Federal Income Tax Rates in 2014: What to Watch Out For

Most taxpayers will face the same rates as in 2013, but there are some still some tricks that you need to stay aware of to pay as little tax as possible.

Feb 10, 2014 at 1:50PM

Last year, dramatic changes to federal income tax rates left many people scurrying to tailor their tax planning to avoid a big tax increase. With the general framework of federal income tax rates for 2014 remaining the same as in 2013, most people won't need to make the same major changes they did last year, but it still makes sense to look closely at your tax situation to make sure you're aware of all the taxes you could end up paying. Let's take a closer look at the federal income tax rates in 2014 and how they'll affect you.

Tax
Source: 401(k) 2013.

The basic rates you need to know
The main structure of the federal income tax rates for 2014 includes six primary tax brackets. Every taxpayer is eligible to earn up to a certain amount of income tax-free. Then, low-income taxpayers face federal income tax rates of 10% on the first $9,075 to $18,150 of your income depending on your filing status. The next tax rate of 15% applies to taxable income up to $36,900 for singles and $73,800 for joint filers.

Above those levels, federal income tax rates of 25%, 28%, 33%, and 35% apply to those making up to $406,750 for singles and $457,600 for joint filers, with the 33% rate applying to the widest swath of that range. The highest-income taxpayers pay federal income tax rates in 2014 of 39.6%.

The only thing that has changed with the 2014 rates is that the brackets have shifted slightly upward for inflation. With brackets roughly 1.7% higher than they were last year, taxpayers will pay slightly less in taxes if they have the same taxable income as in 2013.

Hidden taxes that can boost your federal income tax rates in 2014
Unfortunately, beyond the basic brackets, there are a host of other tax provisions that can boost your effective tax rate. As a result, you can't count on the rates above necessarily reflecting the true federal income tax rates you'll pay for 2014.

Here are some of the provisions that could boost your tax rate in 2014:

  • Singles with earned income above $200,000 and joint filers above $250,000 will have to pay an extra 0.9% Medicare payroll tax on their earnings above those levels.
  • In addition, if you have modified adjusted gross income above those $200,000 to $250,000 levels, then you'll owe a 3.8% net investment income surtax on interest, dividends, capital gains, and other types of investment income.
  • Even less obvious are phaseouts of various credits, deductions, and exemptions that can raise your effective income rate dramatically. For instance, because of the way that Social Security benefits can become subject to tax, some retirees who fall into the 25% tax bracket actually pay marginal tax rates of more than 46%. Similarly, the phaseout of the earned income credit, child tax credit, and other credits, as well as the reduction in personal exemptions and itemized deductions that take effect at certain income levels, can push your effective federal income tax rate higher.

What to do
Obviously, it doesn't make sense to give up $1 of income just to avoid paying less than $1 of income tax. But in making decisions about how much you want to work and earn, the federal income tax rates for 2014 give you important information about how much you'll actually get to keep of that hard-earned money. By watching both the headline tax rates and the hidden ways that you can actually end up paying more than those rates, you'll put yourself in the best position possible to cut your tax bill in the long run.

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Dan Caplinger is the Motley Fool's director of investment planning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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