For future reference, here are the tax brackets for 2007.
| Marginal Tax Rate | [Taxable Income] Single | Married Filing Jointly |
| 10% | $0-$7,825 | $0-$15,650 |
| 15% | $7,826-$31,850 | $15,651-$63,700 |
| 25% | $31,851-$77,100 | $63,701-$128,500 |
| 28% | $77,101-$160,850 | $128,501-$195,850 |
| 33% | $160,851-$349,700 | $195,851-$349,700 |
| 35% | > $349,700 | > $349,700 |
I notice that this year being married with dual incomes will result in us paying more in taxes than if we had stayed single. I really wish the tax code was more simple and logical. Actually, I’m more scared about the AMT this year, which this does not take into account.
For comparison, here are the 2005 and 2006 tax brackets. Taken from IRS.gov. See here for state income tax information.
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I’ve been trying to lower my tax burden, but I’m not sure how effective my strategy is. So, I’ve a couple of questions for you financial wizzes out there…
1) Can you reduce your AGI/MAGI by upping your 401k contributions? From my understanding, increasing your contributions by x% decreases your AGI/MAGI by the x%.
2) Are there any other ways of reducing it? Would increased contributions to a Flexible Spending Account have the same effect?
3) This is less important, but does anyone have a simple explanation of the difference between AGI and MAGI? I know it doesn’t matter much, but still…
1) Yes–max all venues, e.g., 401k, IRA, etc.
2) Yes–pretax childcare, transit, and health FSAs; charitable contributions? Buy a house; start a business. Then there are tax credits: hybrid cars, energy saving devices, child tax credit, Hope and Lifetime learning… others?
3) My other fave money blog: link and Wikipedia have answers.
Re: Kay,
You can reduce your (M) AGI by increasing your 401k contributions… it is one of the best ways to do it. MAGI has some “deductions” added back in that were taken off of the AGI like student-loan interest, which may or may not apply to you.
Remember, though, the tax rates that are listed above are only for earned income, unqualified dividends/interest, and short-term capital gains. If you have qualified dividends or long-term gains, then you will be taxed at the 15% level (for most people).
Yep, Jon, getting married for a dual-income household is unfortunately not economically the “correct” decision! My wife and I made the same “mistake” as well. 🙂 Unless you have kids or have one spouse earning much less than the other, you are better off being single but living together. I guess it is the gov’s way of encouraging you to have kids.
In rough terms, you get to AGI by subtracting certain “adjustments,” and to get MAGI you add back a couple of those adjustments. MAGI is used to determine eligibility for Roth IRA contributions and for deducting regular IRA contributions.
Just to make it confusing, adjustments are not the same thing as deductions. This Wikipedia article’s not a bad place to start, though if you really want to know, you’ll eventually end up at the IRS website.
In basic terms, to reduce your tax burden you need to either make less money, or have a lot of deductions to reduce your taxable income. 401(k) contributions and HSAs are both deductible. So are business expenses (this is why a lot of people recommend starting your own company). This is a decent site to get you going.
You left out the increased marriage deduction. With that you probably pay only a little bit more than if you were single. If you made less money, you might even pay a little less as married.
That makes sense in that the tax code is progressive. That is, a single person earing 100K will always pay a higher rate than someone making 50K. Thus, the tax code must decide whether two people making 50K will pay the same as a person making 100K (marriage penalty) or whether they will pay their 50K rates.
And you pay the same if you’re a 100K earner with a non-working spouse or two 50K earners, but those families have very different individual tax treatment. Thus, you should quit your job and write this blog full-time.
The std deduction being increased for married folks does not help, though, unless only one person is working, *particularly* if you own a house. Here is why:
Let’s say you live with your fiancee/girlfriend but are not married:
-You both get $5350 std deduction
-The mortgage holder, in lieu of the $5350, can take the mortgage interest deduction/property taxes/other itemized deductions, which in my case is about $9000 (TX has no state income tax and cheap houses)
-The other person can still take the $5350 deduction
-In total, you both have reduced your taxable income by a combined $14350
Let’s say you are now married:
-You get a single $10700 deduction
-Itemizing results in only $9000 so you are forced to take the standard deduction
In other words, being married costs us $14350-$10700=$3650 in deductions each year… oh yeah, not to mention that the marginal tax rate is higher on the combined incomes!
Jon, even in CA where you will have a substantial itemized deduction (or, more likely, be forced into the AMT), you will still run into this problem. But what can you do, right, other than have one of you stop working or earning much less? All the more incentive to become financially independent at an earlier age.
I
If you’re interested in a simplified tax code, you should look into the FairTax Act (HR 25, S 1025). It is a comprehensive proposal that replaces all federal income and payroll taxes with a national consumption tax. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, AMT, Social Security, Medicare, and self-employment taxes.
The FairTax abolishes the IRS, closes all loopholes and brings fairness to taxation, ensures Social Security and Medicare funding, brings transparency and accountability to tax policy, allows American products to compete fairly overseas and at home, reimburses the tax on purchases of basic necessities, enables retirees to keep their entire pension, and enables workers to keep their entire paycheck.
The efficiency of this proposed tax code alone will save businesses and individuals great amounts of money in compliance costs. I strongly recommend anyone reading this blog to read the FairTax book. It’s a quick read and opens your eyes to the possibilities. I believe that this will become a hot topic in the upcoming presidential election, and strongly urge everyone to consider a candidate who supports simplified tax reform.
I’ve taken some of this straight from http://www.fairtax.org because they do a better job of explaining it than I can. The book is “The FairTax Book” by Neal Boortz and Congressman John Linder.
What is the AMT? A separate post would be great.
The short version of the AMT:
Created in the 1970s to make sure that people with high incomes paid at least *some* tax (there being a lot of well-publicized loopholes). It essentially denies a lot of the itemized deductions but gives back a larger general deduction. You prepare your taxes both ways and pay whichever number is higher. In theory the AMT is only higher for those with a lot of income.
Sadly, it wasn’t inflation-indexed so it hits more and more upper-middle-class folks every year. People most at risk of being tagged by it: People with many kids, huge mortgage deductions, high state income tax. Also in the news a few years ago because it tagged people who exercised and held certain stock options – when those options then became worthless in the crash, the taxpayers were hosed.
If you are a business owner, you should not be worried about the AMT if you know how to work the system (legally of course).
I would love to see more info on AMT, it is so hard to determine if I will hit it next year or not. Would be great to see a post on the AMT, what to do to avoid it, what to do to lower your taxes if you’re subject to AMT, etc.
Actually, with those tax brackets, my wife and I end up paying $4,500 less in taxes than if we had filed singly. Hurray for marriage! 🙂
OT – I like many things about the fair tax – except there are two issues that keep me from being a supporter and I have yet to hear a definitive solution to these important problems.
1) Our economy must grow in order to sustain prosperity, and precisely, the rate of growth is proportional to gains in prosperity. While the nation sales tax will create more tax transparency, I believe a larger sales tax will create a disincentive for consumption. Since consumer consumption accounts for the majority of the economy, less consumption would substantially contribute to slower growth.
When consumers spend less, one of two things must happen. They will earn less, or spend less, both which are bad for growth. Ideally, with added visibility, there would be a awakening, and tax rates would be lowered across the board and the consumption disincentive would be removed, but that is a lot to hope for.
2) It will have a tremendous negative impact on anyone who has any after tax savings. It will cause them to be double taxed on any after tax savings/capital they have accumulated to date.
The AMT is not a problem – in fact the calculation for it is much simpler than the regular tax code. In fact, it gets much closer to a much more efficient (but more regressive) flat tax. It will not allow for much in the way of deductions (mortgage is one the big ones that is allowed, but your property taxes often aren’t), making it relatively less loophole prone.
I paid a big AMT bill, will pay a smaller one this year, BUT, most of that decreased AMT liability will turn up as a transfer of tax burden in the form of property taxes. Make sure you understand this aspect of calcuations BEFORE you purchase a home thinking that it will significantly decrease your tax burden. In my case, it decreased my tax burden slightly, but not nearly as much as I had (incorrectly) thought it would.
Hi Jonathan,
I was reading this older post and had a question about your statement, “being married with dual incomes will result in us paying more in taxes than if we had stayed single.” How did you reach this conclusion? Are you filing separately or jointly? I was looking at the 2006 tax table and the total tax for ‘married filing jointly’ is less than if two incomes(with the same total agi) were filed ‘single’ or ‘married filing separately.’ I also think you should include on your post the distinction between the ‘marginal tax rate,’ ‘marginal tax bracket’ and ‘average tax rate.’ It seems to be a misconception that those in the “28% tax bracket” will pay 28% of their AGI in taxes. This is not true. For example, in 2006 a $101K AGI is in the “28% tax bracket” but will pay taxes of $22,611. This is 23% of their AGI. Further, a married couple filing jointly with $101K AGI will pay $18,365 or 18%. Thanks for you time,
Jonathan Hui
my husband’s bonuses reached to approximately 25k this year and of course about 40% was taxed. Should we expect some of that towards our tax refund next year? We both work, own a home and file M2. Thanks!