As we just celebrated New Year’s 2013 and a round of fiscal cliff battles is behind us, the country’s financial focus is shifting to tax season.
I know I’m not the only one itching to file my tax return and get a refund of the hard-earned money I overpaid to the government!
As we get ready to file 2012 tax returns, I thought it would be a good time to review the 2012 IRS tax tables. Many people don’t know exactly how individual income tax brackets work – they just use TurboTax to compute their taxes each year and never think twice about it. But, in reality, federal tax brackets and tax rates are two different things.
2012 Individual Income Tax Brackets vs. Tax Rates vs. Tax Tables
I’ll explain how tax brackets work and list the 2012 income tax rates you’ll encounter as you file taxes in early 2013. I’ll also explain where to find a handy federal income tax table that offers a tax due cheat sheet for most individual taxpayers.
2012 IRS Tax Tables Online
The IRS publishes tax brackets and tax rate tables in the individual tax return instructions every year. These are sometimes available in December, but oftentimes you can’t access them until January.
But even before the federal tax return instructions are publicly available, you can find current tax rates from other IRS sources. To obtain 2012 income tax brackets, you can look at Revenue Procedure 2011-52.
Federal Income Tax Tables Shortcut in Publication 17 – Updated for Each Tax Year
Each year the IRS updates Publication 17, the Tax Guide for Individuals, with important information individuals needs to complete their personal tax returns.
As of this writing, Publication 17 has not been updated for the 2012 tax year; however, once it is, it will contain a handy tax table that tells you exactly how much tax is owed for any income up to a certain amount (typically $100,000). For incomes beyond that amount, the publication contains a tax computation worksheet.
Once ready for 2012, Publication 17 is accessible in the Forms & Pubs section or irs.gov.
2012 Tax Rates
Here are the 2012 tax rates: 10%, 15%, 25%, 28%, 33%, 35%.
The tax rates are marginal tax rates, meaning that each amount is meant to apply to a set range of income.
FYI: As of this writing, the 2013 tax rates will be the same except with one additional higher tax rate for the highest income earners.
How to Calculate Income Taxes – Married Filing Jointly Example
Calculating taxes due is easier than you might think. It just takes a bit of concentration to follow the math.
Perhaps the simplest way to explain how the United States marginal tax rates work is to focus on one type of filer and pick an exact income amount to run through an example.
So, for instance, here are the ranges of income for anyone using Married Filing Jointly or Surviving Spouses:
- Up to $17,400
- Over $17,400 but not over $70,700
- Over $70,700 but not over $142,700
- Over $142,700 but not over $217,450
- Over $217,450 but not over $388,350
- Over $388,350
When you layer the married filing jointly tax rates over the income ranges, you get the following:
- 10% on income up to $17,400
- 15% on income over $17,400 but not over $70,700
- 25% on income over $70,700 but not over $142,700
- 28% on income over $142,700 but not over $217,450
- 33% on income over $217,450 but not over $388,350
- 35% on income over $388,350
Simple Example Calculation – IRS Federal Income Taxes
Let’s go over an example. Let’s say you and your spouse have joint income of $65,500.
To compute your federal tax liability based on the chart above, you would first multiply $17,400 by 10%. To that, you would add $48,100 times 15% ($48,100 is the difference between $65,500 and 17,400).
This would have the effect of taxing you at 10% for your first $17,400 of income, then taxing you at 15% on the amount of income above $17,400 but below the next threshold (which you do not meet because your income stops at $65,500).
$17,400 x 10% = $1,740
$48,100 x 15% = $7,215
$1,740 + $7,215 = $8,955
Graduated Income Taxes – Calculating Taxes on Different Levels of Income
When you put all of this information together, what you get is a multi-step calculation for most income levels. Basically, the more you make, the more you must to the federal government. But to keep things fair, each level is taxed gradually.
For instance, if a couple makes $15,000 a year, they will be taxed 10% on the whole amount because it is less than the maximum income threshold for that rate. But for couples who make $55,000 combined, the tax rate is 10% on the first $17,400 of income and 15% on the remainder. Couples making $100,000 per year will get taxed 10% on the first $17,400 worth of income, 15% on the portion from $17,400 to $70,700, and 25% on the remainder. And the calculation is stepped up in the same manner the higher the income goes.
The computation works the same way for Married Filing Jointly (including widowers), Married Filing Separately, Single, and Head of Household; the applicable income ranges are just different for each category.
No Need to Compute – Use IRS 2012 Income Tax Tables
Luckily, for most taxpayers, there is no need to run through this manual calculation. Just use the tax reference tables or the tax computation worksheet in Publication 17 when it is updated for 2012 tax rates.
Interestingly enough, the IRS suggests using the tax tables to find your exact tax liability each year; calculating income taxes on your own may result in a slightly different answer due to rounding.