Filing Status & Witholding

A key to tax planning is knowing your marginal tax rate. That's the rate that applies at the margin, to your top dollar of income. Under our graduated income tax system, as income rises, not only does your tax bill go up but the percentage of that income claimed by the government also increases.

Your marginal rate is affected by your filing status. While everyone faces the same six tax brackets, the brackets hold different amounts of income depending on whether your file as a single person, for example, or you are married and file a joint return with your husband or wife. The wider the brackets, the slower you march up into higher rates. To complicate things -- but in a good way -- tax rates will be changing over the next few years. The big tax cut passed by Congress in 2001 and 2003 calls for the gradual reduction of rates. The top rate, which was 39.6% when the law was passed, fell to to 38.6% for 2002 on its way down to 35% in 2003.

Knowing your marginal rate is essential because it lets you determine how much of any extra earnings - from investments, a raise or moonlighting - you get to keep. It also measures the saving power of deductible expenses. Only if you know your tax bracket can you pinpoint what a charitable contribution or business expense really costs you after your tax savings are taken into account.

The bottom line is this: knowing how high your tax bracket really is can greatly energize your tax-planning efforts by enhancing the potential rewards.