The Mathematics of Money

388 Chapter 9 Taxes

If Taxable Income

is Over But not Over The Tax is:

$0 $7,550 10% of the amount over $0

$7,550 $30,650 $755.00 plus 15% of the amount over $7,550

$30,650 $61,850 $4,220.00 plus 25% of the amount over $30,650

$61,850 $94,225 $12,020.00 plus 28% of the amount over $61,850

$94,225 $168,275 $21,085.00 plus 33% of the amount over $94,225

$168,275 No limit $45,521.50 plus 35% of the amount over $168,275

2006 INCOME TAX RATES—MARRIED FILING SEPARATELY

If Taxable Income

is Over But not Over The Tax is:

$0 $10,750 10% of the amount over $0

$10,750 $41,050 $1,075.00 plus 15% of the amount over $10,750

$41,050 $106,000 $5,620.00 plus 25% of the amount over $41,050

$106,000 $171,650 $21,857.50 plus 28% of the amount over $106,000

$171,650 $336,550 $40,239.50 plus 33% of the amount over $171,650

$336,550 No limit $94,656.50 plus 35% of the amount over $336,550

2006 INCOME TAX RATES—HEAD OF HOUSEHOLD

While different tables are used for each filing status, the tax calculation can be done in

essentially the same way.

Example 9.2.3 Zoe’s taxable income for 2006 was $43,000. Her fi ling status is

single. Based on the tax table given above, how much did she have to pay in federal

income tax?

According to the table, Zoe’s tax would be $4,220.00 plus 25% of the amount over

$30,650. Then $43,000  $30,650  $12,350. Applying the 25% rate to this gives

(0.25)($12,350)  $3,087.50. So her total income tax would be $4,220.00 
 $3,087.50 

$7,307.50.

The term tax bracket is sometimes used to indicate which of these rate levels a taxpayer

falls into. For example, Zoe from the previous example would fall into the 25% tax bracket.

This wording sometimes causes a misunderstanding about how income taxes are calculated.

People often mistakenly assume that someone in the 25% bracket pays 25% of her taxable

income in income taxes. This is not correct. Zoe’s taxes are not 25% of her taxable income

(which would have amounted to $10,750).

Example 9.2.4 Zoe (from Example 9.2.3) is in the 25% tax bracket. What percent of

her taxable income does she actually pay in federal income taxes? If her actual income

(before deductions) was $58,375, what percent of her actual income does she actually

pay in federal income taxes?

Her income tax was $7,307.50 on $43,000 of taxable income. As a percent, $7,307.50/

$43,000  16.99%.

As a percent of her actual income, her tax would be $7,307.50/$58,375  12.52%.

The first $7,550 of an individual’s taxable income is taxed at the lowest 10% rate,

regardless of how much total income she has. Your first $7,550 of income would be

taxed at the same rate as Zoe’s, or LeBron James’s, or Bill Gates’s for that matter.

Likewise, the amount of Zoe’s income between $7,550 and $30,650 is taxed at the same

15% rate as anyone else’s. Actually her taxes are calculated by breaking her income up

by level: