Tax Rates and Taxes Payable

• Author: Lionel S. Sobel
• Pages: 115-126

115

CHAPTER 5

Tax Rates and Taxes Payable

Income Tax

Capital Gains

Alternative Minimum Tax

Social Security and Medicare Taxes

Taxpayers Who are Employed by Others

Self-Employed Taxpayers

Income Tax

Once you have calculated taxable income for the tax year, you have

what you need to calculate the amount of tax owed for that year. To

do that, you simply multiply taxable income by the relevant tax rates.

Again, if you like formulas, here it is:

Gross Income for the Tax Year

2 Above-the-Line Deductions (for the Tax Year)

5 Adjusted Gross Income

2 Below-the-Line Deductions (for the Tax Year)

5 Taxable Income

3 Tax rates

5 Tax owed

You noticed (I hope) that in order to calculate the tax that is

owed, it is necessary to multiply taxable income by the relevant tax

rates—with an “s” at the end of “rates.” That is not a typo. Every

taxpayer pays tax at several different rates. This is so for two reasons.

First, taxable income is divided into two types of income—

ordinary income and capital gains—and each type is taxed at its

own rates. Second, ordinary income is divided into six layers, and

a different rate—ranging from 0 percent to 39.6 percent—is applied

to each layer. Capital gains income is divided into two layers, and

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