Are Tax Brackets Based on Gross Income or Adjusted Gross Income?

You never fall into a tax bracket based only on your gross income. If you're filing using a 1040EZ form, you take the gross numbers, then subtract your personal exemption and standard deduction. If you're using a 1040 or 1040A form, you also get to adjust your income and bring it even lower. Only then do you look up which bracket you land in.

The Adjustments

You adjust your gross income by claiming various deductions on the front of your 1040. If you put money in IRAs, for instance, you subtract it from your income as an adjustment. If you take write-offs for student-loan interest, tuition, moving expenses or part of any self-employment tax you pay, you make further adjustments. Even after that, you still claim your exemptions and standard deduction -- or your itemized deductions -- before calculating your tax based on what income remains.

Tax Brackets

The United States uses a marginal tax-bracket system. If, say, your 2012 income falls into the 15 percent tax bracket, you don't pay 15 percent on all your adjusted gross income, only on income above an upper margin. On a joint return, you'd pay 10 percent on your income up to $17,400, and only pay 15 percent on income above that. On income above $70,700, you'd start paying 25 percent.

Other Adjustments

After you calculate your tax bill, you may be able to shrink it some, if you qualify for any of the federal tax credits. You can claim credits for college expenses and foreign taxes, among other write-offs, and take them directly off your taxes, not your taxable income. There are also lines for adding other tax, such as self-employment tax. If you're filing a 1040EZ, there are very few possible adjustments, such as the Earned Income Tax Credit.

Alternative Minimum Tax

In addition to the regular income tax, you have to make a completely different set of calculations to figure the alternative minimum tax. Originally designed to catch high-income people employing tax loopholes, the AMT ignores many of the usual tax deductions. To calculate it, you take your AGI, crunch your financials again -- use Form 6251 for this -- and see if you owe more tax. Many tax software programs will make the calculation automatically.

 

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)