“Worry often gives a small thing a big shadow.” – Swedish Proverb

The very first thing we would do with any client who wants to get ahead of their tax bill is to first figure out what their tax bill would actually be, if all things remain the same.

While there are a lot of variables that come into play, we can get a good grasp of things by looking at the tax brackets. We’re still waiting for Congress to finalize many 2014 tax laws (an annual exercise this time of year), but the seven ordinary income tax rates are the same, starting at 10 percent and topping out at 39.6 percent.

And the IRS inflation adjustments last fall told us what income ranges will be taxed at those various rates. And, so you don’t have to go searching, here they are in the table below.
 

Tax Rate

Single

Head of Household

Married Filing Jointly

or Surviving Spouse

Married Filing Separately

10%

Up to $9,075

 Up to $12,950

 Up to $18,150

 Up to $9,075

15%

$9,076

to $36,900

 $12,951

 to $49,400

 $18,151

to $73,800

 $9,076

to $36,900

25%

$36,901

to $89,350

 $49,401

 to $127,550

 $73,801

to $148,850

 $36,901

to $74,425

28%

$89,351

to $186,350

 $127,551

 to $206,600

 $148,851

to $226,850

 $74,426

to $113,425

33%

$186,351

to $405,100

 $206,601

 to $405,100

 $226,851

to $405,100

 $113,426

to $202,550

35%

$405,101

to $406,750

 $405,101

 to $432,200

 $405,101

to $457,600

 $202,551

to $228,800

39.6%

$406,751 or more

 $432,201 or more

 $457,601 or more

 $228,801 or more

 
Keep this handy, as it WILL be useful in the process of planning ahead.

Remember, even if your annual salary falls in the 39.6 percent bracket, that doesn’t actually mean that you pay that rate on every dollar you earn.

This is because the U.S. tax system is what is known as “progressive”. This means that you pay the top rate, or whatever bracket your income tops out at, on the “last” dollar you earn. The rest of your money is taxed at the lesser rates leading up to your top tax bracket.

So every federal taxpayer pays 10 percent on the first $9,075 of taxable income that he or she receives. That’s $907.50. Then we pay the 15 percent rate on our earnings that fall into that tax bracket and so on, until all our money is taxed at the proper rate.

These tax calculations mean that while your income may be in the 39.6 bracket, your “effective tax rate” will be less.

All of these considerations go into what moves we make, and when we make them, when we create a tax plan for clients.

And it’s no surprise that wealthier taxpayers also have to worry about some added taxes.

There’s the 3.8 percent Net Investment Income Tax, or NIIT, as well as the additional 0.9 percent Medicare payroll tax on top of the 1.45 percent all of us already have withheld from our paychecks.

These added taxes are applied if you make more than $200,000 as a single filer or $250,000 as a married couple filing jointly.

All these considerations are why it’s better to start thinking about your 2014 taxes now, instead of next April.

Which is why, it’s a very good idea to send me an email or give us a call: 847-243-3600

Let’s get started on getting your 2014 taxes as low as legally and ethically possible, shall we?

To more of what’s yours, in your pocket…

Warmly,