Do you know your tax bracket? Understanding what rate was assessed on the last dollar of taxable income on your 2015 federal income tax return can help with 2016 tax planning as well as financial decisions you make throughout the year. For example, say you’re wondering how much tax you’ll save by increasing the pre-tax contribution to your retirement plan during 2016. The additional amount invested times your tax rate provides a quick estimate.
For 2016 planning, your estimated taxable income determines which of the seven federal tax brackets will apply. For instance, 2016 taxable income ranging from $75,301 to $151,900 puts you in the 25% bracket if you’re married and filing a joint federal return. Keep in mind that your tax bill will not be 25% of your total taxable income. One reason: The rate only applies to the income in that bracket.
Since each bracket consists of a range of income, a planning opportunity is to “fill a bracket.” That means you keep your income below the level that will push you into the next bracket. You could accomplish this by prepaying itemized deductions, making a partial conversion of a traditional IRA to a Roth, or taking a comprehensive family-level approach to planning.
Give us a call for more information about tax brackets and 2016 planning strategies.