Do You Know How Income Taxes Are Calculated
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Understanding How Income Taxes Are Calculated
Title:
Understanding How Income Taxes Are Calculated
Introduction:
As part of a series of 2007 Tax reference sheets, this guide focuses on key federal income tax numbers. Upcoming sheets will address estate, retirement, and business planning. Stay tuned for more insights.
Federal Income Taxes Overview:
Income taxes significantly impact most people's finances. This sheet provides a handy reference for essential 2007 figures.
Common Misconceptions:
Many mistakenly believe being in a 28% tax bracket means paying 28% on all taxable income. In reality, taxes are calculated progressively. For example, a couple with a taxable income of $125,000 doesn’t pay 25% on the entire amount?"only on income exceeding $63,700. Here's how it works:
Tax Brackets for 2007
Married, Filing Jointly
- $0 - $15,650: taxed at 10%- $15,650 - $63,700: taxed at 15%
- $63,700 - $128,500: taxed at 25%
- $128,500 - $195,850: taxed at 28%
- $195,850 - $349,700: taxed at 33%
- Over $349,700: taxed at 35%
Married, Filing Separately
Sometimes, filing separately might be more beneficial for tax strategies or other reasons. Consult with a tax advisor to determine the best approach. The tax brackets for this status are half of the amounts listed above.Single
- $0 - $7,825: taxed at 10%- $7,825 - $31,850: taxed at 15%
- $31,850 - $77,100: taxed at 25%
- $77,100 - $160,850: taxed at 28%
- $160,850 - $349,700: taxed at 33%
- Over $349,700: taxed at 35%
Head of Household
- $0 - $11,200: taxed at 10%- $11,200 - $42,650: taxed at 15%
- $42,650 - $110,100: taxed at 25%
- $110,100 - $178,350: taxed at 28%
- $178,350 - $349,700: taxed at 33%
- Over $349,700: taxed at 35%
Standard Deductions
These are for those who do not itemize expenses:- Married, Filing Jointly: $10,700
- Married, Filing Separately: $5,350
- Single: $5,350
- Head of Household: $7,850
Add $1,050 (married) or $1,300 (single or head of household) if blind or over 65.
Personal Exemptions
Set at $3,400 per person, subject to phaseouts based on income, starting at $117,300, depending on status.FICA Tax
Maximum taxable earned income: $97,500Social Security and Medicare tax rate: 15.3%
W-2 employees split this with employers; self-employed individuals pay the full amount.
Capital Gains and Dividend Rates
- For 10% and 15% tax brackets: 5%- Higher tax brackets: 15%
- Collectibles (e.g., coins, stamps): 28%
Conclusion
A proactive tax advisor can help minimize your taxes using appropriate methods and strategies. Investing in expert advice is invaluable.By understanding these key figures and engaging with a knowledgeable tax professional, you'll be better equipped for tax planning.
You can find the original non-AI version of this article here: Do You Know How Income Taxes Are Calculated .
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