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Rapid Tax, Do You Know How Income Taxes Are Calculated?

Mar 27, 2008
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Rapid Tax, Do You Know How Income Taxes Are Calculated?

This is the first of a series of 2007 Tax reference sheets that I'll be sharing with you over the next month or so. This one focuses on some of the major federal income tax key numbers. I'll do future ones for estate planning, retirement planning and business planning in the not too distant future so stay tuned.

Since federal income taxes are such a large part of most peoples life or expenditures, I thought that you might like a summary or reference sheet for some of the important figures for 2007.

Many people believe that if someone is in the 28% tax bracket, they pay all taxes due at the rate of 28% of taxable income. This is not correct. A couple having a taxable income of $125,000 does not pay 25% federal income tax on ALL of the taxable income... but only on everything over $63,700. The first $15,650 is only taxed at 10%, the taxable income from $15,560-$63,700 would be taxed at 15% and so on. The figures below is taxable income (after deductions and exemptions).

I'll start out with the tax brackets for the 2007 tax year. The figures below show the various "steps" on how the marginal income brackets are progressively taxed higher.

Married, Filing Jointly:

$zero - $15,650 is taxed at 10% $15,650 - $63,700 is taxed at 15% $63,700 - $128,500 is taxed at 25% $128,500 - $195,850 is taxed at 28% $195,850 - $349,700 is taxed at 33% over $349,700 is taxed at 35%

Married, Filing Separately:

Note: Often times it make more sense for a married couple to file taxes separately for either tax reduction strategies or for non-tax reasons. Your tax advisor should help you decide if there are important reasons for YOU to take advantage of this filing status.

Tax brackets for Married Filing Separately: Simply cut the above taxable figures in half for those six tax brackets

Single:

$zero - $7,825 is taxed at 10% $7,825 - $31,850 is taxed at 15% $31,850 - $77,100 is taxed at 25% $77,100 - $160,850 is taxed at 28% $160,850 - $349,700 is taxed at 33% over $349,700 is taxed at 35%

Single, Head of Household:

$zero - $11,200 is taxed at 10% $11,200 - $42,650 is taxed at 15% $42,650 - $110,100 is taxed at 25% $110,100 - $178,350 is taxed at 28% $178,350 - $349,700 is taxed at 33% over $349,700 is taxed at 35%

Standard Deduction:

Standard Deduction is ONLY for those who do NOT itemize expenses like mortgage interest, charitable contributions, etc.

Married, Filing Jointly: $10,700 Married, Filing Separately: $ 5,350 Single: $ 5,350 Single, Head of Household: $ 7,850

Those who are blind or over age 65 can ADD $1,050 (if married) or $1,300 (if single or head of household) to the above Standard Deductions

Personal Exemptions:

Personal Exemptions are set at $3,400 per allowed person subject to Phaseouts (which are reductions in the Exemptions) based on taxable income. This is not an issue unless your taxable income is at least $117,300 (depending on filing status).

Maximum taxable EARNED income subject to FICA tax: $97,500

The Social Security and Medicare combined tax rate is 15.3% on income up to that figure. W-2 employees pay half of the 15.3% and employers pay the other half. Self-employed pay the whole amount.

Long-term Capital Gains and Qualified Dividend Rates: For those in the 10% and 15% Income tax brackets only: 5% For taxpayers in the higher tax backets: 15% Capital gains on collectibles (coins, stamps, etc.) 28%

One of the important functions of a financial advisor is to help reduce taxes to your legal minimum due by using all appropriate deductions, methods and strategies. A good tax advisor is worth their weight in gold! So go find a pro-active tax advisor, not someone who just files tax returns.

And now, hopefully you will have a better idea of what that person is talking about.

Since 1997, Mark J. Orr, a Certified Financial Planner, has helped hundreds plan for more financial success through powerful strategies and advice. To get 101 FREE Financial Planning Tips and to Register for his complementary e-newsletter, simply go to:

Rapid Tax, Can You Deduct Your Mortgge Payment From Taxes?

Mar 5, 2008
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Rapid Tax, Can You Deduct Your Mortgge Payment From Taxes?

As a landlord, you will want to make sure you take advantage of all of the tax benefits you can receive by owning a property. There are many other deductions than just the obvious ones. Expenses incurred to cancel a lease, reimbursements to renters for expenses that they have incurred and many others exist. Make sure you are taking advantage of all of the expenses you have.

Interest. Mortgage interest payments on the loan to purchase the rental property are a deductible cost, but make sure you also deduct interest on loans for improvements to the property, as well as credit card interest for credit card accounts you use to purchase any items or services for the property. Interest can be one of the largest deductible expenses for a landlord.

Depreciation. The cost of your property is recovered over time through depreciation. After the second year of ownership, you can claim depreciation over a 27.5 year period.

Repairs. Any repairs you make to the rental property are deductible expenses in the year the expense occurs. These include painting, replacing broken windows, hiring a plumber to fix leaks, putting new flooring down, plastering walls. To qualify, you have to make sure the expenses are ordinary expenses in the cost of running the rental property, reasonable costs and not capital improvements.

Travel. If you have to travel to your rental property to collect rent, discuss issues with renters, attend renter association meetings or carry out repairs, you can deduct the cost of this travel. If you have to visit service providers such as plumbers or electricians, you can deduct that as well. If you are travelling from a distance, you can deduct the cost of your hotel as well.

Home Office. If you use a room in your home as an office to conduct the business of running your rentals, that portion of your own rent or mortgage is deductible.

Losses. You can claim any losses as deductions. These include fire and weather damage or floods. If you have insurance, you can only deduct the non-reimbursed portion, of course.

Insurance. The premiums you pay on your property insurance is deductible. You will probably have flood, fire, theft and liability insurance on the property.

Services. Any kind of fees you pay for services related to the property are deductible, such as attorney fees, accountant fees, payments to property management companies, real estate investment advisors and other professionals who provide you services to properly manage your rental property.

Some expenses that you may have are not deductible, however. If you have a loss of rental due to vacancy are not deductible, and certain modifications that are capital in nature such as a new roof, room additions, a new fence, etc. are not deductible.

Vince Paxton publishes for the most part for http://www.insidewoodworking.com , an online publication about woodworking tools and cnc machinery. Working on his detailed publications such as http://www.insidewoodworking.com/cnc/index.html

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