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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

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Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

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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