So until last year, I was least concerned about tax brackets because I was getting money back every year. However, my wife started working this year and sounds like we do owe some money to uncle SAM this year.

Now, I started looking into different kind of tax deductions(401k, IRA, charities etc) and I was also referring to the tax bracket here:

on Married Filing Jointly table. Our house hold income last year was 185k and with 401k Contribution, I brought it down to 160k(taxable income).

Now, If I am interpreting the table correctly, if I reduce my taxable income further down by 10k(which will be below 151k tax bracket), I should see significant amount of reduction in the tax amount that I owe to government because

  1. Not only by Percentage of tax went down from 28% to 25%(almost 3% decrease)
  2. but also, my base rate would go down from almost 29k to 10k(almost 20k, which is HUGE)

So while I was on Turbo Tax, Just for fun I entered 10000 as Charity JUST TO SEE that if I see any significant decrease in amount of tax that I owe. I was expecting (3% at 150k (4500) + 20k base reduction = 24k less in taxes). However, what I saw was ONLY 3 thousands payable tax going down.

What am I missing?

  • 1
    What do you mean by your "base rate"? – BrenBarn Feb 26 '16 at 6:45
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    Taxable income above the bracket threshold is taxed at that rate, it has no impact whatsoever on income below the bracket threshold. Reducing your taxable income only shields income above the threshold from the marginal rate increase. – quid Feb 26 '16 at 7:50
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    Or put another way: Almost always, no kind of donation or expenditure can reduce the tax you pay by more than the amount you spent -- so attempting to do so is a losing proposition from the perspective of saving money. – Matthew Read Feb 26 '16 at 19:09

You are not interpreting the table correctly. The $20K "base rate" that you think should have been eliminated is in fact the total tax for the whole bracket. You only dipped partially into the bracket, and the $3K reduction accounts for that.

Look at the table again:

Over            But not over                            of the amount over
$50,400     $130,150    $6,897.50   +   25%         $50,400
$130,150    $210,800    $26,835.00  +   28%         $130,150

What it means is that if you earn $100K, you will pay $6897.50 + 25% of (100000-50400) = $12400.

If you earn $140000, you'll pay $26835 + (140000-130150) * 0.28 = $2758.

So why the difference between $26835 and $6897.50? That's exactly 25% of $79500, which is the difference between $130150 and $50400 - the whole value of the bracket.

  • Ok which sounds like reasonable increment of taxes. Which also means that shifting my tax bracket would not show me drastic amount of change in the taxes that I pay. It explains a lot. Thanks !!! – Lost Feb 26 '16 at 7:06
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    You may also want to point out that the amount of the 'of the amount over' value is the total amount of tax you would pay if you had the highest amount in the previous bracket, and just provides a shortcut so you only need to have a single calculation. This helped me to understand tax rates better. – kingofzeal Feb 26 '16 at 15:20
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    @kingofzeal Yeah, what you're really paying is 10% of the first x number of dollars plus 15% of the next y number of dollars plus 25% of the next z number of dollars, plus 28% on the remainder. – reirab Feb 26 '16 at 18:51
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    This answer has the right idea, but $140,000 is still in the 25% bracket for 2015 married joint, not the 28% bracket. $140,000 taxable income for 2015 would have $10,312.5 + (140,000 - 74900) * 0.25 = $26,587.50 tax liability. The $130,150 number appears to be from the 2016 head of household table, which is different from married joint. – reirab Feb 26 '16 at 18:54
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    Numbers are not really the point, it's just to show how to read the table. – littleadv Feb 27 '16 at 21:32

Most of the time, your tax only reduces by the current marginal rate - meaning you would only reduce your tax by 28% to 25% depending on which part of the bracket you're in.

However, in the area around 100k, there are cases where reductions will have more of a marginal effect than that. You'll never reduce it more than 100%, but you can reduce it by 35-40% despite being in the 25% bracket.

That is because of certain deductions and credits which phase out beginning around 80k-120k; things like the IRA deduction, the Child Tax Credit, Childcare Tax Credit, and similar. Since many of them phase out in this range, additional dollars cost you your marginal rate (25%) plus the percentage of the credits or deductions which phase out here, which might bring you up another 10% or so.

  • Most of those don't matter for us single folks, of course. – keshlam Feb 26 '16 at 16:19
  • @keshlam Single people can contribute to an IRA, have children, and need to pay for childcare too. :) In fact, a single person with a child may be more likely to need childcare and therefore get this credit. – GalacticCowboy Feb 26 '16 at 19:39
  • Ok, "solitary", then. My point is that if you don't have dependents, this may be a non-issue. – keshlam Feb 26 '16 at 19:43
  • There may well be other phased out deductions/credits - I have kids and therefore know about those primarily... I know the mortgage interest deduction for example has its own phaseout for example. – Joe Feb 26 '16 at 20:01

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