A few weeks ago I ran a survey on my Facebook page asking whether your income tax rate has gone up, gone down, or stayed about the same over the years.
The answers astounded me. Clearly most people think tax rates have gone UP. Some believe they’ve stayed about the SAME.
But only one respondent believed that our income tax rates are LESS today than they were a few years ago. Indeed far less than what our parents or grandparents paid.
The fact is tax rates have gone down over the past 40 years. When I was in college in the 70s the top tax bracket was 70%. Yes you read that right: 70 cents of a dollar earned was paid out in tax to the IRS.
Today the top tax rate is 39.6%. But you have to earn over $415,000 in taxable income before the first dollar of your income is taxed at that 39.6% (marginal) rate.
So what is your income tax bracket? In other words, for every dollar of income you earn, how much are you paying out in taxes (on average)?
The truth is not every dollar is created equal. If you’re single…
- your first $9,275 of income is completely free of income tax
- The next bracket of your income ($9,276-$37,650) is taxed at 15 cents on the dollar
- Then you pay 25 cents on every dollar over $37,650 earned
- and 28 cents on every dollar earned over $91,150
- And so on… up to 39.6%
If you file married, or head of household, click here to see the 2016 income tax rates for your filing status.
By the time you average all your different tax rates on your different income brackets you’re probably paying out somewhere in the neighborhood of $.20 on the every $1.00 of income you bring in.
How does 20% compare with what you thought you were paying in taxes?
When I sit down and review their tax return with clients, I often ask them what they think their tax rate is before we start. Most really don’t have any idea.
Hey, I get it… Most of us don’t like to focus on taxes, just like we don’t like to focus on going to the dentist. Both happen once a year. But vacations happen once a year too, and we give a lot more thought and planning to that once-a-year event than we typically due to taxes.
Keep in mind the 20% tax rate is only your federal income tax. You can probably add another 5% for state taxes.
25% total. Which means thousands of dollars a year. Maybe it’s not 39%, and maybe it’s not 70% like it used to be.
But certainly enough to deserve a little more of your time and attention during the year. And the good news is you can reduce it with a little planning, using every deduction, tax credit, strategy, and legal loophole available.
Which is exactly what our tax coaching service is designed to do.
If you’d like more information on how the process works, what it costs, and how much in taxes you can save, click this and book a 10 minute phone call or 30 minute in-person get-together. Either way, it’s a free, non-decision making, fact finding consult.
We’re here to help!