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September 12, 2008

Tax rates

We're beginning to see some detailed proposals from the presidential candidates, and many of these proposals have to do with taxes. However, today, let's see if we can gain some understanding of concepts. For example, when a candidate talks about increasing or decreasing an income tax rate for households making certain amounts of money, does that rate change apply to all of their income? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Excellent question, and the short answer is, no it does not. Here's what happens. The money that you make during a year from working - first you are not taxed on all that money - you get to take exemptions, deductions and adjustments. And after you take those off, you are left with something called taxable income. Then, that taxable income is broken up into ranges. And there are different tax rates applied to each range, and everyone gets to take advantage of all these ranges. So for example, today for federal income taxes, there are five income tax ranges, and so there are five tax rates applying to each of those ranges. And the tax rates go from a low of 15 percent applying to the lowest income range up to 35 percent applying to the highest income range. Now, that 35 percent right now for married couples only applies to your taxable income over $357,700. Obviously, if you are not that high, you don't have to worry about it. But the point is that if a candidate said, 'Well, we're going to adjust that upper tax rate, that 35 percent tax rate,' that wouldn't apply to all income of households making a lot of money. It would only apply to that part of their taxable income over - again - $357,700."

Posted by Dave at September 12, 2008 08:00 AM