Federal Income Taxes.....aka stuff I don't understand

[THUNDER HANDS]

I'm trying to figure out my taxes for this year. This is my first year as an independent contractor, so I have to do this stuff on my own (with an accountant, of course).

I'm looking at the Federal Income Tax bracets and how they're broken down by income amounts.

Anything less than $7,825 a year is 10%

$7,835 to $31,850 is 15%

fine, fine. Then it gets strange.

$31,850 to $64,250 is 25%

$64,250 to $97,925 is 28%

$97,925 to $174,850 is 33%

and over $174,850 is 35%

....


so what I'm seeing is that someone making one dollar over $31,850 is taxed at the same rate as someone making twice that.

And someone making three times that amount is taxed only 3% more.

And a millionaire/billionaire is only taxed 10% more.


something doesn't seem right about that.

what the hell?!?!?

[MrCoffee]

1. that's why we MUST have a flat tax in this country

why should people who have more have to pay more? how is that fair?

[kay1864]

6. You do realize the flat tax is a GOP idea, right?

Not to mention that the flat tax most often proposed amounts to a sales tax of 30%.

[LostinVA]

8. I think he was being sarcastic

[kay1864]

9. I sure hope so

[MrCoffee]

10. of course i do? i'm a freeper troll!!1!!!

muah ha ha!

[kay1864]

13. I *hate* Illinois Nazis

and those damn freeper trolls. They pop up where you least expect 'em...

:hi:

[MrCoffee]

15. say what you will about National Socialism, at least it's an ethos

:hi:

[kay1864]

17. Yeah, but *Illinois* National Socialists

They drive lame station wagons.

[Dr. Strange]

27. So's your face!

I propose a tax on Mr. Coffee's face!

[kay1864]

2. I don't think that's quite correct

The person making one dollar over $31,850 has that one dollar taxed at 25%, not his/her entire income.


Edit: I was right, per Wikipedia:

If taxable income falls within a particular tax bracket, the individual pays the listed percentage of income on each dollar that falls within that monetary range. For example, a person who earned $10,000 in 2006 would be liable for 10% of each dollar earned from the 1st dollar to the 7,550th dollar, and then for 15% of each dollar earned from the 7,551st dollar to the 10,000th dollar, for a total of $1,122.50.

[THUNDER HANDS]

3. oh ok

still doesn't seem fair though that there's no millionaire's bracket.

[kay1864]

5. Well, there used to be...

During the Great Depression and World War II, the top income tax rate rose again. In the Internal Revenue Code of 1939, the top rate was 75%. The top rate reached 94% during the war and remained at 91% until 1964.

In 1964 the top rate was decreased to 70% (1964 Revenue Act), then to 50% in 1981 (Economic Recovery Tax Act or ERTA). (Ronald Reagan)

The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets). (Ronald Reagan)

During the 1990s the top rate rose again, standing at 39.6% by the end of the decade. (Bill Clinton)

The top rate was cut to 35% and the bottom rate was cut to 10% by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). (Der Chimperor)

[THUNDER HANDS]

7. interesting, thank you

if i could set the rates, they would be...

1. Less than $26,000 = 7%
2. $26,000 to $38,000 = 10%
3. $38,000 to $50,000 = 13%
4. $50,000 to $62,000 = 16%
5. $62,000 to $86,000 = 19%
6. $86,000 to $99,000 = 22%
7. $99,000 to $120,000 = 30%
8. $120,000 to $200,000 = 33%
9. $200,000 to $500,000 = 38%
10. $500,000 to $999,999 = 40%
11. More than $1,000,000 = 43%

[krispos42]

12. If I had my choice....

Flat tax.

Single: 75% of everything over $75,000 adjusted gross income
Married: 75% of everything over $150,000 adjusted gross income

And stop treating dividends and bond interest as different from other sources of income.

Something like 80% or more of the country wouldn't pay federal incometaxes at all. And they would all be the low-income earners.

[Starbucks Anarchist]

4. Marginal tax rate, right?

[kath]

24. Yes - this is the concept of "marginal tax rate", which is what the "brackets" express, &which is a

concept that, sadly, very few Americans understand.

Here is an explanation: (from http://taxes.about.com/od/2006taxes/qt/2006_tax_rates.htm
Tax Calculation Example
Mary is a single taxpayer with $350,000 of taxable income. Her income is taxed in each of the tax brackets, as follows:
$755.00 (tax on the first $7,550 of Mary's income, taxed at the 10% rate), plus
$3,465.00 (tax on the income between $7,550 and $30,650, taxed at the 15% rate), plus
$10,887.50 (tax on the income between $30,650 and $74,200, taxed at the 25% rate), plus
$22,568.00 (tax on the income between $74,200 and $154,800, taxed at the 28% rate), plus
$59,977.50 (tax on the income between $154,800 and $336,550, taxed at the 33% rate), plus
$4,707.50 (tax on the income over $336,550, taxed at the 35% rate), for a grand total tax of
$102,360.50.
Mary's income tax is $102,361 (rounding up). This tax consists of $4,707.50 tax on the amount over $336,550 (the income in the 35% tax bracket) plus $97,653.00 (the tax on income in the lower tax brackets).
Mary's marginal tax rate is 35%. The next dollar Mary earns will be taxed at 35%. However, Mary's average tax rate is 29% (total tax divided by taxable income). On average Mary is paying only 29 cents for every dollar of taxable income she earns. Mary's average tax rate is lower than her marginal tax rate because most of her income is taxed at lower tax rates.

We can compare the changes in the marginal tax rates by comparing Mary's total tax using 2005 tax rates and 2004 tax rates. If Mary had the same taxable income of $350,000 in 2006, 2005, and 2004, her total tax liability would have been $102,970 in 2005 and $103,408 in 2004. Mary's taxes are lower in 2006 because of changes in the income tax brackets.




**** Note that all this applies only to TAXABLE income -- ie, the amount left after subtracting out the personal exemption(s), standard deduction or itemized deductions, other adjustments to income, any tax credits (such as the child tax credit, etc.)

[MissMillie]

11. eliminate the income tax--replace w/ a National Sales Tax

the most progressive of all taxes

grocery food and clothing under $75 is not taxed.

Everything else is.

[kay1864]

16. So Neal Boortz is "progressive" now?

He's the biggest advocate for that idea.

[MissMillie]

18. I'm not using "progressive" as a political term here

but as an economic one.

Consumption taxes are progressive in nature. Those that have the most money spend the most money and will pay the most in taxes.

[kay1864]

20. Oh OK. Still...

This chart says that everyone making less than $200,000 would be negatively impacted:



http://en.wikipedia.org/wiki/FairTax#Distribution_of_tax_burden

From the same webpage:

Economist William Gale analyzed a National Sales Tax (though different from the FairTax in several aspects<30><36>) and reported that the overall tax burden on middle-income Americans would increase while the tax burden on the very rich would drop.

[MissMillie]

23. wouldn't that depend on specifically what is taxed?

and that chart you posted is by a group put together by George W. Bush. If you don't mind, I'm gonna consider that chart to be a little suspect.


There's another chart on the same page (that shows the data from a Boston University study) that shows that people who make more will indeed pay a higher percentage of their income in taxes than those with lower incomes.

And your sentence about economist Gale had a sentence that followed that contradicted his argument:

According to economist William G. Gale of the Brookings Institution, the percentage of income taxed is regressive (using a cross-section time frame).<6> However, when presented with an estimated effective tax rate, the low-income family above would pay a tax rate of 0% on the 100% of consumption and the higher income family would pay a tax rate of 15% on the 75% of consumption (with the other 25% taxed at a later point in time, as savings is tax-deferred).<35> The effective tax rate is progressive on consumption,<2> as a person spending at the poverty level would have an effective tax rate of 0%, whereas someone spending at four times the poverty level would have an effective tax rate of 17.2%.<35>

[kay1864]

25. Yeah, I noticed that

Still, not every panel the Chimp appoints is bogus. The 9/11 Commission, for example. The individuals still have reputations at stake when they present their report, especially among their colleagues.

The Boston U chart looks COMPLETELY bogus, OTOH. That chart shows NO ONE paying more in taxes! Everyone pays less under FairTax, no matter their income? I don't buy it. Which is why I didn't post that chart.

Actually you're quoting a different sentence. The one you have does *not* follow the sentence I quoted--it's two paragraphs up the page.

That said, the sentences you quote essentially say "the tax is progressive on consumption". Me, I prefer something without economic terminology, so I chose "the overall tax burden on middle-income Americans would increase while the tax burden on the very rich would drop". Which agrees with the chart above.

[billyskank]

19. That's not progressive. That's the same as applying a flat income tax rate to almost everyone.

The right wing would jump at that idea.

We have a really good wheeze on our fuel taxation. The government levies duty on fuel at a rate of, I dunno, 50 pence per litre or something. Then we pay VAT (sales tax) on it as well, which is levied as a percentage, but get this - the VAT is levied on the duty as well as the cost of the fuel. We pay tax on the tax that we pay! You can't make this shit up.

I bet somebody in the Treasury had a good old laugh about that one.

:D

[MissMillie]

21. I work w/ economists, all of them have always called consumption taxes "progressive"

again, I'm not using this as a political term, but an economic one. Check any economic glossary. Consumption taxes are considered, in economic circles, to be progressive taxes.

[billyskank]

22. Delete.

This is going to be a stupid argument.

[THUNDER HANDS]

26. progressive meaning?

progressively lower as one becomes more wealthy?

[underpants]

14. The motherfucker backing up the truck to the treasury is the one fucking you

the poor and the powerless.... see my sig line

[WinkyDink]

28. It's called "Republicans".

[Critters2]

29. My experience has been that they're pretty lax

about your first year in a new job as an independent contractor. They won't come down on you too hard if you don't get all your quarterlies just right. You may have a small penalty, but it won't be too bad. Once you've filed this way one time, they watch more carefully after that. So, don't worry too much. And have a good accountant.

The biggest challenge for me is schedule SE, where I have to include housing value and other things that aren't technically income, but are taxable for Social Security. Then I have to break out the math skills.