Q Now that my children are both in school, I am considering returning to work. My spouse is worried that my income will put us in a higher tax bracket and I will be working for absolutely nothing, or even worse, we will need to pay more taxes. If we get inbecome part of a greater tax bracket, exactly what will happen?A Your concern illustrates a confusion regarding the tax rate schedule that I regularly encounter amongst my clients. It nearly constantly makes sense financially making more cash. Just if the tax rates were above 100 percent would it not make good sense to make more cash.
Normally, tax preparers take a look at tax rates from 2 point of views: the reliable tax rate and the minimal tax rate. The efficient tax rate is the overall income tax paid divided by your taxable incomegross income. The minimal tax rate is the percentage of tax you will pay on the next dollar of earnings you make based upon your current level of taxable income.The tax rate
schedule is #x 201c; progressive. #x 201d; The percentage tax rates increase progressively higher with higher taxable earnings. Nevertheless, by earning more you do not always lose the benefits of the lower tax rate portion brackets.
For instance, if you remain in the 25 percent bracket and the next dollar you make will put you in the 28 percent bracket, you will just pay an additional 3 cents (28 cents less 25 cents) on that dollar by getting in the 28 percent bracket. Entering the 28 percent bracket does not imply all your taxable income will be taxed at 28 percent!Due to the complexity of the tax laws with many credits and reductions tied to various income levels for phase-outs, there may be specific(however rare)situations where earning more cash might not be helpful. If you have a complex tax return that includes substantial investment earnings, Social Security benefits, passive activity losses, education credits, and so on, you might want to discuss this problem with your income tax return preparer. Barry Dolowich is a licensed public accountant in
Monterey. He can be reached at 372-7200, PO Box 710, Monterey 93942-0710 or email@example.com.