Written By: by Hilary L
The Federal income tax became a permanent fixture in the United States in 1913 with the enactment of the 16th Amendment. At the time, it consisted of seven graduated tax brackets – from one to seven percent – and applied equally to singles, married couples and families. These days, the situation is a bit more complicated.
Purpose of income tax brackets
The purpose of income tax brackets has migrated from one of simple revenue capture to one where redistribution of wealth is expected. As the taxpayer increases their earnings, the income tax brackets ensure that they pay more and more of the money that they have earned. This may seem a reasonable scheme to the bureaucrats in Washington D.C. but this penalization of success is certainly unwarranted. In short, the more successful members of society are simply having some of their wealth confiscated and given over to their less productive neighbors. The fairness of tax brackets has been hotly debated since its inception, but it does seem to have done the country and its people a fair amount of good over the years.
Here is a quick rundown of the latest (2015) tax brackets and how to determine a taxpayer’s status:
Filing category – Currently, the U.S tax code recognizes four separate tax categories for individuals, that is, non-corporate entities: single, married filing jointly, married filing separately and head of household. These categories have a significant impact on how much a taxpayer will ultimately pay in income tax. In addition, the taxpayer must differentiate between earnings made while working versus income derived from other sources.
Earnings vs. income – As initially envisioned, there are still seven tax brackets: 10 percent, 15 percent, 28 percent, 33 percent, 35 percent and 39.6 percent, but they now focus on income rather than simple earnings. Depending on the taxpayer’s status, as mentioned above, these rates kick in at various income levels. For example, a married couple filing jointly will pay 10 percent on an income up to $18,450, 15 percent thereafter on income up to $74,900, 25 percent on income up to $151,200, 28 percent on income up to $230,450, 33 percent on income up to $411,500 and a further 39.6 percent on any income over that threshold.
Deductions – To mitigate some of these taxes, the Federal government allows taxpayers to reduce their tax liability with a variety of exemptions. In particular, each person in the household lowers the tax (the personal tax exemption runs from $6,300 to $12,600) as do mortgage payments and itemized deductions, for such things as medical expenses. The Federal government also gives credit for payments to other taxing authorities, like state and municipal governments.
Alternative minimum tax – In another attempt to ensure that everyone “pays their fair share,” the Congress of the United States has passed legislation known as the the alternative minimum tax (AMT). This law is designed to ensure that the richest Americans cannot use completely legal means to avoid paying taxes. In other words, they are penalized for using the very laws that they pay to see upheld, although those of lesser means are allowed to use those laws and exemptions to their fullest extent.
As one can see, the United States income tax code is a veritable labyrinth of rules and regulations – and a capricious one at that. It is no wonder that such companies as H&R Block and Jackson Hewitt as well as a substantial army of individual tax preparers – not to mention the online sites! – make a fortune at tax time in April. Still, knowing one’s tax bracket and the options available are essential for paying taxes in the most equitable fashion possible.