How do tax brackets work?

If you’re in the 25% federal marginal income tax bracket, does that mean the federal government is scheduled to take 25% of your income? Not exactly. Let’s assume that you’re married, filing jointly, and you earn $135,000 in income in 2014. To estimate your 2014 federal tax, start with your first dollar. The lowest bracket is 10%, meaning income between $0 and $18,150 would be taxed at 10%. Income between $18,150 and $73,800 would be taxed at a 15% rate, and the income between $73,800 and $148,850 falls into the 25% bracket. Your estimated federal income tax bill would be $25,462.50, just under 19% of your total income.

Now, let’s take a closer look at your 1040 form, particularly lines 8a and 9a, which show income earned from interest and dividends. If you are simply reinvesting this income, you may want to consider moving the money to investments with the potential to grow tax-deferred. Since you’re reducing your total household income from the top down, you may end up saving money that’s taxed at your highest marginal tax rate.

Do you want to learn more about the effect of taxes on investments? Call us today and let’s review your situation.