by Mae Saslaw

Know Your Tax Bracket

Man stands under awning while raining arrows fall

Your calendar isn’t lying to you: It’s March. The winter is almost over, green things are happening to plants, and your pile of tax documents is glaring at you extra-hard if you haven’t filed yet. I was raised in a household where my mother looked forward to staying home on New Years’ Eve, spreading all her tax paperwork on the living room floor, watching Dick Clark on TV, and doing her taxes while she waited for me to get home before a specially extended curfew. This year, when I called her on her birthday in early February and asked how she was celebrating, she said (quite happily, I assure you), “I’m finishing my taxes!”

Those of you who are less excited about taxes than my mother may be thinking, “Yeah, it’s March, I have six weeks left.” Don’t worry; we’ve got you covered with last-minute tax tips and resources. This week, we’d like to take a moment to ask just how much money the IRS wants, and from whom, and for what.

Your Tax Bracket for 2011

The Tax Foundation, according to their website, “is a non-partisan tax research group based in Washington, DC.” They read the IRS documentation and legislation and compile data and research reports for public use. You can see a list of tax bracket information for every year from 1913 to the 2011 tax period. Based on this chart, tax brackets from 2011 break down as follows:

If you’re single:

  • 10% for incomes up to $8,500
  • 15% for incomes from $8,500 to $34,500
  • 25% for incomes from $34,500 to $83,600
  • 28% for incomes from $83,600 to $174,400
  • 33% for incomes from $174,400 to $379,150
  • 35% for incomes over $379,150

In the interest of saving space, we’ll continue to highlight the numbers for an unmarried individual with no dependents, but you can see all the data on the chart linked above.

The IRS has used six brackets since the Economic Growth and Tax Relief Reconciliation Act of 2001 (PDF via IRS). With this legislation, President Bush’s administration made huge revisions to the tax policies that had been in effect throughout the 1990’s. When the law known as EGTRRA took effect for the 2002 tax year, the brackets were as follows:

  • 10% for incomes up to $7,483
  • 15% for incomes from $7,483 to $34,861
  • 27% for incomes from $34,861 to 84,439
  • 30% for incomes from $84,439 to $176,174
  • 35% for incomes from $176,174 to $382,967
  • 38.6% for incomes over $382,967

Those numbers (and all the ones below) are adjusted for inflation to 2011 dollars by The Tax Foundation. In the last decade, the brackets have shifted up slightly each year, and the rates were dropped for the upper four brackets in 2003.

We’ve only looked at the individual income tax thus far— these rates cover taxes people pay on their reported wages. There are also capital gains taxes on our investment returns, estate taxes, corporate taxes, and state and local taxes, which include property taxes on your home or land. As you can imagine, those in the lowest two income tax brackets are less likely to have much other tax liability, since $8,500 per year doesn’t leave a lot of room for investing even for a person with no children or spouse.

A Little Context

Prior to 2001, income tax brackets were based on the Omnibus Budget Reconciliation Act of 1993. The Clinton Administration narrowly passed it through a Democratic Congress—Vice President Al Gore broke the tie in the Senate. The new policy designated five tax brackets; the IRS used two from 1988 through 1992. Individuals in the lowest bracket (up to $34,317 in 1993; up to $34,896 at its peak in 1998) paid no taxes in 1993 and 2000, when the policy expired. Every year in between, they paid 15%. For everyone else, the rates were as follows:

  • 28% for incomes from $34,317 to $83,075
  • 31% for incomes from $83,075 to $178,572
  • 36% for incomes from $178,572 to $388,200
  • 39.6% for incomes over $388,200

The Tax Foundation’s records go back to 1913, though the US government has collected federal taxes since the end of the Civil War. Different brackets for individuals and married couples weren’t introduced until 1948, which makes sense considering how WWII altered the demographics of civilian workers. This is the first available tax structure from 1913, which applied to individuals regardless of marital or familial status:

  • 1% for incomes up to $453,292
  • 2% for incomes from $453,292 to $1,133,230
  • 3% for incomes from $1,133,230 to $1,699,846
  • 4% for incomes from $1,699,846 to $2,266,461
  • 5% for incomes from $2,266,461 to $5,666,152
  • 6% for incomes from $5,666,152 to $11,332,304
  • 7% for incomes over $11,332,304

A Crash Course in Tax History

There have been a handful of major turning points in 100 years of US tax history. The first significant change of the modern era introduced rates up to 67% in 1917. Rates rose and leveled out in 1921 at 73%, then fell dramatically. The highest tax bracket (income over $1,282,169) paid only 25% income tax from 1925 to 1932, when the tax codes caught up with Depression-era economic policy.

In response to the Great Depression, President Hoover passed a huge increase, raising the highest tax rate to 63% and introducing dozens of limited brackets. After President Franklin D Roosevelt’s first re-election in 1936, he passed another increase up to 79%. Increases were greater for those in the upper brackets.

As we mentioned last week, WWII was really, really expensive. President Roosevelt continued to raise taxes to fund the Allies’ efforts, and by the time the war ended, anyone making over $1,121,898 (again, in today’s dollars) paid over 90% in income tax.

The highest rates didn’t drop below 80% again until President Kennedy’s tax cut took effect in 1964. By contrast, the lowest bracket paid 16% under the same policy. Rates and brackets fluctuated throughout the next twenty years, but there were no dramatic changes until President Reagan took office in 1981. The Tax Equity and Fiscal Responsibility Act of 1982 (PDF) increased taxes and overall revenue, and it eradicated the highest tax brackets and established a 50% rate for those earning more than $199,035 — considerably lower than previous upper bracket breakpoints.

Two Things In This Life Are Certain

If this brief summary made your head spin, you’re not alone. I may be a daughter of a self-professed tax nerd, but researching and writing this blog post alone got me a bit dizzy. It pays to be informed, in any case, so take a look at some of the resources linked above if you’d like to learn more about each line on your tax forms and why they’re there.

When you’re done, feel free to put off actually doing your taxes until next time. I know I will!