- Days left

Income Tax Rates: The More You Know, the Less You Pay

Tax on income
One thing you may have noticed in preparing your tax return is that different types of income don't all get taxed at the same rate. Knowing how much tax you'll pay on each kind of income will help you figure out the best way to cut your tax bill this year and beyond.

Ordinary Income
For most income, the set of tax brackets ranging from 10 percent to 39.6 percent apply in calculating your total taxes. That includes not only wages and salaries but also business income, money you make from property rental, and most interest payments you receive.

In addition, some dividend income gets treated as ordinary income. And if you sell investments at a profit during the first year you own them, short-term capital gains get taxed at ordinary income rates.

In general, ordinary income rates are the highest you can pay, and qualifying for lower rates makes sense whenever possible.

Tax-Free Income
The ideal tax rate is zero, and a few investments provide tax-free income. The most common are municipal bonds issued by state and local governments, which produce interest that's free of tax.

But some investment vehicles actually transform what would otherwise be taxable into tax-free income. Roth IRAs make all the interest, dividends, and capital gains free of tax when you take money out during retirement, while 529 plans do the same for money used for educational purposes.

Dividends and Long-Term Capital Gains
Certain dividends qualify for a preferential tax rate. For top-bracket taxpayers, that rate is 20 percent. But those in the lowest two tax brackets pay nothing in taxes on qualified dividends, while those in between pay 15 percent.

The same treatment applies for most long-term capital gains. If you sell an investment at a profit after having held it for longer than a year, then the gains from the sale get taxed at the same rates as qualified dividends as described above.

Income From Sales of Collectibles
Profits from selling collectibles, such as coins, stamps, and precious-metals bullion, don't qualify for the low long-term capital gains rates above. Instead, a special 28 percent maximum rate is imposed on collectibles gains. If your ordinary tax rate is less than that, though, you'll pay the lower rate.

Know Your Taxes
By realizing that various types of income get taxed differently, you can tailor your investing strategy to take advantage of favorable rates and reduce your tax bill accordingly. That could make next April's tax bill look a lot better than what you pay this year.

More tax tips from DailyFinance:
5 Simple Rules for Keeping Your Tax Bill in Check
Last-Minute Tax Filing Tips
Don't Get Burned by Your Charitable Donations
The Most-Overlooked Tax Deductions

Increase your money and finance knowledge from home

Banking Services 101

Understand your bank's services, and how to get the most from them

View Course »

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

TurboTax Articles

Video: Tax Guidelines About Gifting

Note: Some of the content of this video applies only to taxes prepared prior to 2012. It is included here for reference only. Find out the tax guidelines about gifting with help from TurboTax in this video on tax tips.

Video: What are Income Tax Rates?

Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. Income tax rates change depending on both the amount of money you make and how you made it. Find out about income tax rates with help from TurboTax in this video on tax tips.

Video: How To Reduce Errors on Your Tax Return

Did you know that errors on your tax return can affect the amount of your tax bill and the amount of time it takes to get a refund? Fortunately, TurboTax helps you avoid errors AND be sure you're getting all the tax deductions and credits you deserve.

Does Your Company Need to File Form 1095-B?

A company is responsible for filing IRS Form 1095-B only if two conditions apply: It offers health coverage to its employees, and it is "self-insured." This means that the company itself pays its employees' medical bills, rather than an insurance company. A company that doesn't meet both conditions won't have to deal with Form 1095-B. Its employees might still receive a 1095-B, but from their insurer, not the employer.

Video: Who Qualifies for an Affordable Care Act Exemption (Obamacare)?

The Affordable Care Act requires all Americans to have health insurance or pay a tax penalty. But, who qualifies for an Affordable Care Act exemption? Find out more about who qualifies for an exemption from the Affordable Care Act tax penalty, how to claim an exemption on your tax return and how the Affordable Care Act may affect your taxes with this video from TurboTax.

Add a Comment

*0 / 3000 Character Maximum


Filter by:
Roger Baack

Why is my social security income taxed again, as this is what was taken from my checks in the first place to create my social security income. It seems like double taxation to me.

April 11 2013 at 10:16 AM Report abuse +1 rate up rate down Reply
1 reply to Roger Baack's comment

From a federal level, if all you have or receive is Social Security, you will not pay a tax on it. Since by definition it is income, something you receive, many states do tax it as income but usually at a lower rate.

If you have additional earnings, part of your social security income may be taxed. For information, read your letter at the end of the year from social security administration.

April 11 2013 at 1:07 PM Report abuse rate up rate down Reply

wasn't there a huge war over this a couple of hundred years ago?

April 11 2013 at 1:35 AM Report abuse rate up rate down Reply

I know that congress can change the tax RATE to 100% but unless they scrap the 73,000 pages of tax CODE, nothing changes.
I know that congress chooses power via the tax code over raising revenue.

April 09 2013 at 8:26 PM Report abuse -2 rate up rate down Reply

"What to Know About Tax Rates"

That rarely does raising tax rates actually increases tax revenues, and often, as with the millionaire's taxes in NY and Md., the "luxury" tax, and the recent tax hike on the wealty in the UK!

Liberals simply are incapable of understanding that we don't live in a static world. Higher taxes almost always means lower revenues, because people change their behavior. That's why we have so many tax attornies and tax accountants.

April 09 2013 at 2:07 PM Report abuse rate up rate down Reply