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 As the close of the year draws near, many taxpayers are concerned about limiting their tax liability in 2007. By understanding their incremental federal income tax rates, taxpayers can better understand the benefit received from a potential tax deduction.
2007 Income Tax Rate Schedules
Income tax rate tables or tax brackets are published each year by the federal government through the Internal Revenue Service or IRS. These tables outline for taxpayers the tax owed and incremental tax rates. These tax schedules can also be used to estimate your potential tax liability in 2007. However, more accurate estimates can be achieved by completing a Form 1040.
We are still seeing a shift in these tax rates due to President Bush's introduction of a tax reform agenda. In fact, he is responsible for introducing the 10% tax rate back in 2001 - the lowest tax rate published.
Reading a Tax Rate Schedule
Reading a tax rate schedule is a pretty simple process. First you need to figure out your total federal taxable income. Again, IRS Form 1040 can help you figure out that value more accurately. Once you know your taxable income, you need to know which tax rate table to use. Basically, there are four schedules depending on your tax status - such as Single or Married Filing Jointly. If you don't know your tax filing status, the instructions for Form 1040 can help you figure that out.
2007 Schedule X - Single
| Taxable income is over - |
But not over - |
The tax is: |
Of the amount over - |
| $0 |
$7,825 |
$0 + 10% |
$0 |
| 7,825 |
31,850 |
782.50 + 15% |
7,825 |
| 31,850 |
77,100 |
4,386.25 + 25% |
31,850 |
| 77,100 |
160,850 |
15,698.75 + 28% |
77,100 |
| 160,850 |
349,700 |
39,148.75 + 33% |
160,850 |
| 349,700 |
- |
101,469.25 + 35% |
349,700 |
2007 Schedule Y-1 - Married Filing Jointly or Qualifying Widow(er)
| Taxable income is over - |
But not over - |
The tax is: |
Of the amount over - |
| $0 |
$15,650 |
$0 + 10% |
$0 |
| 15,650 |
63,700 |
1,565.00 + 15% |
15,650 |
| 63,700 |
128,500 |
8,772.50 + 25% |
63,700 |
| 128,500 |
195,850 |
24,972.50 + 28% |
128,500 |
| 195,850 |
349,700 |
43,830.50 + 33% |
195,850 |
| 349,700 |
- |
94,601.00 + 35% |
349,700 |
2007 Schedule Y-2 - Married Filing Separately
| Taxable income is over - |
But not over - |
The tax is: |
Of the amount over - |
| $0 |
$7,825 |
$0 + 10% |
$0 |
| 7,825 |
31,850 |
782.50 + 15% |
7,825 |
| 31,850 |
64,250 |
4,386.25 + 25% |
31,850 |
| 64,250 |
97,925 |
12,486.25 + 28% |
64,250 |
| 97,925 |
174,850 |
21,915.25 + 33% |
97,925 |
| 174,850 |
- |
47,300.50 + 35% |
174,850 |
2007 Schedule Z - Head of Household
| Taxable income is over - |
But not over - |
The tax is: |
Of the amount over - |
| $0 |
$11,200 |
$0 + 10% |
$0 |
| 11,200 |
42,650 |
1,120.00 + 15% |
11,200 |
| 42,650 |
110,100 |
5,837.50 + 25% |
42,650 |
| 110,100 |
178,350 |
22,700.00 + 28% |
110,100 |
| 178,350 |
349,700 |
41,810.00 + 33% |
178,350 |
| 349,700 |
- |
98,355.50 + 35% |
349,700 |
Tax Rate Example Calculation
Now that you've seen the tax rate tables, let's run through a quick example to help you figure out your incremental tax bracket in 2007. In this example, let's say that your filing status is Married Filing Jointly. That means you'll be using Schedule Y-1 above. If your federally taxable income in 2007 is $100,000, then the tax owed is calculated as follows:
You're going to use the third row of the Y-1 tax rate schedule because your income falls between $63,700 and $128,500. That puts you in the 25% tax bracket. Calculating your tax liability from that table:
$8,772.50 + 25% x ($100,000 - $63,700)
$8,772.50 + 0.25 x $33,300
$8,772.50 + $9,075 = $17,847.50
Marginal Tax Rates
If you understand how to read these tax rates, then you'll also understand why they are also referred to as marginal tax rates. That's because within each rate schedule you can find your incremental tax rate, or marginal rate of tax, which is taxed at the rate shown (25% in this example).
One of the more common misconceptions is that if you earn more money all of the income is taxed at the higher rate - the above tables demonstrate that this is simply not true. You are taxed at an incremental rate on marginal income. That means you're taking home less pay for each hour worked, but you are certainly bringing home more money.
About the Author - Federal Income Tax Rates
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