Tax Implications of Financial Decisions

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The Internal Revenue Code is a very complex, often confusing and constantly changing set of rules. Individuals sometimes let tax issues cloud their decision-making. Here are three areas where some simple reminders can help you make wiser financial decisions.

The income tax rate structure
Our marginal tax rate structure generally means that income at lower levels is taxed at lower rates than income at higher levels. There are complex rules about how to calculate taxable income, taking into account deductions and exemptions. The tax rates start at 10% and go up to 39.6%.

Income Tax Rate Schedules for 2015

2015 Single Return Rate Schedule

2015 Married Filing Jointly Rate Schedule

Taxable income levels

Tax rate

Taxable income levels

Tax rate

0 to $9,225

10%

0 to $18,450

10%

$9,226 to $37,450

15%

$18,451 to $74,900

15%

$37,451 to $90,750

25%

$74,901 to $151,200

25%

$90,751 to $189,300

28%

$151,201 to $230,450

28%

$189,301 to $411,500

33%

$230,451 to $411,500

33%

$411,501 to $413,200

35%

$411,501 to $464,850

35%

Over $413,200

39.6%

Over $464,850

39.6%

2015 Taxation of Dividends and Long Term Capital Gains

For taxpayers in the 10% and 15% brackets, qualifying dividends and long term capital gains (assets held for more than a year) will be taxed at 0%. For those in 25%, 28%, 33% and 35% tax brackets, the tax rate on dividends and long term capital gains is 15%. For those in the top 39.6% bracket, the tax rate is 20%.

2015 Medicare Surtaxes

As part of the health care reform enacted in 2010, additional Medicare surtaxes begin in 2013 for high income wage earners and high income investors. The surtaxes apply when a single taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds a threshold of $200,000 or joint return filers when their MAGI exceed $250,000.

  • For wage earners, an additional 0.9% Medicare surtax applies to wages (including bonuses and self-employment income) above the threshold amounts.
  • For investors, an additional 3.8% Medicare surtax applies to net investment income (taxable interest, dividends, capital gains, etc.) in excess of the thresholds.

Taxable vs. tax-free bonds

Those in higher tax brackets often benefit from tax-exempt interest income. To see if you should consider tax-exempt bonds, compare the after-tax yield of a taxable bond to the yield of a tax-exempt bond. Be sure the bonds have similar maturity dates and similar quality ratings. This chart can help with that comparison.

Tax free yield

Equivalent taxable yield in these tax brackets

15%

25%

28%

33%

35%

39.6%

3.0%

3.5

4.0

4.2

4.5

4.6

5.0

3.5%

4.1

4.7

4.9

5.3

5.4

5.8

4.0%

4.7

5.3

5.6

6.0

6.2

6.6

4.5%

5.3

6.0

6.3

6.8

6.9

7.5

5.0%

5.9

6.7

6.9

7.5

7.7

8.3

5.5%

6.5

7.3

7.6

8.3

8.5

9.1

The tax brackets are those in effect in 2015.

According to the chart, a tax-exempt bond yielding 4.0% has an equivalent after-tax yield of 6.0% for someone in the 33% tax bracket. For that person, a taxable bond yielding more than 6.0% will produce a better after tax return. Taking time to understand how the tax laws apply to your financial situation will enable you to make more informed decisions.

Always consult your tax advisor to determine how the rules apply to your situation and remember that state income taxes must be considered.