April 17, 2012

It's tax day!

I hope everyone did their taxes and got a large refund which was immediately spent on bike-related equipment. Regardless, I feel as though it is my civic duty to discuss a common misconception of how our progressive federal taxation system works.

At my father's recent 50th birthday party, one of my uncles talked to me about his pay.  He was worried that part of his pay, which is reimbursement for car mileage, would bite him in the butt at tax season. I'm unclear on the details but he would have to claim the transportation benefits during his tax return but these benefits had no tax withheld like standard pay. He was worried that it would bump him up to a different tax bracket.

Fortunately for him, additional income doesn't place all earnings into a higher tax bracket. That's because we have a progressive tax system in the United States. What this means is that parts of our adjusted gross income are taxed at different rates.
Source: The IRS. Heard of it?
This chart is for people filing as single. It's showing you how the amount you pay is calculated. You know, these charts:

Those charts weren't just made up. For example, here's how to calculate how much you owed on an adjusted gross income of $11,000 if filing as single. Remember the limit for the 10% tax is $8,500 then the next portion of money is taxed at 15%.

When you look at the chart for $11,000 to $11,050, the amount you pay if filing as single is $1,229. The discrepancy arises because of the $50 increments. The tax would be $1232.50 for an adjusted gross income of $11,050. $1,229 is the average of the two amounts.

This calculation for the first $11,000 of your pay is true no matter how much money you  make. If your adjusted gross income is $1,000,000 and filing single, you will pay $1225 taxes on the first $11,000 of it. If it's $20,000, you will pay $1225 taxes on the first $11,000.

One sliver of truth to my uncle's claim is that all additional income claims on fringe benefits will be paid under the highest tax bracket of the filer. So if my uncle's semi-adjusted gross income was $11,000 and he had to claim $1,000 for transportation benefits, that $1,000 would be taxed at 15%.

Maybe next year I'll discuss what adjust gross income is all about.

The YouTube Music video with the highest view count with the term "Boring" in its title:

1 comment:

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