How To Calculate The Tax You Owe
as you've probably already noticed, the more money you earn more tax you pay. this is because of the marginal tax rate. but it doesn't increase your tax rate in quite the way you might expect. suppose that bob wants to calculate his marginal tax rate. first, bob calculates his total gross income for the year including all taxable income reported on his w2 and 1099 forms. this year bob earned $49,000 in salary and $1,000 in interest in a savings account. that means bob's gross income for the year, $50,000, $49,000 plus $1,000. however, not all of this income is taxed, because the government allows bob to take deductions. bob can either take the standard deduction or he can itemize his deductions. bob will use whichever method will give him the larger deduction. so he takes the standard deduction. let's say the standard deduction is $6,000 for a single man like bob. bob's adjusted gross income is $50,000. if he subtracts the $6,000 standard deduction, he's left with $44,000, the amount of income on which he must pay tax. but how much tax? this is where the marginal tax rate comes in. to determine his marginal tax rate, bob uses the irs'es tax rate schedules. this year the schedule for a single filer shows a tax rate of 10% for income between $0 and $8,000, 15% for income between $8,000 and $35,000 and 25% for income between $35,000 and $80,000. because $44,000 falls into the last category, bob's marginal tax rate is 25%. but bob doesn't pay 25% tax on all his income. based on marginal tax system, he'll pay $800 of tax on the first $8,000 of his income, a 10% rate, $4,050 on his income between $8,000 and $35,000, a 15% rate, and $2,250 on the final $9,000 of his income, a 25% rate. in total, bob owes $7,100 in income taxes. many people believe that their tax rate represents the percentage of their income they must put toward tax. but this is only partly true. in fact, bob's income is taxed at a variety of rates, and bob must pay more on the amounts that exceed each bracket.