Items you will need
- Gross taxable income
- Tax return forms
- Tax rable
While we all must pay federal income tax on a variety of earned and unearned income, the concept of tax rate and tax brackets are often misconstrued. If a person falls into a certain tax bracket, this usually refers to the marginal tax bracket for which any additional income will be taxed at that rate. The marginal tax rate determines the rate of tax payed on an individuals last dollar of income. This method is useful in determining what earning additional income will mean from a tax perspective.
Gather all records of possible earned income for the current tax year. This includes any 1099 form's sent by employers, savings or investments as well as business or other income. The Internal Revenue Service requires reporting all income, so contacting any employers or corporations to get the necessary documentation is mandatory.
Adjust income accordingly using any and all possible credits and/or deductions. Tax credits can be counted as dollar-for-dollar reductions to your tax bill. Examples of tax credits available include dependent child care, retirement contributions and education or adoption credit. Tax deductions, although not dollar-for-dollar, reduce the amount of income taxed, thus reducing your taxes by your tax rate. Tax deductions include mortgage interest, property taxes, charity contributions and medical expenses.
Subtract your total credits dollar for dollar from your income and then enter your deductions to get your adjusted gross income amount that is taxable. Find your standard deduction amount based on your filing status to determine if you should use that amount or itemize depending on which amount is higher.
Apply your new adjusted gross taxable income amount to the tax table found in the appropriate tax schedule return form. Decide on how you intend on filing depending on this status (i.e., single, married separate or married jointly).
Determine your marginal tax bracket based on the income amount for this status on your taxable table. For example, if you are filing jointly with a taxable income of $100,000 annually and the table indicates a 25 percent marginal tax rate for income between $67,000and $124,000 for this filing status, then your marginal tax rate bracket would be 25 percent.
To find your marginal tax bracket (the percentage you’ll pay on your last dollar of income, or save on the last dollar of a deduction), you can download the current tax tables in a publication called IRS Revenue Procedure Table.
- "Personal Finance At Your Fingertips"; Ken Little; 2007
- A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com