US income tax laws require taxes to be calculated by two methods – the ‘Regular Tax’ method and the ‘Alternative Minimum Tax’ method.The first method as is clear by its name is the regular method. From the total of an individual’s income, all applicable deductions such as interest on home mortgages, education expenses, student loan interest, etc. are reduced and then a marginal tax rate is applied as per the person’s income bracket.
All applicable tax credits which again may include child and dependant care credit, retirement savings contribution credits, education credits, etc. are then reduced from this amount and the balance is the tax owed by the individual to the IRS.
The second method or the Alternative Minimum Tax is based on the gross income of an individual but the tax liability calculation in this method allows for reduced deductions. The resulting higher income base is taxed at two rates of 26% and 28% and the tax payer is required to pay the higher of the two calculated tax liabilities.
Are Our Tax Rates Fair?
Depending on incomes, tax rates vary from zero to thirty five percent of an individual’s taxable income. Is this rate fair? While it is a universal truth that one has to pay higher taxes as one’s income increases, is the marginal rate so high that it discourages earning the extra dollar?
The US Income Tax rate structure is considered to be a progressive structure where the incidence of tax shifts disproportionately to people with higher incomes and rates of tax for individuals with smaller incomes are low. Data available from the IRS shows that the top 1% of tax payers who earn 19% of total income of all tax payers pay close to 37% of taxes paid in the country and the bottom 50% of tax payers who earn a little above 13% of total income pay a shade over 3% of total taxes.
To answer the question asked above, individuals with incomes in excess of $300,000 a year, who fall into the top 1% tax payers’ bracket, know that death and taxes are the only two certainties in life and hence are not likely to be discouraged by the high marginal rate of tax.
What Are Our Tax Rates Like?
Rates at which our individual income tax liabilities are calculated varies first with the total amount income, that is, the income bracket applicable to each individual, and secondly the marital status of the tax payer. Married couples can choose to file their returns as married filing separately or married filing jointly. Generally speaking, it is usually beneficial for married couples to file jointly as there are limits on tax credits and other deductions which can be claimed when returns are filed separately.
A brief overview of the currently applicable rates (for 2008) for individual income tax is given in the table below:
| Tax Rate | Single | Married filing jointly or Qualified Widow(er) | Head of Household | Married Filing Separately |
| 10% | $0 - 8,025 | $0 - 16,050 | $0 - $11,450 | $0 - 8,025 |
| 15% | $8,026- 32,550 | $16,051- 65,100 | $11,451- 43,650 | $8,026- 32,550 |
| 25% | $32,551- 78,850 | $65,101- 131,450 | $43,651- 112,650 | $32,551- 65,725 |
| 28% | $78,851- 164,550 | $131,451- 200,300 $ | $112,651- 182,400 | $65,726- 100,150 |
| 33% | $164,551- 357,700 | $200,301- 357,700 | $182,401- 357,700 | $100,151- 178,850 |
| 35% | over $357,700 | over $357,700 | over $357,700 | over $178,850 |