Weekly Washington Words
Friday, December 7 2012
This week’s Washington Words is about income tax rates.
“Tax Rates” – Nothing makes people jump to arms in the political arena like the mention of tax rates, but many don’t think of tax rates in the context of the complex environment that is the U.S. tax code. In general, when tax rates are being discussed in the news what is being referred to are the marginal tax rates.
Marginal tax rates exist for each tax bracket and change as income rises.
2012 Tax Year Federal Income Tax Brackets (Single tax filer)
Bracket Marginal tax rate
$0 to $8,700 10%
$8,700 – $35,350 15%
$35,350 – $85,650 25%
$85,650 – $178,650 28%
$178,650 – $388,350 33%
Over $388,350 35%
Marginal tax rates also differ depending on how one files their tax return (married, single with dependents, etc.), which is just the beginning of the confusion when it comes to our tax code. These only apply to earned income wages; salaries, tips, and other taxable employee pay for example, and will exclude things such as carried interest, dividends, and capital gains, which are taxed at different rates.
It is important to remember that with marginal tax rates that only earned income above the floor of the new tax bracket is taxed at that rate, so all income up to $8,700 is only taxed at the 10% rate, while if the individual makes $8,701 only the $1 above will be taxed at the 15% rate and so on.
Furthermore, these tax rates only refer to federal income tax and not to what citizens pay in payroll tax. For a substantial amount of the tax paying population their payroll tax burden is greater than that of the federal income tax.
The federal government has a number of taxes in place, so it is important to understand what our elected officials mean with these Washington Words .