Calculating your tax bracket is not rocket science. It’s easy and can be done by any one. All it needs is a little understanding of the logic that is involved in taxation. First and foremost what is tax bracket? Your income (salaries and wages) after all the deductions (retirement and savings account) defines your tax bracket. Anybody who earns an income would fall under one of the many tax brackets. It is important to determine under which tax bracket are you most likely to fall in order to determine the amount of tax that you are most likely to pay at the end of the financial year. Calculating your tax bracket in advance helps you to plan your financial budget.
Begin by estimating your taxable income for the current year. You can do this by taking an average of the monthly income from the months that have passed and then multiply this by 12. Make sure to include wages and tips. Minimum retirement account withdrawals are also considered as income and are taxable, so are lump sum withdrawals from these retirement plans.
When filling the form, determine your filing status (single, head of the house hold, married filing separate, married filing joint or Qualified Widow/ Widower). There are different tax brackets depending on your taxable income and the status that you are filing under.
For example if you are single and fall under the $0 to $ 8350 tax bracket, you would have a marginal tax rate of 10%. But in order for the same marginal tax rate (10%) to be applicable the tax bracket for people filing under the Marginal Filing Jointly or Qualified Widow(er) is $ 0 to $ 16,700.
You can simply log on to www.irs.gov and navigate to the Federal Tax Rate Schedule and check the tax bracket for the current or future (if available) year. Determine your tax bracket using this tax rate schedule as a guide.
Thus as you would have now seen, the higher the income, higher is the taxability. To this general rule, the exception is tax shelters. The government allows you to legally exempt yourself (provisionally) from paying taxes. A few tax shelters include investment in real estate, investment in retirement plans etc. Of course there is also the illegal way to exempt you from paying taxes. This is called tax evasion. You may be able to evade yourself from paying taxes up to a certain time, but remember, you can only fool someone, sometimes, and not every time. Sooner or later, the IRS is bound to catch you. The consequences of such an eventuality is horrible, with you not only paying huge penalties (the tax amount is peanuts in comparison), but also could end you in jail. For example a tax evasion of a mere $ 1000, could end up as $ 10,000 in penalty in seven years.