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Tax brackets move slightly higher for 2011

Sandy Smith's picture

As taxpayers prepare to file their income tax returns for 2010, it's not too early to start planning for your 2011 income taxes, especially when one considers the changing tax brackets.

While the two-year extension of the income tax cuts enacted during the George W. Bush administration keeps in place the six tax brackets ranging from 10% to 35%, the income threshold for each bracket will rise slightly in 2011, following the established IRS practice of adjusting the brackets each year to take inflation into account.

Indexing of income tax brackets dates at least to the income tax reform of 1986, if not earlier. Indexing was implemented in order to eliminate or reduce "bracket creep" - the pushing of taxpayers into higher tax brackets as a result of wages rising to keep pace with inflation. As the inflated salaries produce no additional real purchasing power, the effect of bracket creep is to reduce real after-tax income for affected taxpayers.

Inflation, while low, is not nonexistent, hence the continued need for annual adjustments in the income tax brackets. The income ranges for each bracket in 2010 were:

Single
10% - Below $8,375
15% - From $8,375 to $34,000
25% - From $34,000 to $82,400
28% - From $82,400 to $171,850
33% - From $171,850 to $373,650
35% - $373,650 and above

Married filing jointly
10% - Below $16,750
15% - From $16,750 to $68,000
25% - From $68,000 to $137,300
28% - From $137,300 to $209,250
33% - From $209,250 to $373,650
35% - $373,650 and above

Married filing separately
10% - Below $8,375
15% - From $8,375 to $34,000
25% - From $34,000 to $68,650
28% - From $68,650 to $104,625
33% - From $104,625 to $186,825
35% - $186,825 and above

Head of household
10% - Below $11,950
15% - From $11,950 to $45,550
25% - From $45,550 to $117,650
28% - From $117,650 to $190,550
33% - From $190,550 to $373,650
35% - $373,650 and above

For 2011, the bracket ranges are:

Single
10% - Below $8,500
15% - From $8,500 to $34,500
25% - From $34,500 to $83,600
28% - From $83,600 to $174,400
33% - From $174,400 to $379,150
35% - $379,150 and above

Married filing jointly
10% - Below $17,000
15% - From $17,000 to $69,000
25% - From $69,000 to $139,350
28% - From $139,350 to $212,300
33% - From $212,300 to $379,150
35% - $379,150 and above

Married filing separately

10% - Below $8,500
15% - From $8,500 to $34,500
25% - From $34,500 to $69,675
28% - From $69,675 to $106,150
33% - From $106,150 to $189,575
35% - $189,575 and above

Head of household
10% - Below $12,150
15% - From $12,150 to $46,250
25% - From $46,250 to $119,400
28% - From $119,400 to $193,350
33% - From $193,350 to $379,150
35% - $379,150 and above

Remember that the tax brackets are marginal - that is, the tax rate is applied only to the "last dollar" you earn. The actual percentage of income that you pay in Federal taxes is therefore less than your tax bracket. For example: A single individual who earns $100,000 in 2011 will be in the 28% tax bracket, but that rate will apply only to his last $16,400 of income; income below that would be taxed at the rate for its bracket. The total tax rate would be:

$8,500 x .1 =$850
$26,000 x .15 = $3,900
$49,100 x .25 = $12,275
$16,400 x .28 = $4,592

Total tax on $100,000 annual income in 2011 = $21,617, or 21.6%

As the current tax rates were extended for only two years, there may be major changes to the tax structure in 2012, depending on what happens in Congress. If the rates expire as scheduled, the top two brackets rise to 35% and 39.6% respectively.

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