The IRS has not formally announced the federal income tax brackets for 2010 yet. In fact, the 2009 tax brackets are still the numbers I — or more accurately, my accountant — will be focusing on in the near future. But around this time each year, The Tax Foundation creates a reasonable estimate of the following year’s changes to the tax brackets.
Thanks to a low level of inflation, there won’t be too many changes in 2010. I’ll keep this updated if the IRS decides to set the rates differently than outlined in this prediction, but chances are these will be the official brackets.
Remember that if you are “in the 29% tax bracket,” for example, you don’t owe 28% on all of your income. You owe that rate on only the income within that bracket. A misunderstanding of this concept often leads to people being afraid of earning enough money to enter the next bracket, with the belief that even $1 into the next bracket would dramatically increase the amount of tax due. Thankfully, the system does not work that way.
Married individuals filing joint returns and surviving spouses
| If Taxable Income Is: |
The Tax Is: |
| Not over $16,750 |
10% of the taxable income |
| Over $16,750 but not over $68,000 |
$1,675 plus 15% of the excess over $16,750 |
| Over $68,000 but not over $137,300 |
$9,362.50 plus 25% of the excess over $68,000 |
| Over $137,300 but not over $209,250 |
$26,687.50 plus 28% of the excess over $137,300 |
| Over $209,250 but not over $373,650 |
$46,883.50 plus 33% of the excess over $209,250 |
| Over $373,650 |
$101,085.50 plus 35% of the excess over $373,650 |
Heads of households
| If Taxable Income Is: |
The Tax Is: |
| Not over $11,950 |
10% of the taxable income |
| Over $11,950 but not over $45,550 |
$1,195 plus 15% of the excess over $11,950 |
| Over $45,550 but not over $117,650 |
$6,235 plus 25% of the excess over $45,550 |
| Over $117,650 but not over $190,550 |
$24,260 plus 28% of the excess over $117,650 |
| Over $190,550 but not over $373,650 |
$44,672 plus 33% of the excess over $190,550 |
| Over $373,650 |
$105,095 plus 35% of the excess over $373,650 |
Unmarried individuals (other than surviving spouses and heads of households)
| If Taxable Income Is: |
The Tax Is: |
| Not over $8,375 |
10% of the taxable income |
| Over $8,375 but not over $34,000 |
$837.50 plus 15% of the excess over $8,375 |
| Over $34,000 but not over $82,400 |
$4,681.25 plus 25% of the excess over $34,000 |
| Over $82,400 but not over $171,850 |
$16,781.25 plus 28% of the excess over $82,400 |
| Over $171,850 but not over $373,650 |
$41,827.25 plus 33% of the excess over $171,850 |
| Over $373,650 |
$108,421.30 plus 35% of the excess over $373,650 |
Married individuals filing separate returns
| If Taxable Income Is: |
The Tax Is: |
| Not over $8,375 |
10% of the taxable income |
| Over $8,375 but not over $34,000 |
$837.50 plus 15% of the excess over $8,375 |
| Over $34,000 but not over $68,650 |
$4,681.25 plus 25% of the excess over $34,000 |
| Over $68,650 but not over $104,625 |
$13,343.75 plus 28% of the excess over $68,650 |
| Over $104,625 but not over $186,825 |
$23,416.75 plus 33% of the excess over $104,625 |
| Over $186,825 |
$50,542.75 plus 35% of the excess over $186,825 |
If you have filed your taxes for the most recent year but would like to take advantage of a new credit, such as the $8,000 first-time home buyer tax credit, without waiting for next year, you will need to file an amended income tax return.
You cannot file an amended tax return electronically. This article will explain the process and all it will cost you is a postage stamp.
Note: Some online tax preparation applications like TurboTax and Tax Cut allow you to complete this form online, but you are still required to print and send the forms and supporting documentation through the mail.
1. Have your completed tax return ready. Start with the income tax form you submitted earlier this year, either your 1040, 1040EZ, or 1040A. You will need to include some of this information on the new form. Do not attempt to rely on your memory.
2. Download the blank amendment form. You need Adobe Reader to download and print Form 1040X. It is available on the IRS website or directly from Consumerism Commentary through this link [pdf]. This will always link to the most recent 1040X.
3. Enter your current personal information in the top section. If you have a current version of Adobe Reader, you should be able to click on any blank line of the form to type directly into the document. Ensure you include the proper tax year at the top of the form; if you are completing this form in July 2009 to amend the tax form you filed in April 2009 for the 2008 tax year, make sure you enter the year 2008 in this field. Double-check your Social Security Number.
4. Identify what has changed. The second section of this page of form 1040X has three columns. The first column should contain the amounts you presented on your original 1040. The third column should contain the adjusted value. The second should contain the difference between your first column (original amount) and third column (new amount). For example, if you are adjusting your form to change the amount of your Earned Income Credit (EIC) from $0 to $300, line 13 would read would read in order $0, $300, and $300. If you are changing the EIC from $300 to $0, the line would read $300, -$300, $0.
5. Download the appropriate credit form. If you are filing the amendment because you now qualify for the first-time home buyers tax credit, download form 5405 [pdf] and use this form in the same manner to calculate your rebate. Enter the result from line 6 of form 5405 on line 15 of form 1040X.
6. Finish the calculations on 1040X. Continue until the first page of the form is complete and be sure to make note of any additional forms you need to provide based on the adjustment you are making.
7. Complete the second page of 1040X. You can skip Part I of the second page if you are not changing your number of exemptions and are not changing your exemption for families displaced by Katrina or midwestern storms. Part II is required. Explain why you are amending your return. Here is an example:
I am filing this amendment to claim the new first-time home buyer tax credit for the house purchased on July 1, 2009. Please see the enclosed documentation to support my ownership.
8. Print and sign the tax forms. Ensure you are printing all forms relevant to the amended tax return including any forms related to credits you are claiming. Don’t forget to add your signature where required.
9. Mail the forms and supporting documentation. In addition to the forms, include any evidence pertaining to the credit you are claiming to ensure the IRS will process your request quickly without questioning the validity of your claim. For example, you might want to include a copy of your bill of sale, your title, or your mortgage documentation.
Send your complete package to the address corresponding to your state.
I might include “(1040X)” at the end of the first line of the address to help route the form to the correct department faster.
It is unlikely the IRS will directly deposit any additional refund owed to you due to your amended return even if your initial refund was directly deposited, so you can expect to receive a check. Many people are reporting the IRS is very slow in providing these checks so ensure all of your documentation is in order and be prepared to wait four months or more.
Always remember that I am not a tax professional. Even if I were, this should not be considered tax advice. Ask your tax accountant if you have doubts whether to file an amended return.
As you are reading this, if you are in fact reading on the same day this was written, both the federal and New Jersey government are reaching deep into my bank accounts. At the end of the day, I will find myself worth several thousand dollars less than at the beginning of the day. Today is the day quarterly estimated taxes are due for those of us who live in the United States and for those who opt or are required to make these payments.
Last year, I didn’t pay enough through estimated tax payments and I was subject to a small penalty tax. I believe I’ve calculated the correct amounts this year to avoid paying extra. Like last year, I enrolled in automatic tax payments for both the federal and state income taxes. This saves the trouble of sending checks, but it necessitates having the right amount of money in my bank account at the right time.
To handle this requirement and to further automate my finances, the accounts are funded monthly to ensure I’m saving enough for both quarterly estimated payments and what will likely be another significant final tax bill next April.
Marginal tax rates are one of the most misunderstood financial concepts, and I intend to write more about this in the future. This misunderstanding occasionally leads people to mistakenly believe that earning $1 over the barrier into the next tax level would result in a significantly higher tax bill because all income would be taxed at a higher rate, but that’s not true.
But knowing the brackets will help you plan your tax payments, and the IRS released this information at the end of last year.
Married individuals filing joint returns and surviving spouses
| If Taxable Income Is: |
The Tax Is: |
| Not over $16,700 |
10% of the taxable income |
| Over $16,700 but not over $67,900 |
$1,670 plus 15% of the excess over $16,700 |
| Over $67,900 but not over $137,050 |
$9,350 plus 25% of the excess over $67,900 |
| Over $137,050 but not over $208,850 |
$26,637.50 plus 28% of the excess over $137,050 |
| Over $208,850 but not over $372,950 |
$46,741.50 plus 33% of the excess over $208,850 |
| Over $372,950 |
$100,894.50 plus 35% of the excess over $372,950 |
Heads of households
| If Taxable Income Is: |
The Tax Is: |
| Not over $11,950 |
10% of the taxable income |
| Over $11,950 but not over $45,500 |
$1,195 plus 15% of the excess over $11,950 |
| Over $45,500 but not over $117,450 |
$6,227.50 plus 25% of the excess over $45,500 |
| Over $117,450 but not over $190,200 |
$24,215 plus 28% of the excess over $117,450 |
| Over $190,200 but not over $372,950 |
$44,585 plus 33% of the excess over $190,200 |
| Over $372,950 |
$104,892.50 plus 35% of the excess over $372,950 |
Unmarried individuals (other than surviving spouses and heads of households)
| If Taxable Income Is: |
The Tax Is: |
| Not over $8,350 |
10% of the taxable income |
| Over $8,350 but not over $33,950 |
$835 plus 15% of the excess over $8,350 |
| Over $33,950 but not over $82,250 |
$4,675 plus 25% of the excess over $33,950 |
| Over $82,250 but not over $171,550 |
$16,750 plus 28% of the excess over $82,250 |
| Over $171,550 but not over $372,950 |
$41,754 plus 33% of the excess over $171,550 |
| Over $372,950 |
$108,216 plus 35% of the excess over $372,950 |
Married individuals filing separate returns
| If Taxable Income Is: |
The Tax Is: |
| Not over $8,350 |
10% of the taxable income |
| Over $8,350 but not over $33,950 |
$835 plus 15% of the excess over $8,350 |
| Over $33,950 but not over $68,525 |
$4,675 plus 25% of the excess over $33,950 |
| Over $68,525 but not over $104,425 |
$13,318.75 plus 28% of the excess over $68,525 |
| Over $104,425 but not over $186,475 |
$23,370.75 plus 33% of the excess over $104,425 |
| Over $186,475 |
$50,447.25 plus 35% of the excess over $186,475 |
According to a new study by Joel Slemrod, a professor at the University of Michigan’s business school, and Andrew Johns, an IRS researcher, the more you earn, the more likely you are to cheat on your taxes. The study compiled data from tax returns from 2001, audits, and unpublished data from the Internal Revenue Service.
People who earn more money have been able to get away with paying less income tax than they would, had they followed the rules, according to the data. The misrepresentation of income is usually accomplished by neglecting to include unreported business income on Schedule C or by inflating deductions. Some get caught, but many don’t.
The study shows that those earning between $50,000 and $100,000 understated their income by 8% on average, while taxpayers whose true earnings were between $500,000 and $1,000,000 understated adjusted gross incomes by 21%. As income grows, there are more opportunities to hide income, such as through rental property income, capital gains, and self-employment. Sole proprietors who report self-employment income on Schedule C underreported their income by 57%. Compare that to those who earn a wage or a salary, reported to the IRS by the employer on a W-2 form. These taxpayers underreported their income by only 1%.
The data neglect to count taxpayers who may have certain offshore bank accounts, sheltering money from the Internal Revenue Service. The IRS hasn’t been able to determine the extent of this practice.
How should the IRS proceed in order to collect more legitimate tax payments due? Raise the income tax rate on those who are most likely to cheat? Or will that encourage those who are able to find new ways to underreport income? I’m starting to lean towards a more consumption-based tax system, but I don’t think there is a perfect solution.
Photo credit: rachaelvoorhees
The Distribution of Income Tax Noncompliance, Joel Slemrod and Andrew Johns, October 23, 2008 [pdf]
This is a reminder in the form of an article I posted a few weeks ago.
If you’ve filed for an extension for reporting your 2007 federal income tax, your deadline is today. Here are some important resources to help you file today without a penalty.
File your taxes for free. The Free File Alliance allows residents in most states to file for free as long as the taxpayer meets certain qualifications. Here is a list of different services that provide options to file your tax return for free.
Economic Stimulus Tax Rebate Calculator. If you haven’t heard, many people who earned income in 2007 are eligible to receive some of their taxes back in the form of the economic stimulus. This calculator helps you estimate how much the government owes you for this particular payment. If you want to receive a payment from the stimulus progran you must file your income taxes by the end of today.
TurboTax Online (the Federal Free Edition) is one of the most popular methods of filing taxes without an accountant. I’ve used this in the past and I was happy with the results.
The online version is good for simple taxes, but if you have more complex situations, you may want to try TurboTax Premier (with support for investments and rental properties) or TurboTax Deluxe to focus on deductions you may receive for mortgage interest paid, donations, or education expenses. Self-employed individuals may opt for TurboTax Home and Business.
H&R Block also offers a variety of software for filing your taxes, all available for completing your federal income tax filing today. TaxCut comes in several different flavors, including software packages on CD-ROM and online editions. One of these online services is directed towards young taxpayers, Tango.
I filed my taxes earlier this year with TaxAct. A few years ago, I switched from TurboTax Online when it was no longer free for me.
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