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URL:  http://boards.fool.com/orangeblood-wrote-ltltok-now-in-english-por-10095217.aspx

Subject:  Re: Roth IRA's (cont.) Date:  2/1/1998  1:18 AM
Author:  Kilmarnoch Number:  1555 of 76398

Orangeblood wrote:
<<OK, now in English, por favor? Just so the non-numerologists like me can understand.<g> >>

sorry about that ... I realised after the post that I should have labeled each row... I was explaining to TMFPixy where XtraFool was coming up with the 26% and 27% tax numbers.

Also my tangent about tax rates in the future was exactly that, a completely seperate tangent... it had nothing to do with any of the numbers I put up. Just me thinking that anyone guessing the tax rates are going to be as low as they are now, 30 years in the future has their head in the sand (like congress).


Hope this makes more sense:

joint filers making exactly $151,750 (top of the 31% bracket), pay $38698.50 in federal tax. which is 25.50148270% of their income. they make $113051.50 after federal income tax.

joint filers making exactly $99,600 (top of the 28% bracket), pay $22532.00 in federal tax. which is 22.62248995% of their income. they make $77068.00 after federal income tax.

single filers making exactly $124,650 (top of the 31% bracket), pay $33644.50 in federal tax. which is 26.99117529% of their income. they make $91005.50 after federal income tax.

single filers making exactly $59,750 (top of the 28% bracket), pay $13525.50 in federal tax. which is 22.63682008% of their income. they make $46224.50 after federal income tax.

now this explained...
41200 * .15 + (99600 - 41200) * .28 + (151750 - 99600) * .31

You pay 15% tax on the first 41200 dollars, then 28% on the next 58400 dollars (99600 - 41200), and then 31% on the next 52150 dollars (151750 - 99600)... etc. The result is you *always* make more money by making more money. ;P ...even if you "fall" into the next tax bracket. some people spend entirely too much time trying to get into a lower tax bracket because they think that they pay 28% or 31% on *ALL* their income. lots of mis-information.


If you factor the taxes incorrectly a single making $59750 would pay $16730 (28%) in federal income tax not the $13525.50 (22.63682008%) he really needs to pay.

Imagine what happens to a single who makes $59800... does he pay 31% of his total income ($18538) or $13541 [24650 * .15 + (59750 - 24650) * .28 + 50 * .31]? The correct answer is $13541, which is only 22.64381270% in tax. =)


The main point of this is that just because you are "in the 28% tax bracket" does *NOT* mean you pay 28% in taxes. being at the very top of the 28% tax bracket you only actually pay 22% in taxes... the lower in the bracket you are the lower the percent of your income you pay to tax, (tax ranges from 15% upto 22% in the "single's 28% bracket", and 22% upto 26% in the "single's 31% bracket", etc...).


Saying that someone pays 36% in tax because they make 200k a year is just plan wrong, they pay much closer to 30% in federal income tax. that 6% difference is *alot* of money ($11,229.50)... ;)


If those numbers still don't make sense I'll try explaining again... I look forward to TMFPixy's posts on Roth vs Traditional IRAs.

Later,
Kilmarnoch
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