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Make Your 2014 Income And Investment Tax Rates Work For You






     Our income is taxed in a progressive manner. As your income increases, it slips into higher tax brackets where that portion is taxed at a higher rate. But before your income is subject to these tax brackets, it must exceed your exemption and standard deduction which together total to your tax threshold for your filing status - single or married; otherwise, you pay no tax.

*Tax-free thresholds and filing status:

For 2014, your personal exemption is $3,950 no matter what your filing status is. If you are filing single then your standard deduction is $6,200. This amount added to your personal exemption totals $10,150. So, if you're filing as 'single' then $10,150 is your tax threshold; you're only taxed on income greater than this.

If you're filing married, your standard deduction is $12,400 - twice the single standard deduction. Increasing this amount by two times the personal exemption - 1 exemption for each of you - makes the married tax threshold $20,300. That turns out just 2 times the single tax threshold amount.

It's only the amount of income you receive that's in excess of your tax threshold that is taxed at the income tax rates given below - for single and for married filers.

There are additional exemption amounts for being 65 or older or blind: If, as a single filer, you're 65 or older, or blind your standard deduction is increase by $1,550 to $7,750 putting your tax-free threshold at $11,700 after adding your personal exemption.

If you're married filer and 65 or older or are blind, your standard deduction increase is $1,200 giving you a $7,400 per person. Adding your personal exemptions for each of you to 2 times this $7,400 standard deduction gives you a married tax-free threshold of $22,700.

So now that you know your tax-free income threshold, let's see what the income tax rate is on any income that exceeds your threshold as a single and as a married filer.

*Income tax brackets:

Income is excess of your appropriate tax-free threshold is subject to federal income tax. The tax rate depends on that excess income above your threshold income. The excess income has a tax bracket amount and tax rate that depends on your filing status.

Below are the tax brackets income rates with their dollar value in excess of your threshold according to your filing status.

Single filing status, excess income range - tax rate for each bracket:

$0 to below $9,075 - 10%

$9,075 to below $36,900 - 15%

$36,900 to below $89,350 - 25%

$89,350 to below $186,350 - 28%

$186,350 to below $405,100 - 33%

$405,100 to below $406,750 - 35%

Over $406,750 - 39.6%

Married filing status, excess income range - tax rate for each bracket:

$0 to below $18,150 - 10%

$18,150 to below $73,800 - 15%

$73,800 to below $148,850 - 25%

$148,850 to below $226,850 - 28%

$226,850 to below $405,100 - 33%

$405,100 to below $457,600 - 35%

Over $457,600 - 39.6%

So you can see that if you're single and 65 or older, any amount of income you have in excess of your threshold of $11,700 will be taxed at a 10% rate up to an excess of $9,075. Any excess between $9075 and $36,900 will be taxed a 15% rate. And so on...

*Investment tax rates:

Your investment income that's subject to yearly taxation (i.e. not part of a tax-deferred qualified plan) is composed of interest, dividends and capital gains and losses from sales in that year. All interest income is added to your working income. So it's subject to your highest (i.e. marginal) tax bracket rate.

All interest income, nonqualified dividends and short term (held for 1 year or less before selling) capital gains are added to your working income. So they're taxed at the highest tax bracket rates they bring you to - i.e. your marginal tax rate.

Both long term capital gains and qualified dividends are taxed at lower tax rates. Presently, that rate depends on your excess income and brackets are ascribed to these rates too. Below are listed the tax rates that apply on 2014 long term capital gains (LTCGs) and qualified dividend (QDs) rates for your filing status:

Single or married filing jointly tax rates on LTCGs and QDs:

0% if your income falls into your filing status's 10 or 15% tax brackets

15% if your income falls into your filing status's 25, 28, 33, or 35% tax brackets

20% if your income falls into your filing status's 39.6% tax bracket

You can see that there are only 3 brackets, with rates of 0%, 15% or 20%, for qualified dividends and long term capital gain. Specifically, there is no tax (0% rate) for LTCG or QD income that falls into your 10 or 15% marginal tax brackets for your filing status. The tax is 15% if that investment income falls anywhere into your 25, 28, 33 or 35% marginal tax bracket for your filing status. Lastly, it's taxed at 20% if that type of investment income falls in your 39.6% marginal tax bracket.

Now that you know how you will be taxed on your types of income, you can plan to minimize your exposure to higher tax rates by deferring gains or taking capital gain losses, or other approaches.






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Posted on 2014-02-06, By: *

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