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HSFPP Weekly Update # 151—Income Tax Brackets Not Well Understood

Message from Bob & Chris: People complain that they don’t make enough money, and then when they get a raise they complain that their salary increases will put them into a higher tax bracket and they will have to pay more taxes. Teens often hear this from their parents and, when they get a raise themselves, they complain, too. But is this something to complain about? While we can’t have everything, sometimes what we get is better than we realize. If you reach a higher tax bracket you will have to pay more taxes, but you also will have more income. When a pay raise puts you into a higher tax bracket, you only have to pay the higher percentage rate on the difference between the limit for the lower bracket you were in and how much your pay increase put you over. Your taxes will not eat up your entire raise, so relax! Celebrate! You’re better off than you were before!

 

Related Updates:

Update # 145 - Tax Refund Scams - 16 January 2006
Update #132 - Cheating - 12 September 2005
Update #80 - Teenagers and Taxes - 26 January 2004
Update #70 - Tax and Identity Fraud Scams - 20 October 2003

 

Web Site Pick of the Week:

http://www.irs.gov/formspubs/article/0,,id=133517,00.html

Using the tax bracket page on the IRS’s Web site, you can find out how much tax you will owe depending on your income. Remember, however, that you might qualify for a variety of deductions, credits, and exemptions that can lower your tax bill.

 

Discussion Questions:

1.) After studying the tax brackets shown on the Web Site Pick of the Week, what is your opinion of the IRS tax system? In what ways is the tax system different from what you expected?

 

Follow-up Activity:

Math/Business Class: Go to http://www.bls.gov/oco/ and look up five careers that interest you. Find the average salary for each career; and then, using the Web Site Pick of the Week, look up the tax bracket for that average salary and figure out much tax you would have to pay. Then, assuming you would receive a 5 percent annual raise for each career—this, of course, would actually vary by career and from year to year, but don’t worry about that now—add that 5 percent to the average salary. Would that raise the tax bracket? How much tax would you have to pay with the 5 percent increase? Subtract the additional tax from the amount of the raise to find your net raise. Then ask yourself: Was it worth getting the raise? Would you turn down the raise?

 

In the New$... The Real IRS Tax System

By Chris Hart, Senior in Communications, University of Kentucky

After I graduate at the end of this semester, I will begin a career and, if all goes well, be paid more. My tax bracket will likely change significantly. But is this something to complain about? You may very well have heard someone complain that their pay increase put them into a higher tax bracket, so their entire increase will be taken away by taxes. They might even believe it, but it is not true.

The IRS tax system is tiered. $29,700, for example, is the limit for the Single Person 15 Percent Tax Bracket. The next bracket is 25 percent. But would a raise of only $1 really raise your income tax 10 percent? No. Not a chance. If you earn $30,000, you would only have to pay 25 percent on the $300 over $29,700. You would still pay 15 percent on the rest of your income. For more information, look at the IRS tax bracket Web site, http://www.irs.gov/formspubs/article/0,,id=133517,00.html.

Now you might ask yourself, why have tax brackets, anyway? Why should some people have to pay more taxes than others? The income tax is not designed for mass redistribution of wealth—though social programs do this to some extent—but it does take into account the fact that, the less money you earn, the more of it you need to keep for your everyday needs; and, the more you earn, the more of the burden for the country’s needs you should expect to pay. Thus, the income tax is progressive. The sales tax, on the other hand, is regressive. Everyone pays the same percentage, regardless of ability to pay. The gasoline tax also is regressive and, as we have seen recently, with the rising and falling cost of gas, many of us have found it a heavy burden, poor and middle class consumers and farmers especially.

It is true that wealthier taxpayers pay more taxes, but they also have more tax write-offs such as the mortgage payments on their homes, property taxes, charitable donations, etc. Just as people complain about paying too much in taxes, they also often complain about what they perceive as excessive tax loopholes for the wealthy. These loopholes may even be excessive. There is more than one side to everything.

On the other hand, young adults who are not wealthy tend to be renters, so they don’t have the tax write-offs such as real estate, property taxes, capital gains taxes, etc.; and, as a result, they usually file the 1040EZ (short form).

Some have advocated a flat tax, with no loopholes for anyone. Some suggest eliminating the income tax altogether and replacing it with other taxes. Others suggest eliminating the sales tax, except on luxuries. (Define luxuries: Is a TV a luxury? What about a computer?) So, although there is disagreement over current and potential tax plans, many have found it best for the income tax system to be tiered; and it will remain that way until Congress decides to change it. Voters can help them decide which way it should be.

 

Kentucky High School Financial Planning Program
http://www.ca.uky.edu/fcs/hsfp
The purpose of the HSFPP weekly financial updates and Web site is to assist county Extension agents, credit union educators, high school teachers, and parents who home school their teenagers so that they may improve the economic well-being of our teenagers; and also to show educators how the HSFPP and the weekly updates meet Kentucky core concepts. The Web site and weekly updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators. The list of core concepts and order form for free program materials including the student guide and instructors manual can be found on the Kentucky HSFPP home page.