For personal reference, there are the new 2009 federal income tax brackets, which have been adjusted for inflation. This is taxable income, so it is after any exemptions and either standard or itemized deductions have taken place, as well as pre-tax contributions to Traditional 401ks and IRAs. (And all that other stuff that makes the tax manual so thick.)
| Marginal Tax Rate | [Taxable Income] Single | Married Filing Jointly |
| 10% | $0-$8,350 | $0-$16,700 |
| 15% | $8,350-$33,950 | 16,700-$67,900 |
| 25% | $33,950-$82,250 | $67,900-$137,050 |
| 28% | $82,250-$171,550 | $137,050-$208,850 |
| 33% | $171,550-$372,950 | $208,850-$372,950 |
| 35% | > $372,950 | > $372,950 |
The value of each personal exemption also increased to $3,650, up $150 from 2008. The standard deduction is now $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Source: IRS.gov
If you are like many others and didn’t get a raise that matched inflation last year, at least you might pay a little less in taxes.
Since we’re married, I always pay attention to the point where you jump from 15% to 25%, which this year is $67,900. (With the two personal exemptions and a standard deduction, this would be a gross income of $86,600.) My fuzzy goal is to be able to live on less than this amount in (early?) retirement, so that all my IRA and 401(k) withdrawals will be taxed at a maximum of 15%.
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That jump from 15% to 25% is a doosey. I’m glad to see that I’m not the only one realizing the significance of that particular jump; I hate paying anything over the 15%. In retirement, I hope to never pay at the 25% level.
Keep in mind you only pay 25% on earnings past $67,900. $16,700-$67,900 will still be taxed at 15%, so it wouldn’t matter all that much if you are making $75,000 for example. Saying “I hope to never pay at the 25% level” is kind of like complaining about taxes when you hit the lottery.
You do realize that if you make $67,901, you will pay 15% on $67,900 and 25% on $1. This makes the significance a lot less. 🙂
Oops, what I said before was inaccurate. If you make $67,901, you will pay 10% $16,700, 15% on $51,200, and 25% on the last $1.00. So making anything over the 15% bracket might not seem like not such a bad deal after all.
In addition, no one is paying attention to the “taxable income” notation – you actually as a married couple have to make over $86,600 (using the standard deduction and two exemptions) to have to pay 25% on anything.
I never realized there was such a huge tax penalty for being single. The government promoting certain values, I suppose. I would like to see marriage taken out of the tax code.
Thanks for the table.
Yes, marginal tax brackets is the tax rate on the last dollar that you earn. Earning more money does not increase the tax on previous dollars.
Charlie – Keep in mind the context of that statement is when you are talking about withdrawing from an IRA. This is already your hard-earned money, not some lottery. You are simply trying to extract it with as little tax as possible.
Also, if you are confident you can extract at 15% max, it makes it easier to go Traditional instead of Roth and save tax now at 25,28,33%.
ttfitz – That is a good point, and one that I did not clarify enough, even though that is why I listed the new exemptions. I’ve added more text to that effect.
joelkton – It all depends on how you look at it. If you are married and have one major breadwinner, you get a tax break. If you are married and have two equal breadwinners, in many scenarios you pay a lot *more* taxes than if you were considered two single people.
I guess I learned something from this page. I didn’t know that with your 401K, your tax rate is whatever you take out each year. Is that correct? I guess I never thought about this before!
Don’t forget that for 2008 & 2009 (I believe) there is an additional $500 property tax deduction per person, so $1000 per married couple.
Teehee – I just have to laugh at the idea of planning your retirement around taxes. I am a tax professional. These are in no way shape or form the tax brackets will be when you retire. The tax code will be revamped many times over.
Anyway, please, all of you, don’t do any long term tax planning based on current tax code. It’s a futile exercise. I’d be pretty hard pressed to tell you where taxes will be for 2009, honestly. It’s hard enough to plan for next year. We don’t even try anything beyond that really. Simply because it is impossible.
When my spouse and I both worked in 1999 the tax code was largely different. We made about $100k and were square in the 28% tax bracket. Today on one income we could make that much and still be square in the 15% tax bracket. Boy, have things changed.
BTW in retirement you lose all your deductions for the most part (no 401k, mortgage should be paid, etc.) so you will hit a higher taxable income on a lower gross income, most likely. Just something else to consider. I am personally convinced taxes go UP in retirement. Not down. That is how it is with the current tax code. I have a lot of retired clients who struggle with this because they always assumed their taxes would go down.
Hate to rain on people’s parade but with our country becoming bailout nation and with the SS and medicare liabilities I’ll eat your hat if the rates still 15 and 25 when people our age retire.
don’t forget the % *AND* the flat rate
Personally, I would happily pay the 35%… having to pay taxes because I make too much money isnt a bad problem to have.
During retirement, I would like to think less about living within the tax code and more about living the way I want to.
When Im old and wearing diapers again, all my money will be gone and the gov’t will be paying to keep me in a nursing home.
I have to agree with greg. Our federal debt alone (not including state and local governments’ debts) is already passing $10.5 Trillion, or almost $35,000 for every man, woman and child living in the US today, and with a deficit of over $1 Trillion looming just this year it’s likely to grow far far higher over the next couple decades.
At some point our government is going to be forced to raise taxes significantly and reduce or at least freeze spending. I prefer to have most of my retirement savings in Roth accounts (IRAs or Roth 401(k) accounts) but I also realise that the odds are very high that the government will renege on the promise of not taxing these accounts when it finally has face up to the massive bill. If that happens, the best I think we can hope for is that distributions from the Roth accounts will be taxed less than those of traditional IRA and 401(k) accounts, perhaps as a credit for the taxes we paid on that money when we first contributed to our Roths.
But that’s pure speculation. We’ve got a very bumpy ride ahead of us as a number of problems that have been allowed to build for decades start to become very urgent. Unfortunately, I believe most of the politicians we elect these days are far too concerned with showboating and getting re-elected in the next campaign cycle for our problems to be dealt with until they become too big to ignore. The housing bubble is just one example of a looming issue most politicians likely knew would be a problem sooner or later, but they gambled that the problem wouldn’t become a crisis until they (the current politicians) were safely out of office. I suspect many other issues will receive a similar treatment because it is easier to tell the public, who most emphatically does not want to hear bad news, that all is good until a problem becomes too obvious, then try to pin all of the blame on just a few of the people or groups that contributed to the mess and hope that the public doesn’t ask too many questions.
I’d rather the government not take all my money, and then I’ll pay for my own retirement home.
Alexandria – You make some good points, and provide food for thought. Of course, $100k in 1999 isn’t the same as $100k in 2008.
But I wonder, has the tax rate on say, a married couple earning the US. median household income changed all that much of the the last few decades? The US government seems to decide what is “middle class” is income-wise and try not to tax it too much.
(More info in upcoming post.)
Don’t forget about your 401k deduction. If you are married, both work and both max out your 401k in 2009 that is an additional 33k you could make before hitting the 25% bracket. Yeah, you will probably end up paying a higher rate in retirement but that is why there are Roth IRAs and Roth 401ks (don’t get the current deduction with this though), tax diversification.
I fall into the 15% bracket and looking forward to the day that I will fall in the 35% bracket (only 20 more points to go, lol).
If my taxable income is 34,950, am i taxed at 15% up till 33,950 and then 25% for the last 1000?
The first $8,350 is taxed at 10%, $25,600 will be taxed at 15%. $1,000 will be taxed at 25%. I assumed you were single.
I may have inadvertantly claimed single with one dependant on my W-4. I have been married for a while and we always have claimed married zero, then do our taxes married with two kids…will I have anyproblems filing my taxes this year because of mhat I claimed on the w-4?