjusted Gross Income (AGI) is Total Income less some specific allowed deductions. Such as; alimony paid (income to the recipient), permitted moving expenses, self-employed retirement program, student loan interest, etc.

Itemized Deductions are other specific deductions such as; mortgage interest on a home, state income taxes, local property taxes, charitable contributions, state income tax withheld, etc.

Standard Deduction is a sort of minimum Itemized Deduction. If you add up all your itemized Deductions and it is less than the Standard Deduction you take the Standard Deduction. In 2007 this was $5,350 for those filing individually and $10,700 for married filing jointly.

Personal Exemption is a tax exemption in which the taxpayer can deduct an amount from their gross income for each dependent they can claim. It was $3,400 in 2007.

The Example:

John is 44, married, has two children and earned a gross salary of $100,000 in 2007. He contributes the maximum $15,500/year to his employer’s 401(k) retirement plan, pays $1,800/year for his employer’s family health plan, and $500/year to his employer’s Flexfund medical expense plan. All of the plans are allowed pre-tax contributions.

Gross pay = $100,000

W-2 wages = $100,000 - $15,500 - $1,800 - $500 = $82,200

John’s and his wife’s other income is; $12,000 from John’s wife’s wages (she also got a W-2 but had no pre-tax contributions), $200 interest from a bank account, $150 state tax refund,

Total Income = $82,200 + $12,000 + $200 + $150 = $94,550.

John’s employer reassigned John to a new office and his moving expenses were $8,000, of which $2,000 was not reimbursed by his employer.

Adjusted Gross Income = $94,550 - $2,000 = $92,550.

John’s Itemized Deductions were $22,300 (he had some big mortgage interest, property taxes, and state income tax withheld).

John had four personal exemptions--himself, his wife and two children. His total personal exemptions were 4 x $3,400 = $13,600.

Taxable Income = $92,550 - $22,300 - $13,600 = $56,650.

The tax on the Taxable Income is found in a Tax Table if the Taxable Income is less than $100,000 and is computed if over $100,000. Both will be used. The Tax Tables can be found in the 2007 1040 Instructions. The Tax Tables list income in $50 increments for all categories of taxpayers, single, married filing jointly, married filing separately, and head of household. For the Taxable Income range of "at least $56,650 but less than $56,700" the tax is $7,718 for a taxpayer who is married filing jointly.

The 2007 Tax Rates Schedule^[2] for married filing jointly is:

Over	But not over		of the amount over
$0	$15,650	10%	$0
$15,650	$63,700	$1,565+15%	$15,650
$63,700	$128,500	$8,772.50+25%	$63,700
$128,500	$195,850	$24,972.50+28%	$128,500
$195,850	$349,700	$43,830.50+33%	$195,850
$349,700	------------	$94,601+35%	$349,700

The tax is 10% on the first $15,650 = $1,565.00

plus 15% of the amount over $15,650 up to $56,650 = $41,000 x 15% = $6,150.00

Total = $7,715.00

The difference is because we used the Tax Tables in the first determination of tax and the tables are in $50 increments. John’s Taxable Income was at the bottom of the increment. If his Taxable Income had been $57,575, in the middle of the increment, then the calculated amount would be $7,718.75.

In addition to the Federal Income tax, John will probably be paying state income tax, Social Security tax, and Medicare tax. The Social Security tax in 2007 for John is 6.2% on the first $97,500 of earned income (wages), or a maximum of $6,045. There are no exclusions from earned income for Social Security so John will pay the maximum of $6,045. His wife will pay $12,000 x 6.2% = $744. Medicare is 1.45% on all earned income with no maximum. John and his wife will pay $112,000 x 1.45% = $1,624 for Medicare in 2007.

To compare how federal tax brackets changed from 1950 to 1980, look at the comparative chart in this link. [1] Most states also levy income tax, exceptions being Alaska, Florida, Nevada, South Dakota, Texas, Washington, New Hampshire, Tennessee and Wyoming; see [2]
See also Rate schedule (federal income tax)

Tax brackets in the UK

See Taxation in the United Kingdom

Tax Brackets in Switzerland

Personal income tax is progressive in nature. The total rate does not usually exceed 30%.

The Swiss Federal Tax Administration website [3] provides a broad outline of the Swiss tax system, and full details and tax tables are available in PDF documents.

The complexity of the system is partly due to the fact that the Confederation, the 26 Cantons that make up the federation, and about 2 900 communes [municipalities] levy their own taxes based on the Federal Constitution and 26 Cantonal Constitutions.

With the additional levies, the total tax rate is often in excess of 55%-60% at its highest bracket.

Tax brackets in New Zealand

New Zealand has the following income tax brackets (as of May 2007). All values in New Zealand dollars. (With earner levy not included):^{[citation needed]}

• 19.5% up to $38,000
• 33% from $38,001 to $60,000
• 39% $60,001 and above
• 46.3% when the employee does not complete a declaration form (IR330)

Earners ACC Levy for the 2007 tax year is 1.3%

Checkout http://www.ird.govt.nz/income-tax-individual/itaxsalaryandwage-incometaxrates.html for more details on taxation in New Zealand

Tax brackets in Canada

Canada's federal government has the following tax brackets for the 2007 tax year:

Federal Tax Rates for 2007:http://www.cra-arc.gc.ca/tax/individuals/faq/taxrates-e.html#federal

• 15.5% on the first $37,178 of taxable income, plus
• 22% on the next $37,179 of taxable income (on the portion of taxable income between $37,178 and $74,357), plus
• 26% on the next $46,530 of taxable income (on the portion of taxable income between $74,357 and $120,887), plus
• 29% of taxable income over $120,887

Each province adds their own tax on top of the federal tax.

Provincial / Territorial Tax Rates for 2007:http://www.cra-arc.gc.ca/tax/individuals/faq/taxrates-e.html#provincial

Tax brackets in Australia

2005-2006

The income tax is administered by the Federal government in Australia. The tax brackets for the financial year 2005-2006 are as follows:^[3]

Taxable income	Tax on this income
$0 – $6,000	Nil
$6,001 – $21,600	15c for each $1 over $6,000
$21,601 – $63,000	$2,340 plus 30c for each $1 over $21,600
$63,001 – $95,000	$14,760 plus 42c for each $1 over $63,000
Over $95,000	$28,200 plus 47c for each $1 over $95,000

These tax brackets are for Australian residents, and do not include the 1.5% Medicare levy or 1% Medicare levy surcharge (for individuals without private health insurance). All figures are in Australian Dollars.

2006-2007

The Federal budget in May 2006 announced new tax rates for the 2006-2007 financial year. They are as follows :^[3]

Taxable income	Tax on this income
$0 – $6,000	Nil
$6,001 – $25,000	15c for each $1 over $6,000
$25,001 – $75,000	$2,850 plus 30c for each $1 over $25,000
$75,001 – $150,000	$17,850 plus 40c for each $1 over $75,000
Over $150,000	$47,850 plus 45c for each $1 over $150,000

Again, the tax brackets do not include the 1.5% Medicare levy. All figures are in Australian Dollars.

2007 - 2008

The Federal budget in May 2007 [4] announced new tax rates for the 2007-2008 financial year. They are as follows :^[3]

Taxable income	Tax on this income
$0 – $6,000	Nil
$6,001 – $30,000	15c for each $1 over $6,000
$30,001 – $75,000	$3,600 plus 30c for each $1 over $30,000
$75,001 – $150,000	$17,100 plus 40c for each $1 over $75,000
Over $150,000	$47,100 plus 45c for each $1 over $150,000

Again, the tax brackets do not include the 1.5% Medicare levy. All figures are in Australian Dollars.

2008 - 2009

The Federal budget in May 2007 [5] announced new tax rates for the 2007-2008 financial year. They are as follows :^[3]

Taxable income	Tax on this income
$0 – $6,000	Nil
$6,001 – $30,000	15c for each $1 over $6,000
$30,001 – $80,000	$3,600 plus 30c for each $1 over $30,000
$80,001 – $180,000	$18,600 plus 40c for each $1 over $80,000
Over $180,000	$58,600 plus 45c for each $1 over $180,000

Again, the tax brackets do not include the 1.5% Medicare levy. All figures are in Australian Dollars.

Tax brackets in the Netherlands

See income tax in the Netherlands.

References

1. ^ Federal Tax Brackets. Edward Jones Investments. Retrieved on 2007-09-17.
2. ^ 2007 Federal Tax Rates Schedule. IRS. Retrieved on 2007-09-17.
3. ^ ^{a b c d} Individual income tax rates. Australian Tax Office. Retrieved on 2006-08-30.

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