Tax Tip of the Week, March 12, 2001 - Understand your tax bracket

What does it mean when someone says he is in the 28% tax bracket? It means that the top tier of his income is taxed at a 28% rate.

Think of tax brackets as a row of buckets. There are five tax brackets — 15%, 28%, 31%, 33%, and 39.6%. First you fill up the 15% bucket. When it is full, you move over to the next bucket, the 28% bucket, and begin to fill it up. Then you move to the 31% bucket, etc.

Each bucket of income is taxed at a specific rate. Entering the next bucket does not cause all your income to be taxed at the new rate, only the amount that flows over from the previous bucket.

The amount of taxable income you have in each bracket depends on your filing status.

Let's take an example. You are a single taxpayer with taxable income of $26,000. Your boss is so pleased with your performance that he's just given you a $5,000 bonus. What is the income tax bite from your bonus? Here are the 2001 tax brackets (buckets) for a single taxpayer.

- 2001 Single Taxpayer -

Tax Rate
Taxable Income

15%
$ 0 - 27,050

28%
$ 27,051 - 65,550

31%
$ 65,551 - 136,750

33%
$ 136,751 - 297,350

39.6%
Over $297,350

The first $1,050 of your bonus fills up your 15% bucket, and it will be taxed at 15%. The rest of your bonus, $3,950, spills over into the 28% bucket, and will be taxed at 28%. The total income tax bite from your bonus is $1,264.

Understanding your tax bracket will help you make informed tax, financial, and estate planning decisions. If you have questions or if we can be of assistance, please call us.

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