Last year, dramatic changes to federal income tax rates left
many people scurrying to tailor their tax planning to avoid a big
tax increase. With the general framework of federal income tax
rates for 2014 remaining the same as in 2013, most people won't
need to make the same major changes they did last year, but it
still makes sense to look closely at your tax situation to make
sure you're aware of all the taxes you could end up paying. Let's
take a closer look at the federal income tax rates in 2014 and
how they'll affect you.
Source: 401(k) 2013.
The basic rates you need to know
The main structure of the federal income tax rates for 2014
includes six primary tax brackets. Every taxpayer is eligible to
earn up to a certain amount of income tax-free. Then, low-income
taxpayers face federal income tax rates of 10% on the first
$9,075 to $18,150 of your income depending on your filing status.
The next tax rate of 15% applies to taxable income up to $36,900
for singles and $73,800 for joint filers.
Above those levels, federal income tax rates of 25%, 28%, 33%,
and 35% apply to those making up to $406,750 for singles and
$457,600 for joint filers, with the 33% rate applying to the
widest swath of that range. The highest-income taxpayers pay
federal income tax rates in 2014 of 39.6%.
The only thing that has changed with the 2014 rates is that
the brackets have shifted slightly upward for inflation. With
brackets roughly 1.7% higher than they were last year, taxpayers
will pay slightly less in taxes if they have the same taxable
income as in 2013.
Hidden taxes that can boost your federal income tax rates
Unfortunately, beyond the basic brackets, there are a host of
other tax provisions that can boost your effective tax rate. As a
result, you can't count on the rates above necessarily reflecting
the true federal income tax rates you'll pay for 2014.
Here are some of the provisions that could boost your tax rate
- Singles with earned income above $200,000 and joint filers
above $250,000 will have to pay an extra 0.9% Medicare payroll
tax on their earnings above those levels.
- In addition, if you have modified adjusted gross income
above those $200,000 to $250,000 levels, then you'll owe a 3.8%
net investment income surtax on interest, dividends, capital
gains, and other types of investment income.
- Even less obvious are phaseouts of various credits,
deductions, and exemptions that can raise your effective income
rate dramatically. For instance, because of the way that Social
Security benefits can become subject to tax, some retirees who
fall into the 25% tax bracket actually pay marginal tax rates
of more than 46%. Similarly, the phaseout of the earned income
credit, child tax credit, and other credits, as well as the
reduction in personal exemptions and itemized deductions that
take effect at certain income levels, can push your effective
federal income tax rate higher.
What to do
Obviously, it doesn't make sense to give up $1 of income just to
avoid paying less than $1 of income tax. But in making decisions
about how much you want to work and earn, the federal income tax
rates for 2014 give you important information about how much
you'll actually get to keep of that hard-earned money. By
watching both the headline tax rates and the hidden ways that you
can actually end up paying
than those rates, you'll put yourself in the best position
possible to cut your tax bill in the long run.
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Dan Caplinger is the Motley Fool's director of investment
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