The federal tax rate is the income tax rate charged to individuals and corporations under the federal tax code. In the United States, there are different rates and schedules depending on whether the tax applies to an individual or a company. Further, there are other considerations such as filing status, exemptions and deductions that affect an individual's tax rate.
The first thing taxpayers must do to figure out what federal tax rate applies to them is to gather all income information and look at all exemptions and deductions. In the United States, everyone gets at least a standard deduction, which reduces your taxable income by thousands. Some may itemize deductions, which has the potential to reduce taxable income by even more (see Resources). Those who are unfamiliar with itemization may want to rely on a professional for those services.
Once income and relevant deductions have been determined, it is then possible for taxpayers to see which bracket they fall in. Regardless of whether a taxpayer is filing as single or married, all will fall between a 0 percent tax bracket and a 35 percent tax bracket. In 2012, for example, those who had a taxable income of $71,000 would have a tax bracket of 25 percent.
The 25 percent figure is known as the marginal tax rate. It is the highest tax rate paid on the last dollar of income. However, it is not the average tax rate paid. For example, that person with a marginal tax rate of 25 percent would only pay 10 percent on the first $8,700, then would pay in each subsequent tax bracket up to that 25 percent bracket. This would mean such an individual would have an average tax rate of somewhat less than 25 percent.
Corporate Tax Rate
The same holds true on the corporate side. If a company brings in an income of $70,000, the first $50,000 will be taxed at 15 percent, according to 2012 tax rates. The other $20,000 will be taxed at 25 percent. Thus, the marginal tax rate is never the true rate that a payer must pay out.
While the United States basically uses a graduated federal tax rate, where those with higher incomes pay a higher marginal rate, that is not always the case. In some cases with corporate income taxes, the marginal tax rate could drop back down to a lower percentage. For example, in 2012, the marginal tax rate for companies making between $15 million and $18,333,333 was 38 percent. Any income more than that was only taxed at 35 percent.
Before determining a corporate tax rate, a company must first determine whether it meets the definition of a personal services corporation. These entities are taxed a flat rate of 35 percent, regardless of income. Personal service corporations are those that provide a variety of professional services such as architectural work, legal services and health services.
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