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Tax Planning With the 2014 Tax Brackets

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The first five 2014 tax brackets and their rates should look very familiar. The income levels have been bumped up a little for inflation, as they are every year. The 25% rate for single filers, for example, applied to taxable income between $36,251 and $87,850 in 2013. In 2014, the 25% rate for singles applies to income between $36,901 and $89,350.

That's not going to make a huge difference in your final tax bill. If nothing else material changes in your tax situation this year, and you generally don't have too little or too much withheld from your pay, you probably don't have much to worry about.

You may need to estimate your tax liability more carefully. For example, if you pay estimated taxes, or you're tired of having way too much withheld from your pay all year, it's time to pay attention.

If you're in the 39.6% tax bracket, it's especially important to plan ahead so you don't have a rude shock in April of next year.

Follow these steps to take better control of your taxes in 2014:

1. Estimate your 2014 taxable income.
This is your income after taking into account before-tax payroll deductions, personal exemptions, the standard deduction or itemized deductions, and a host of other additions to and subtractions from your income. Start by looking at your 2013 return, and make adjustments as necessary to estimate your 2014 taxable income as closely as possible.

2. Find your tax bracket.
Using your taxable income and your filing status, find your marginal tax rate on this chart:

Marginal tax rate

Single filers

Married filing jointly or qualifying widow/widower

Married filing separately

Head of household

10%

Up to $9,075

Up to $18,150

Up to $9,075

Up to $12,950

15%

$9,076 to $36,900

$18,151 to $73,800

$9,076 to $36,900

$12,951 to $49,400

25%

$36,901 to $89,350

$73,801 to $148,850

$36,901 to $74,425

$49,401 to $127,550

28%

$89,351 to $186,350

$148,851 to $226,850

$74,426 to $113,425

$127,551 to $206,600

33%

$186,351 to $405,100

$226,851 to $405,100

$113,426 to $202,550

$206,601 to $405,100

35%

$405,101 to $406,750

$405,101 to $457,600

$202,551 to $228,800

$405,101 to $432,200

39.6%

$406,751 or more

$457,601 or more

$228,801 or more

$432,201 or more

Tax Brackets, 2014 tax year.

Your marginal tax rate is the rate you pay on each additional dollar within this tax bracket. Your marginal rate does not affect the rate you pay on income in the other brackets.

For example, you pay 10% federal income tax on your first $18,150 of taxable income if you are married filing jointly, no matter how much money you make. You pay 15% tax on the amount of taxable income you have between $18,151 and $73,800.

If your income is $406,751 or more and you are a single filer, or it's $457,601 or more and you file jointly or are qualifying widow(er), welcome to the 39.6% tax bracket. You'll pay almost 5% more on your highest level of income in 2014 than you would have before this rate went into effect.

4. Use your tax rate to make better money decisions.
For example, say you're thinking about making a retirement plan contribution. You might be able to afford to put away more in your plan if you figure out how much state and federal income tax you save contributing to a non-Roth plan.

On the other hand, perhaps you're deciding whether to take money out of a retirement account now, or five years from now when you are retired. (Assume you are over age 59 ½ and won't pay a penalty.) Furthermore, say you're in a 35% bracket now, and you expect to be in a 25% bracket after retirement. By withdrawing the money from a retirement account now, you're paying 10% more than you would if you withdrew it later.

Be aware that tax rates don't tell the whole story. When your income rises, you can lose tax benefits, such as credits, that phase out at higher income levels.

Watch out for tax items that change your marginal tax rate. If you're single with a taxable income of $36,000, for example, your marginal tax rate is 15%. If your taxable income goes up by $10,000, however, you're now in the 25% tax bracket. The tax you pay on your first $36,900 of taxable income doesn't change, but most of the additional $10,000 is in the higher tax bracket.

Don't forget to estimate your state taxes, and self-employment taxes if they apply.

Tax situations can be complicated, and taxable and nontaxable income can affect your tax liability in more ways than you might expect. If you use tax software, you can use their planning features to do the calculations for you with your best estimates for 2014. If you take your taxes to an accountant, consider asking the accountant to help you estimate your taxes.

5. Continue to monitor your tax situation all year.
Revisit your tax plan at least once a quarter, and before you make any major financial decision. That's the best way to make sure you're never surprised by the results when you file your return.

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Sally Herigstad
Herigstad

Sally is a new Fool contributor for 2014, but a long-time personal finance writer, columnist, and certified public accountant. Sally wrote "Help! I Can't Pay My Bills" for St. Martin's Griffin.

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