Income Tax Brackets: The Basics From A Tax Attorney


What are income tax brackets? And why should we care? Income tax brackets are the divisions at which tax rates change in a progressive tax system. Essentially, they are the cutoff values for taxable income, or income that is past a certain point causing it to be taxed at a higher rate.


This can be confusing, so let's use an example.


An increase in a marginal rate does not increase the rate below. Let's suppose there are just two tax brackets- 20% for all income below $100,000 and 50% for all income above $100,000. What would be the effective tax rate for someone who makes $150,000.00?


In that case the first $100,000 is taxed at a rate of 20%, so the total is $20,000. For the remaining $50,000, income is taxed at a 50% rate, so the total for this amount is $25,000. Therefore, by adding the two together, the total tax is $45,000. To calculate the effective tax rate, we divided the tax by the income: $45,000/$150,000, which equals 30%. So we would say that a person earning $150,000 in income  has an effective tax rate of 30%, but his marginal tax rate (the tax rate of earning one more dollar) is 50%.


These tax brackets are only a rough guide, in the loosest sense of the word, and the IRS gives this same warning. The only way to accurately calculate your tax liability is by completing your personal 1040 with all schedules, including the SE for those who are self-employed or the Alternative Minimum Tax (AMT) for higher income earners.


With these warnings, here are the four tax rate schedules of IRS tax brackets for 2011:



Taxable income over But not over Rate
$0.00 $8,700.00 10.00%
$8,700.00 $35,350.00 15.00%
$35,350.00 $85,650.00 25.00%
$85,650.00 $178,650.00 28.00%
$178,650.00 $388,350.00 33.00%
$388,350.00   35.00%


Married, Joint

Taxable income over But not over Rate
$0.00 $17,400.00 10.00%
$17,400.00 $70,700.00 15.00%
$70,700.00 $142,700.00 25.00%
$142,700.00 $217,450.00 28.00%
$217,450.00 $388,350.00 33.00%
$388,350.00   35.00%


Married, Separate

Taxable income over But not over Rate
$0.00 $8,700.00 10.00%
$8,700.00 $35,350.00 15.00%
$35,350.00 $71,350.00 25.00%
$71,350.00 $108,725.00 28.00%
$108,725.00 $194,175.00 33.00%
$194,175.00   35.00%


Head of Household

Taxable income over But not over Rate
$0.00 $12,400.00 10.00%
$12,400.00 $47,350.00 15.00%
$47,350.00 $122,300.00 25.00%
$122,300.00 $198,050.00 28.00%
$198,050.00 $388,350.00 33.00%
$388,350.00   35.00%


IRS Income Tax Brackets for 2012 are only a starting point to calculate tax. For instance, on the first $110,100, Social Security and Medicare taxes are assessed at a flat-tax rate.  But for income taxes, various other tax rates apply.


However, none of these tax brackets may end up applying. If the IRS feels a taxpayer has reduced his or her income tax too much based on total income, the IRS is allowed by law to assess an Alternative Minimum Tax, or AMT for short. The AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (exemption). This exemption is substantially higher than the exemption from regular income tax.


In addition, regular taxable income is adjusted for certain items computed differently for AMT, such as depreciation and medical expenses. No deduction is allowed for state income taxes or miscellaneous itemized deductions in computing AMT income. Taxpayers with incomes above the exemption, whose regular Federal Income Tax is below the amount of AMT, must pay the higher AMT amount.


There are also separate AMT tax brackets:


Status Single Married Joint Married Separate Trust Corporation
Tax Rate: Low 26% 26% 26% 26% 20%
Tax Rate: High 28% 28% 28% 28% 20%
High Rate Starts $175,000 $175,000 $87,500 $87,500 n/a
Exemption 2009 $46,700 $70,950 $35,475 $22,500 $40,000
Exemption 2010 $47,450 $72,450 $36,225 $22,500 $40,000
Exemption phase-out starts at $112,500 $150,000 $75,000 $75,000 $150,000
Zero 2009 exemption at $299,300 $433,800 $216,900 $165,000 $310,000
Zero 2010 exemption at $302,300 $439,800 $219,900 $165,000 $310,000
Capital gain rate 25% 25% 25% 25% 20%


As you can see, the top tax rate for AMT is 28% , yet the top tax standard bracket is 35%. Because of the difference in exemptions and credits, a 28% tax rate can actually result in a higher tax than a 35% tax rate!


if you are confused at this point and just want help with your taxes, contact us. We can assist with tax prep, tax planning, and tax resolution. Call us at 888-727-8796 or email info@irsmedic.com.