Discussion:Is tax calculated on Taxable or on Gross Income?
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Discussion Forum Index --> Tax Questions --> Is tax calculated on Taxable or on Gross Income?
| 26 June 2006 | |
| My gross annual income comes to about $32K.
That tips me over into the 25% tax bracket, which is ($29,051 - $70,350). My question is, since I'm entitled to 1 deduction, my taxable income comes to: 32,000 - 3,200 = $28800. $28,800 keeps me in the 15% tax bracket ($7,151 - $29,050). My question is this: Is tax calculated on "Taxable Income", or on "Gross Income"? In my situation, if tax is calculated on gross income, I'll be in the 25% tax bracket. But it it's calculated on taxable income, I'll still be in the 15% bracket, which is a huge difference. Thanks. | |
| 26 June 2006 | |
| Tax is computed on taxable income -- after personal exemptions and either itemized deductions or the standard deduction.
However, even if you were slightly over the break point, don't make the mistake of thinking that ALL of your income is taxed at 25%. The 25% would be your MARGINAL tax bracket, meaning that only the EXCESS over the break point is taxed at the higher rate. | |
| 26 June 2006 | |
| Cwatt1, great answer. I certainly didn't know about MARGINAL tax bracket.
How far from the break point does one have to pay 25% tax on all of one's income? | |
| 26 June 2006 | |
| Never pay the same rate on ALL. Marginal taxation....remember. | |
| 27 June 2006 | |
| DZCPA, your comment is confusing.
When you say "Never", are you saying a tax payer has a choice as to what to pay taxes on? When you say "remember", you're assuming people know what you know. | |
| 27 June 2006 | |
| Fw: While there is a bracket that taxes marginal increments at 25%, the point at which gross income just happens to be taxed at 25% is, because of the particular way the law is written, mathematically discrete. For a single individual with no itemized deductions, this amount would be $191,320. A dollar more or less and the overall percentage would change. | |
ConservativeDC (talk|edits) said: | 27 June 2006 |
| FW12:
I get this a lot from people. Here is the best way to think of it: All sources of income (wages, interest, dividends, etc.) "minus" 401(k) deferrals, health insurance, etc "minus" adjustments to income (IRA contributions, student loan interest, tuition and fee, etc) gives you adjusted gross income "minus" either the standard deduction or itemized deductions (usually only the latter if you own a home) "minus" personal exemptions depending on the size of your household gives you taxable income taxable income is then subject to the bracket structure (10, 15, 25 for most people) then, you may qualify for credits against tax (children, retirement, etc.) that gives you tax after credits hope that helps. | |
