Anyone who likes getting a look at their future tax expenses might be interested in seeing what next year’s tax brackets and tax rates will be. The IRS has now announced the official rates and brackets for 2014, although the numbers have been predicted for months because the IRS uses a simple process of inflation and somewhat round numbers to determine the brackets. Congress isn’t expected to make any changes to the tax laws this year, unlike the last several years when the question to continue Bush-era tax breaks needed to be addressed every year.
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Keep in mind that the 2014 federal income tax brackets don’t matter to most people until they file their 2014 income tax returns in early 2015. That’s a long way off. But for those who pay estimated taxes for 2014 income throughout the year, the information doesn’t hurt. Chances are you’re getting ready to settle your 2013 income taxes, which will be due April 15, 2014. In that case, the rates and brackets you want to review are the 2013 rates and brackets. If you want to see how your income earned in 2015 is being taxed, view these tax brackets and marginal rates for 2015.
Before getting to the numbers, keep in mind what marginal rates are. Your marginal rate is what you pay on your last dollar of income earned. If, for example, you will earn $50,000 in 2014, your marginal rate will be 25%. That does not mean you pay 25% on all of your income.
In fact, there is a strongly-held belief that the tax code penalizes people for earning more. I’ve heard people expressing disappointment with receiving a bonus because it might push them into the next tax bracket. Yes, as you earn more money, you’ll owe more income tax (in general), but when you’re in a higher tax bracket, it doesn’t affect the tax you owe on income below that new bracket’s threshold. There’s no big jump — the higher tax rate applies only to the income you earn above the top bracket’s baseline.
(Employers have a funny way of withholding taxes on your bonus payment, but to the IRS, and in the end when you finally settle your tax bill, a dollar is a dollar whether it was earned as salary or bonus.)
There’s one instance when it does make sense to be concerned about receiving more income — when that income comes in the form of an asset that’s not very liquid. Here’s an example: In the rare circumstance you win a new car in a contest or sweepstakes, the value of that car must be treated as income. If you win a $60,000 car, you’re going to have to come up with more cash to pay taxes on that $60,000. This is one of the reasons many who end up winning these kinds of contests end up selling the prize.
The 2014 federal income tax brackets and marginal rates.
The federal income tax brackets and marginal rates have now been officially announced by the IRS. These were the rates predicted by Wolters Kluwer, CCH several months ago, based on the rate of inflation the IRS announced it would use in September. The Tax Foundation, a non-partisan tax research group based in Washington, D.C., has also shared the official information.
|Rate||Single Filers||Married Joint Filers||Head of Household Filers|
|10%||$0 to $9,075||$0 to $18,150||$0 to $12,950|
|15%||$9,075 to $36,900||$18,150 to $73,800||$12,950 to $49,400|
|25%||$36,900 to $89,350||$73,800 to $148,850||$49,400 to $127,550|
|28%||$89,350 to $186,350||$148,850 to $226,850||$127,550 to $206,600|
|33%||$186,350 to $405,100||$226,850 to $405,100||$206,600 to $405,100|
|35%||$405,100 to $406,750||$405,100 to $457,600||$405,100 to $432,200|
|39.6%||$406,750 and up||$457,600 and up||$432,200 and up|
Determining your effective tax rate.
The table above lists marginal tax rates. What might be more interesting to calculate is your effective tax rate. For example, if you’re single, you earn $100,000 in taxable income in 2014, your effective tax rate — how much tax you end up paying as a percentage of your income — will likely be much lower than the marginal tax rate of 28%. It could be half of that. After taking out the standard deduction for your income, which in 2014 will be $6,200, leaves you with $93,800 in taxable income, although there might be other deductions that apply to you.
With $93,800 in income after the standard deduction, you would owe 10% of $9,075, 15% of $27,825 (the total income covered in the second tax bracket), 25% of $52,450, and 28% of $4,450 (the fourth tax bracket up to your taxable income). That calculation results in $19,439 in federal income tax — an effective tax rate of 19.4% based on the total income of $100,000. That amount could be further reduced by any tax credits for which you might qualify. Your effective tax rate would be considered lower if you’ve had other reductions to your gross income, like 401(k) contributions.
The new standard deductions and personal exemption.
As inflation effects the tax brackets, it also affects the standard deduction amounts. I mentioned above that the standard deduction for single files will be $6,200 in 2014, an increase of $100. For married taxpayers filing jointly, the standard deduction will be $12,400, an increase of $200. For heads of household, the amount of the standard deduction will increase $150 to $9,100.
The personal exemption for 2014 will be $3,950.
What is the possibility of Congress changing the tax rates?
Congress could make a new law at any time that changes tax rates. Last year, there was a big debate that centered around the extension of certain tax cuts. The government made the decision to break the cycle in which the tax rates required a vote every year, so for once, we might be able to get through the next few months without a debate about tax rates. Given Congress’s recent proclivity for negotiating like terrorists with hostages rather than sensible adults who were elected as representatives of the citizens of this country, there’s no perfect prediction of what might occur over the next few months.
Updated October 16, 2015 and originally published October 2, 2013.