Incentives drive behavior. How does the United States incentivize taxpayers?
What incentives exist based on Figure 1?
Federal tax tables define distinct tax brackets with rates ranging from 10-35%. A plot condensing tax tables into one graph is presented in Figure 1.
Figure 1. Total taxation as a function of taxable income & filing status (derived from 2010 tax tables). Dashed lines identify alternative minimum tax zero exemption thresholds for 2010.
1. Marriage: It pays to be married and file jointly. Assuming benefits compound with time, it pays to marry early (from a purely financial perspective).
2. Married (filing separately): Separation and divorce are discouraged. It pays to maintain a good relationship with your spouse and avoid spouses who refuse to file (forcing you to file your return separately).
3. Head of household: It pays to change your situation such that you can file jointly with a spouse.
As shown in Figure 2
, marriage and joint filing savings can be substantial (approaching $7500 in higher tax brackets).
Complicating the matter, the Alternative Minimum Tax (AMT) is a parallel tax system ensuring deductions like California king size mortgage interest payments, financial instrument exclusions, or asset/property dispositions do not generate an unusually favorable tax situation.
This system is triggered when taxpayers have high income. Many life circumstances influence AMT calculations. Consult your tax advisor if you earn enough to have such a predicament. Alternatively, the IRS offers an on-line AMT calculator
. Compute taxation with the standard table and AMT calculator.
You pay the higher of the two computed values.
Note 1: In 2011 the AMT exemptions are scheduled to increase to $48,450 (single) and $74,450 (joint). In 2012 exemptions are scheduled to decrease to $33,750 (single) and $45,000 (joint). In 2010 the AMT exemptions were $47,450 (single/head), $72,450 (joint), and $36,225 (separate).
Note 2: For 2010 the zero exemption thresholds were $302,300 (single/head), $439,800 (joint), and $219,900 (separate).
Figure 2. Total taxation as a function of taxable income & filing status (derived from 2010 tax table). Use this log-log plot to see how much your taxation changes with filing status.
Looking forward, expect taxation to increase. Baby boomer commitments are due in the next two decades with 79 million estimated to retire (video requires Adobe® Flash
Disclaimer: Onyx Research, Inc. does not provide tax advice. Consult your tax advisor to optimize your tax situation.
Data Source: Internal Revenue Service
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