Understanding How Much Taxes You Pay

An important aspect in financial planning is understanding how much taxes you  pay and why. Below is the table of the federal tax-brackets for 2012. So lets say you make $90,000 from your job in 2012 and you filing you are single. First take  off the standard deduction ($5800) out and you will not pay federal income tax on the first $5800. So the remaining income you are taxed on is $84,200.

So the quick math is 10% of income up to $8700 which is $870. Now take 15% of all income between $8700 and $35,350 which is $3,997.50. Now take $84,200-$35,350 that is all of the income that will be taxed at 25%, this is $12,212.5 So your total taxes out of $90,000 would be $870 + $3997.5 + $12,212.5 = $17,080 which would be an effective tax rate of 19%.

Understanding how the tax brackets work is very important for retirement planning and annual planning, in higher income years it can be beneficial to reduce tax exposure by increasing IRA, 401K, and/or HSA contributions.

2012 Marginal Tax Rate	Single
10%	$0 to $8,700
15%	$8,700 to $35,350
25%	$35,350 to $85,650
28%	$85,650 to $178,650
33%	$178,650 to $388,350
35%	$388,350+