Taxes are always confusing, and marginal tax rates are no exception. Although I am no accountant, here are some clarifications on how to use the 2006 tax bracket table I just posted.

First, it should be noted that it is for taxable income, not gross income. In very broad terms, taxable income is your gross income minus exemptions and deductions. Everybody has the standard deduction ($5,150 for single taxpayers and $10,300 for married taxpayers filing jointly for 2006), and many people have more from things like personal and dependent (kids) exemptions, mortgage interest, and state income taxes. For example, if you were single and had $35,150 in gross income, with the standard deduction you would only have a taxable income of $30,000. You owe no tax on the first $5,150.

But remember, gross income also takes into account interest and capital gains from selling investments in addition to just salary. So estimating your actual taxable income without actually filling out a 1040 form can be a bit tricky.

Second, it’s your marginal tax rate, not your overall tax rate. Marginal tax rate means this is the rate at which your next dollar earned will be taxed. So it’s not retroactive to the dollars you already earned, and you can never make less money after getting a raise.

For example, if you were single and had $30,000 of taxable income, and got a $1,000 raise later to $31,000, your entire $31,000 will not be taxed at the 25% rate (a big jump from 15%!). Only the $350 above $30,650 would be taxed at the 25% rate. Your total taxes would then be:
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I keep having to look these up, so here are the tax brackets for 2006.

For comparison, here are the 2005 tax brackets. Taken from IRS.gov. For state income taxes, this site is the best resource that I could find.

29 states and the District of Columbia offer a tax deduction or credit for residents who contribute to their state’s 529 plan. Here is a list of them all. If you’re working your way through school, you should definitely try to take advantage and open a 529 plan for yourself.

How? It’s easy.

1. Open a 529 and make yourself the beneficiary.
2. Then, contribute to the plan and get the tax break, using the most conservative option (since you’ll be spending the money soon).
3. Finally, take the money back out of the 529 plan to pay for your college expenses.

You must make sure that it’s okay for the contributor and beneficiary to be the same person. Also, you can’t pay for things with a 529 distribution that you want to use for the Lifetime Learning Credit. But this shouldn’t be a problem, as 529 plans are allowed to cover room and board, not just tuition. All you have to do is look up your school’s estimated tuition chart and see what their estimated room and board costs are.

For example, let’s take Oregon. You can deduct $2,000 a year in contributions. At Oregon’s 9% marginal rate, that’s $180 in savings each year. The estimated room and board for Oregon State University is $7,344, easily over $2,000.

I was browsing the library a few months ago, looking for some accounting books, when I came across a book entitled Keep Your Hard-Earned Money: Tax-Saving Solutions For The Self-Employed. It was clearly a bit dated, as it boasted about ‘including the 1997 tax law changes’.

Now, if you are looking for a book about aggressive tax-reducing tactics that skirts right on the edge of the legal vs. illegal (and hints past it), then this is your book. How it saves you money is by helping you “convert everyday living expenses into business deductions”. The motto of this book is “When In Doubt, Deduct”. We’re talking vacations, last night’s dinner, everything. I definitely wouldn’t feel comfortable doing some of the stuff in this book. However, I did learn a couple of new legitimate business deductions.
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Since the taxes are done and the IRS has already cashed my check (funny how quick they are at that!), it’s time to throw away some of the paperwork that I’ve accumulated through the year. I usually keep all my pay stubs, bills, and other papers in their own folders in a creaky filing cabinet. By this time of year, I can barely open the drawer anymore. But how long should you really keep your papers?

I got this list from a Fidelity newsletter I received a few years ago. Not sure how accurate it all is, but it seems like a good general guideline:
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For those cutting it close to April 17th, it may be time to consider filing a tax extension. But while it’s pretty easy to get an extension until October 15th to file your taxes, you still have to pay any tax you owe by the 17th. Still, the penalty for failing to file (5% per month + interest) is a lot worse than the penalty for paying late (0.5% per month + interest). So even if you know you’re going to pay late, file an extension!

So how do you get one and how much will it cost? According to IRS Form 4868, there are three ways to do it:
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What a wonderful way to spend a Saturday! Ugh. At least now I’ve figured out that I can contribute $2,500 to my 2005 SEP-IRA. I plan to open one up at Vanguard by the April 17th deadline and then merge it with the rest of my Traditional IRA funds. Am I supposed to mail my returns via Certified Mail? I’m not – If they cash my check then that should be proof enough.

Here is a useful SEP-IRA contribution calculator (Thanks Wes). If you had Google Adsense revenue in 2005, don’t forget that it’s taxable income! Check out Adsense Taxes for more information and tax-minimizing ideas.

Q: How do you know when you’ve been at this too long?

A: When you you are halfway done on a post about how to underwitholding taxes without paying a penalty, only to find out you’ve already done it! Check out my post on April 23rd of last year – Maximizing My Tax… Bill? Underwithholding On Purpose. Let’s see if I can add to what I wrote already without too much overlap…
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April is almost here, and I haven’t finished doing my taxes yet. Tsk, tsk. I’m actually about 90% done with my return, but I am still trying to track down every single receipt possible in order to reduce my tax liability. They are legit business expenses, but I really need to work on my bookkeeping skills. After reading up on the rules I am not messing with the home office deduction for 2005.

I would just file a tax extension to October 16th, but I underwitheld on purpose this year and will be owing taxes (without penalty). That means I have to pay what I owe by April 17th even with an extension. If you followed some of the deals from my blog this past year, here are some things you may want to note:
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