Part 1 - Tax confusion - understanding how the federal tax code works

Part 1 - Tax confusion - understanding how the federal tax code works & what you really pay:   

Bottom Line: As we're closing in on a federal tax reform package that has the potential to be in place for 2018 - I continue to hear, see and read confusion from people on the topic of what people pay. The tax code is complicated as can be. Being confused about how it works doesn't make you dumb or odd but it could cause you to make personal mistakes based on the code if you don't understand how it works. Here's the current tax code brackets (the layout via the Tax Foundation):  

2017 Tax rates for an individual's: 

10%: $0 to $9,325 

15%: $9,325 to $37,950 

25%: $37,950 to $91,900 

28%: $91,900 to $191,650 

33%: $191,650 to $416,700 

35%: $416,700 to $418,400 

39.60%: $418,400+ 

Those are the seven brackets you're hearing about potentially being reduced to three or four. So back to the confusion for a moment. Let's say that you earn/report $40,000 this year. It doesn't mean that your tax rate is 25% on all money earned. Only $2,050 would be taxed at 25%, with the majority of your earnings being taxed at 15%. The most common mistake I see/hear/read is that people think whatever the bracket they end in with reported income is the bracket they have to pay for all income. In the 2nd part of today's story we'll take a look at the average net effective tax rate that we end up paying. 

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