How to determine tax bracket, AGI or gross salary?

Discussion in 'Financial Planning' started by Sam, Jan 13, 2007.

  1. Sam

    Sam Guest

    Is a persons tax bracket determined by their AGI or just gross salary?
    I just received a pay increase that puts my gross salary just a few
    hundred dollars below the cut off for the 28% tax bracket and next year
    (2008) I fully expect that my gross salary will be in the 28% tax
    bracket but I think taxes are based on AGI so I should still be in the
    25% bracket.

    Can someone please confirm that a persons tax bracket is based on AGI
    or gross salary?

    Thanks
     
    Sam, Jan 13, 2007
    #1
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  2. "Sam" <> writes:

    > Is a persons tax bracket determined by their AGI or just gross salary?


    Neither. It's determined by their taxable income (AGI less itemized or
    standard deduction less personal exemptions).

    > I just received a pay increase that puts my gross salary just a few
    > hundred dollars below the cut off for the 28% tax bracket and next year
    > (2008) I fully expect that my gross salary will be in the 28% tax
    > bracket but I think taxes are based on AGI so I should still be in the
    > 25% bracket.


    You do realize that only the amount of taxable income extending into
    the 28% bracket is taxed at 28%, not all of it?

    --
    Rich Carreiro
     
    Rich Carreiro, Jan 13, 2007
    #2
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  3. Sam

    joetaxpayer Guest

    Sam wrote:

    > Is a persons tax bracket determined by their AGI or just gross salary?
    > I just received a pay increase that puts my gross salary just a few
    > hundred dollars below the cut off for the 28% tax bracket and next year
    > (2008) I fully expect that my gross salary will be in the 28% tax
    > bracket but I think taxes are based on AGI so I should still be in the
    > 25% bracket.
    >
    > Can someone please confirm that a persons tax bracket is based on AGI
    > or gross salary?
    >
    > Thanks


    There is a line on the 1040, which shows "taxable income" line 43.
    Go to http://www.fairmark.com/refrence/index.htm and you'll see the 2007
    tax rate schedule. This is your 'tax bracket' or marginal rate.

    In truth, it's more complex than that. Exemptions phase out at a certain
    income level, so marginal rates actually are higher. At retirement,
    social security can be taxed baed on other income, so phantom rates of
    50% may appear. I have yet to fine a good graph or spreadsheet showing
    that. At the simplest level,in 2007, you are in the 28% bracket if your
    taxable income is above $77,100, single, $128,500 married.

    So in either case, 28% bracket land mean you are doing well.
    (stepping up on soapbox) I hope you are planning for your future and
    your family's if you are married. Killed off credit card debt you
    accumulated when you were young and stupid (I was both, perhaps you
    weren't)? Putting money in the retirement plan(s) at work? Up to 15% (or
    more if you aspire to retire early)?
    It's never too soon to start to think on these things, and whether you
    go it alone or seek a professional, knowledge is power, time is money,
    and I've forgotten the punchline.....

    JOE
     
    joetaxpayer, Jan 13, 2007
    #3
  4. Sam

    Elle Guest

    In addition to Richard's and Joe's suggestions, you might
    find the following online calculator to be a helpful guide
    in understanding rates at which your income will be taxed:
    http://www.dinkytown.net/java/Tax1040.html

    I did a partial Traditional IRA conversion (and naturally,
    followed by a recharacterization... one day I'll do it
    perfectly the first time) and was contemplating taking some
    capital gains on stock sales in 2006, and used the
    calculator a lot, along with a spreadsheet here at home, to
    gage, roughly, the effects of different scenarios re the
    conversion and gains. Of course, I have been doing my own
    taxes for decades now, so I have a handle on Richard's and
    Joe's points already, and this helps when using the
    calculator at the link above.
     
    Elle, Jan 14, 2007
    #4
  5. Sam

    Bucky Guest

    Rich Carreiro wrote:
    > Neither. It's determined by their taxable income (AGI less itemized or
    > standard deduction less personal exemptions).


    exactly.

    > You do realize that only the amount of taxable income extending into
    > the 28% bracket is taxed at 28%, not all of it?


    yup, this is a point that many people misunderstand. If you are $1 over
    the 28% bracket, then only that $1 is taxed at 28%.
     
    Bucky, Jan 14, 2007
    #5
  6. Sam

    Sam Guest

    Thanks everyone for your responses. Turns out I will not break over
    into the 28% tax bracket as I had thought. Before posting I had thought
    the breaking point was $74,200 but that was for 2006, 2007 is $77,100.
    I dont think I will be making that big of a jump from where I am today.


    I guess my original post did not really ask the question correctly.
    What I was really getting at was if I am close to going into a higher
    tax bracket then would it make sense to increase my 401k contribution
    to reduce my taxable income and thus keep me in a lower tax bracket. I
    realize now that my original post did not really get down the real
    question, which is... if I am on the border of crossing over into a
    higher tax bracket would it make sense to increase my 401k contribution
    so that I reduce my taxable income and stay in the lower tax bracket
    and also invest more at the same time. Seems like a win-win situation.

    (this is getting off topic)
    joetaxpayer, I do realize that I am sitting pretty good for being 32
    and single and I have been trying to put aside as much as possible. I
    will be 33 in March and I have ~$102k in retirement accounts, not
    exactly setting the financial world on fire but not too bad I think. I
    keep telling myself that investing more earlier will allow my
    investments more time to grow (you know the whole "delayed consumption"
    thing, consume less today so that I can consume more tomorrow). I think
    my biggest problem is finding a balance between saving for retirement
    and paying down debt. I am currently struggling with a decision to
    change my 401k from roth to traditional so that I can take the tax
    deduction, bring more cash home and use that additional take home pay
    to pay down some debt. I should note that the debt is not credit card,
    two homes and a new (used) truck. I have also been fully funding my
    roth ira for about 5 or 6 years. Just using rough estimates I am
    currently spending ~$800/month just on loan interest and I hate that
    but I should also note that one of the houses is a rental unit so a
    good portion of that $800/month interest payment is getting paid by the
    tenet. I realize there is not a "silver bullet" for this question but
    how does a person determine how much debt is acceptable for their given
    situation? I am sure that depends on the type of debt, for my personal
    situation it is all mortgage and a single auto that I just purchased
    last month. Oh and as of last week a student loan, again. Just
    yesterday I figured out that I can change me 401k from roth to
    traditional, increase my contribution from 10% to 20% and only lose
    about $9 from my 2006 take home (partly because of being able to take
    the tax deduction and partly because of a pay increase). One side of me
    says thats a no brainer and I should do it but at the same time that
    still does not help me pay down my debt. So how does a person decide
    whether to pay down debt or increase retirement investments? I would
    really like to pay down some debt because I have a feeling that my
    salary is going to take a pretty big cut one of these days and I may
    not be able to handle my current payments.

    Sorry for the long post...

    Sam
     
    Sam, Jan 14, 2007
    #6
  7. Sam

    RML Guest

    Is pension considered income, in determining if SS is taxed? What
    about withdrawals from an IRA, are they "income"?

    Thanks

    On Sat, 13 Jan 2007 14:54:53 -0600, joetaxpayer
    <> wrote:

    At retirement,
    social security can be taxed baed on other income, so phantom rates of
    50% may appear.
     
    RML, Jan 14, 2007
    #7
  8. Sam

    Dave Dodson Guest

    RML wrote:
    > Is pension considered income, in determining if SS is taxed? What
    > about withdrawals from an IRA, are they "income"?


    Yes and yes.

    Dave
     
    Dave Dodson, Jan 14, 2007
    #8
  9. Sam

    Elle Guest

    "Sam" <> wrote
    > I am currently struggling with a decision to
    > change my 401k from roth to traditional so that I can take
    > the tax
    > deduction, bring more cash home and use that additional
    > take home pay
    > to pay down some debt. I should note that the debt is not
    > credit card,
    > two homes and a new (used) truck. I have also been fully
    > funding my
    > roth ira for about 5 or 6 years.

    snip
    > how does a person determine how much debt is acceptable
    > for their given
    > situation? I am sure that depends on the type of debt, for
    > my personal
    > situation it is all mortgage and a single auto that I just
    > purchased
    > last month. Oh and as of last week a student loan, again.


    Sam, can you give the interest rates and lengths of all
    loans? This will be key here. IMO, if the interest rate is
    below about 5.5%, I would forget about paying them off,
    unless you really like the psychological boost of being debt
    free. A lot of people do prefer the latter.

    Also, the general guideline for retirement vehicles is
    1) Contribute to 401(k) up to the employer's matching
    2) Max out, if possible, the Roth IRA
    3) Review 401(k) expenses and investment options, and
    consider continuing to contribute to it

    About losing your job: Remember that the Roth IRA
    contributions (but not earnings on same) may be withdrawn
    without penalty at any time. Of course one wants to avoid
    drawing on any retirement, tax advantaged account, but this
    flexibility is there for folks who have emergencies.
     
    Elle, Jan 14, 2007
    #9
  10. Sam

    RML Guest

    What I actually meant to ask was, "Is SS reduced based on pension
    income and/or IRA withdrawals"?

    Thanks

    On Sun, 14 Jan 2007 06:52:22 -0600, "Dave Dodson"
    <> wrote:

    >
    >RML wrote:
    >> Is pension considered income, in determining if SS is taxed? What
    >> about withdrawals from an IRA, are they "income"?

    >
    >Yes and yes.
    >
    >Dave
     
    RML, Jan 14, 2007
    #10
  11. Sam

    Dave Dodson Guest

    RML wrote:
    > What I actually meant to ask was, "Is SS reduced based on pension
    > income and/or IRA withdrawals"?
    >
    > Thanks
    >
    > On Sun, 14 Jan 2007 06:52:22 -0600, "Dave Dodson"
    > <> wrote:


    No. Social Security benefits are reduced from "earned income,"
    including what shows up on a W-2 form, but pension income and
    distributions from IRA accounts does not affect Social Security
    benefits.

    And I should have added in my previous post that distributions from
    Roth IRAs do not affect the taxability of Social Security benefits.

    Dave
     
    Dave Dodson, Jan 14, 2007
    #11
  12. "Dave Dodson" <> wrote in message news:...
    >
    > RML wrote:
    >> What I actually meant to ask was, "Is SS reduced based on pension
    >> income and/or IRA withdrawals"?
    >>
    >> Thanks
    >>
    >> On Sun, 14 Jan 2007 06:52:22 -0600, "Dave Dodson"
    >> <> wrote:

    >
    > No. Social Security benefits are reduced from "earned income,"
    > including what shows up on a W-2 form, but pension income and
    > distributions from IRA accounts does not affect Social Security
    > benefits.


    Unless that pension income is from federal government civil service,
    as mine is. Not sure if state and local government pensions fall
    into that category.

    --
    John Richards
     
    John Richards, Jan 14, 2007
    #12
  13. Sam

    joetaxpayer Guest

    John Richards wrote:

    > "Dave Dodson" <> wrote in message
    > news:...
    >
    >>
    >> RML wrote:
    >>
    >>> What I actually meant to ask was, "Is SS reduced based on pension
    >>> income and/or IRA withdrawals"?
    >>>
    >>> Thanks
    >>>
    >>> On Sun, 14 Jan 2007 06:52:22 -0600, "Dave Dodson"
    >>> <> wrote:

    >>
    >>
    >> No. Social Security benefits are reduced from "earned income,"
    >> including what shows up on a W-2 form, but pension income and
    >> distributions from IRA accounts does not affect Social Security
    >> benefits.

    >
    >
    > Unless that pension income is from federal government civil service,
    > as mine is. Not sure if state and local government pensions fall
    > into that category.


    2 points. Yes, state employees may not get SS, depending. My 80 yr old
    client was a teacher in Mass, and did not participate in Social Security
    (what her deductions were, while employed, I don't know, I just know she
    only collected the teacher retirement, not SS when she retired).
    For the original question, no, nothing is reduced.
    If you earned money Fed, or State as my teacher did, you don't earn the
    SS credits, it's not like she was expecting anything, and then found out
    that due to pension, she gets less SS.
    If you have too much income at retirement, the SS is taxed, so the net
    effect is the same, but the SS check isn't reduced, just taxed more so.
    This may very well be nit-picky, but it's an important point.

    On a side note, it's possible to work in government, earn the pension,
    and quit after 20 years, no SS earnings. Then work a civil job, and get
    20 years of SS credits and quit with both SS and the Gov pension.

    JOE
     
    joetaxpayer, Jan 14, 2007
    #13
  14. "joetaxpayer" <> wrote in message
    news:...
    >
    > On a side note, it's possible to work in government, earn the pension,
    > and quit after 20 years, no SS earnings. Then work a civil job, and get
    > 20 years of SS credits and quit with both SS and the Gov pension.
    >


    This is the situation where SS gets reduced. If the pension is based on
    income that wasn't subject to SS taxes, then the amount of the pension will
    reduce your SS benefit. If your pension is increased (for inflation or
    something), then your SS benefit is reduced additionally. Also, it is
    interesting to note that a person who receives such a pension will not be
    able to collect SS as a widow/widower based on a deceased spouse's income.
    They call this double-dipping. However, and paradoxically, that spouse who
    collects SS may be beneficiary on the pension and collect both. Finally,
    note that this pension is based on non-SS taxed income. If you worked for a
    state of local government and DID pay SS taxes, then nothing happens to your
    SS benefit no matter what happens with your pension.

    Elizabeth Richardson
     
    Elizabeth Richardson, Jan 16, 2007
    #14
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