Your Taxable Income
Some people have notion in mind that they are taxed on all income they made. In reality, you are taxed on your taxable income rather than the gross income. The taxable income is the amount of income left over after you’ve made your pre-tax contributions to your 401(k) and after you’ve subtracted the tax breaks to which you’re entitled. Taxable income is your adjusted gross income (AGI) minus your standard or itemized deductions.
Not every dollar of your taxable income is taxed at the same rate
Your tax rate increases progressively as your income increases. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. A tax bracket is a range of incomes taxed at a specific rate. Your taxable income falls into different brackets, which are taxed at different tax rates. When your taxable income moves above or below the range limits, you switch to a different tax bracket.
Your marginal tax rate
Your marginal tax rate is the tax bracket at which the highest portion of your income is taxed. That is the tax rate at which your “last dollar” could be is taxed. For example, if you report $80,000 of taxable income for 2012, your marginal tax rate is 25% — the rate at which the last dollar of that $80,000 is taxed.
You can use tax bracket to calculate the amount of additional tax you’ll pay if your income increases. You can also use the marginal rate to estimate the value of a deduction. For example, if your marginal rate is 28%, a $100 deduction reduces your taxable income by $28 (100 x 0.28).
Be aware that marginal tax rates interact with other tax rates. In particular, the alternative minimum tax can push income into a higher tax rate or eliminate the tax savings of deductions.
How to find your Tax Bracket
Tax brackets are set based on income levels. The income ranges that determine tax brackets differ depending on your filing status. They are adjusted for inflation and change yearly. First you need to know your taxable income. Next you need to know your filing status. Based on your filing status and taxable income, you can easily find your tax bracket.
Here are the tax brackets for 2001-2013. You can use it to calculate your federal income.
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