http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Other numbers of interest are the standard deduction will be $5350 for single, $7850 for HoH, and $10,700 for married filing jointly.

I just took my last paycheck and did my estimated taxes in around 10 minutes. This article definitely helped to explain what I saw. As I’ve gotten raises over the years I’ve noticed a continual decrease in the size of my tax return. This year due to our company being bought out and all our stock options being forcefully cashed out, many received some large checks. For me, it looks like I found the ‘sweet spot’ and my return will be very close to 0. (single taking the standard deduction) I guess there will be no tax-time splurge this year!

Nicole, I think the calculations imply that Annie’s net will be higher and her return will be lower (assuming her dependents and the like stay the same). She will pay more of her total income than she did at the 25% rate, but her take-home income will increase by 75% of the amount of the raise. (less all the other withholding stuff)

The reason for the smaller return (as in my case, although this is only a guess, but it would explain the numbers) is that your withholding is a constant percentage (at least it is for me, looking at one paycheck from 2005 and one from today). So if Annie is withholding at 19% (probably unlikely, just used because it makes the example easier to understand) she will end up with a refund of $442.50 before her raise. After her raise she will owe the IRS $157.50. If I understand correctly, the difference is that her withholding remains the same while her marginal rate increases. However, her take-home pay is increasing by much more than the $600 swing her tax return is showing.

Thanks, good post!

(I do understand how marginal tax rates work. I use a spreadsheet every year to compute my expected taxes, based on my primary salary plus secondary income, so that I can get my withholding right.)

AMT is beyond the scope of Trent’s comment on this subject, but you can find an excellent primer on AMT at Fairmark’s website.

I’ve only been hit by AMT once, due to the exercise of incentive stock options. It was an enormous pain, but the long-term effects washed out (aside from the additional effort in doing my taxes!) because I ended up taking a gigantic AMT loss on that stock (a “dot-bomb”), which gave me several years of the maximum capital loss (due to AMT credit).

The concept is called your marginal tax rate. Even though you might be in the 25% tax bracket, this does not mean your income is taxed at 25%. It does mean that any *additional* income is taxed at 25%. So in Trent’s example, the person is in the 25% tax bracket, but his effective tax rate is only about 18%.

Any help would be appreciated.

Thanks.

P.S. One guideline I use is to increase my retirement savings by 2% each time I get a raise… may not seem like much, but I work for a state agency, so my raises are usually only an increase of 3-5%.

Jamie: Yes, your long-term capital gains tax rate is dependent on your income tax bracket–5% if you’re in the 10% or 15% bracket, 15% if you’re in the 25%, 28%, 33%, or 35% brackets. Your scenario is right (though you can contribute up to $15,500 to your 401K, and another $4,000 to an IRA, which will reduce your AGI more than in your example).

I did not know that they actually chop your income into parts or am I missing something?

* 0% : on taxable income of $7999.00 or less
* 15.25%: on taxable income of $36,378 or less
* 22%: on taxable income of more than $36,378, but not more than $72,756
* 26%: on taxable income of more than $72,756, but not more than $118,285
* 29%: on taxable income of more than $118,285

But the Province could also take a portion. Up to 15% I think. Alberta has a flat rate of 10%.