What Percent of Your Income Goes to Taxes?
The percentage of your income that goes to taxes depends on many factors, primarily the amount of money you earn per year and your filing status. But there is a distinction between your real income and your taxable income, since the Internal Revenue Service exempts a portion of your income from taxation. You can further reduce the percentage of total income you owe by taking advantage of credits.
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Rates
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Starting in 2003 and extending at least through 2012, the six tax brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. Your income determines your tax bracket, with the income thresholds for each bracket differing for single taxpayers, married taxpayers who file jointly, married taxpayers who file separately, qualified widows or widowers and designated heads of household. For example, a $50,000 household income places you in the 25 percent bracket if you are single, married filing separately or a designated head of household. But for married couples filing jointly and qualified widows or widowers, a $50,000 income leaves them in the 15 percent bracket.
Clarification
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In each bracket, the applicable tax rate is a marginal rate. That means it applies only to income you earn above the threshold, not to all your income. For example, the 10 percent tax bracket applies to income up to $17,000 for married couples filing jointly in 2011. If a couple has taxable income of $100,000, they would pay 10 percent income tax on their first $17,000. They would pay 15 percent on their remaining income up to $69,000, since that is the cutoff for the 15 percent bracket. They would pay 25 percent on the last $31,000 of their income, since that rate applies to income of between $69,000 and $139,350. Their payment would be $17,250, or a little more than 17 percent of their taxable income.
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Adjustments
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You will pay a lower percentage of your total income than your tax rate suggests. To determine your taxable income, the IRS exempts part of your total income and allows you to make deductions. The exemption in 2011 is $3,650 each for you and your spouse --- if you file jointly --- as well as for each of your dependents. The standard deduction is $5,700, or $11,400 if you file a joint return. Alternatively, you can itemize deductions, such as charitable donations, medical expenses and mortgage interest, if itemizing would allow you to exceed the standard deduction. In the earlier example of a couple with $100,000 in taxable income, their actual income would have been $118,700 before applying the standard deduction and a pair of exemptions. Their $17,250 tax bill thus would be 14.5 percent of total income.
Credits
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Once you determine your tax bill, you can use credits to reduce it --- and in turn further reduce the percentage of income you pay in taxes. Credits are essentially dollar-for-dollar reductions of owed tax. For 2010-11, key credits relate to raising kids, buying a first home and pursuing a college education. If the couple in the earlier example bought their first home in 2010, they could claim a credit of $8,000. This would reduce their tax bill from $17,250 to $9,250. Given their previously mentioned income of $118,700, they would pay 7.8 percent in taxes.
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- Photo Credit tax time image by Gale Distler from Fotolia.com
