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.
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 |
When I first came across the term “refundable tax credit,” I have to admit I was confused about its meaning. And now that the economic stimulus bill will be signed into law today, I’ve seen that my misconception is shared by others.
A tax credit is a dollar amount that decreases the amount of tax you owe. Normally, a tax credit stops once you reach zero tax liability. However, a refundable tax credit can cause your tax liability to cross over zero, resulting in a refund. This is what is meant by “refundable.” Therefore, even if you owe no tax or had no income, a refundable tax credit might result in receiving a check from the government. In effect, there is a possibility that some people, due to refundable tax credits, may find themselves with an “negative effective income tax rate,” receiving more from the government than they put into the system.
“Refundable” does not mean that you have to pay the credit back to the government over time. Depending on the tax credit, this may be the case, but you wouldn’t be able to tell just by virtue of it being called a refundable tax credit. An example of a refundable tax credit is the Earned Income Tax Credit, designed to reduce or eliminate tax paid by low-income workers.
Refundable tax credits create the possibility for scenarios in which certain families pay no income tax and still receive a payment from the government.
If President Obama’s economic stimulus plan is signed into law is it currently stands, individuals stand to receive a tax credit of $500 and couples stand to receive a tax credit of $1,000. Provided you’re not disqualified for earning too much money, $75,000 for an individual or $150,000 for a couple. Taxpayers might receive this credit either by claiming a credit on the 2009 and 2010 tax returns or by reducing withholding from paychecks.
There is little hard evidence that last year’s stimulus payment helped the economy. In fact, it has done more to confuse and anger taxpayers who now believe they are required to return the stimulus payment to the government, a widespread misunderstanding thanks to the way the Congress decided to facilitate the credit.
While I explained that in whole the 2008 economic stimulus payment would not affect tax returns, astute people who file their taxes online or use software to calculate what they owe or receive have noticed that changing the amount in the line for the recovery rebate credit affects the amount of their refund or payment due.
There’s a simple explanation: If I tell you I’ll give you and nine of your friends $100 next year, but then offer to give you and only eight of your friends that $100 this year to provide a head start in spending that money, you can’t come to me next year and get that $100 again. You have one friend that will get to collect the $100 next year, but you and your nine friends who received the early check don’t receive it again.
An additional new tax credit created with the possibility of receiving a partial or complete payment in advance will cause more confusion when it comes time to file 2009 tax returns.
For me, another $500, especially if spread over two years, will have absolutely no effect on my consumerist spending tendencies. I would save the money, not spend it or pay off debt. You could argue that those of us who save the money are just passing along funds from the government to banks, but banks can’t use customer’s deposits the same way they can use a cash infusion directly from a government bailout.
Will a $500 or $1,000 “stimulus” affect your ability or desire to save, pay off debt, and spend?
February 13 Update: The Senate and House of Representatives have both passed the compromise version of the stimulus bill. Read the complete stimulus bill here, and you’ll be a step ahead of many of the congressmen who didn’t have a chance to read it before voting.
I’ve started receiving W2s, 1099s, and a variety of other tax-related documentation in the mail and online, which means one thing: It is time to get serious about determining my final tax liability. If I planned right, I will have paid just enough between estimated taxes and withholding to avoid an underpayment penalty, but it’s likely I’ll end up with a hefty tax bill.
I’m leisurely seeking a recommended tax accountant in my area, someone specializing in sole proprietors, to help me out with my filing this year. Theoretically, a professional who understands more of the nuances of the tax code than I understand will help me manage my tax liability. I could do an adequate job with TaxACT, as I have been for the past several years, but I don’t want to part with any more money than I would need to. If I find a good tax accountant, his or her fee would pay for itself through suggestions for deductions or other tips. Also, a professional will allow me to save time for other activities and reduce my stress.
For typical taxpayers, hiring an accountant may be overkill. Before my situation increased in complexity, I was a happy user of TaxACT, as I mentioned above. I switched to TaxACT from TurboTax Online thanks to a lower introductory price. Both of these services allow you to store your past years’ returns in an online repository, but if you want to access older filings, you may need to pay an additional fee. I keep copies of all my tax documentation on paper in a folder, on my personal computer hard drive, and on an external back-up drive, so I can avoid paying fees from TaxACT or TurboTax just to look at my old 1040 forms.
TurboTax and its parent company, Intuit, has been in the news recently thanks to the revelation that Timothy Geithner, the incoming Secretary of the Treasury, used this software to file his taxes and somehow missed paying $34,000 in Social Security and Medicare taxes in 2001 and 2002. He was careful to accept blame rather than fault the software, but TurboTax was quickly linked to the “scandal” after Geithner was pressed to name the method he used for filing. The company quickly responded noting that any software calculation relies on the validity of the data entered by the user. Somewhere, between Geithner and the software, this should have been caught.
In 2001 and 2002 I filed my taxes by hand, so I’m not sure how advanced the error-checking features of TurboTax were at that point. With current incarnations of tax filing software, self-employment taxes would be taken into account and calculated properly if all income were entered accurately, at least among well-known and long-running software like TaxACT, TurboTax, and TaxCut.
H&R Block’s TaxCut is another popular option for self filing, also for a price. But not everyone is required to pay to file taxes. If you qualify, there are ways you can file your taxes for free. Qualifications vary per the method you choose, but you may need to live in a certain state or have an income below a certain maximum.
How do you plan to file your taxes this year? And can you recommend a good tax accountant in central New Jersey?
Consumerism Commentary readers: Please complete this readership survey for a chance to win a $50 Amazon.com gift card!
At the pump, gas prices are “low” now. Remember last May when Chrysler was offering a $2.99 gas guarantee while the price per gallon continued to climb towards $4.00? It seemed like a good deal at the time, but I was quite skeptical, thinking prices would eventually return and that Chrysler must have known that in order to offer this “deal.” Other people considered the era of gas prices lower than $2.00 to be over. Today in New Jersey, gas prices are closer to $1.50 per gallon.
Some experts believe that right now, before consumers begin taking advantage of lower gas prices and buying large SUVs and Hummers again, would be a perfect time to enact a national tax on oil, natural gas, or coal, far up the supply chain. It’s quite possible that this tax would be passed down the line to consumers in the form of higher prices, perhaps amounting $1 per gallon.
The tax would be an incentive for the industry to increase the pace of research and development in alternative, cleaner sources of industry.
ExxonMobil is looking forward to this tax if the other choice is to cap greenhouse gas emissions. I find it unlikely that Congress would pass this energy tax, but anything can happen.
When gas prices were higher last year, it corresponded with a change in driving and consumer behavior across the country. The threat of a recession and the general economic sentiment might have contributed as well. Will keeping the gas price high prevent a return to large cars and trucks even when the economy improves?
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]
Email this article
Print this article
