Do You Know Your Tax Bracket?

Recently while deciding how to contribute my bonus to my 401K (traditional before tax or Roth), I realize I never knew what tax bracket I’m in. I have a general idea what the tax rate was, but never confirmed. So I did a quick search and found this pretty table of the 2013 Tax Brackets from Bankrate.com (original post link here).

Table from Bankrate.com

Table from post at Bankrate.com

I also never knew how taxes are actually calculated. The amount of taxes that you need to pay are determined by the different ranges. This means from the first $1 you make to $8,925, you will be taxed at 10%, and then from the $8,926 to $36,250, will be taxed at 15%.

(Updated from an inaccurate calculation)
So how many of you know the tax bracket you are in? And do you realize the importance of this information?? Let’s play with round numbers to the nearest $1000 and say you currently have a salary of $35,000.

Your first $9,000 – will be taxed at 10% = $900

From $9,001 – $35,000 – taxed at 15% = $26,000 * 15% =  $3,900

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Total of $4,800 in taxes

After taxes, your take home pay, roughly $30,200.  Now let’s assume you’ve worked hard and want to bring it up to your boss and negotiate a raise. Now let’s see the calculation between a $1000 raise and a $2000 raise that pushes you to the next bracket.

With a $1000 raise, total salary of $36,000.

Your first $9,000 – will be taxed at 10% = $900

From $9,001 – $36,000 – will be taxed at 15% = $27,000 * 15% = $4,050

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Total taxes – $4,950

 

With a $2000 raise, total salary of $37,000.

Your first $9,000 – will be taxed at 10% = $900

From $9,001 – $36,000 – will be taxed at 15% = $27,000 * 15% = $4050

From $36,001 – $37,000 – will be taxed at 25% = $1,000 * 25% = $250

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Total taxes – $5,200

 

A $1000 raise will increase your taxes by $150, but a $2000 raise will increase your taxes by $400!  8)

Of course, there are other factors that could come into play and this is a very simple case, but this gives you a general idea. Next time you want to get a salary raise, make sure you consider the tax bracket as one of the factors!

 

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