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WHILE we approach the last quarter of the year, this serves as a reminder that it’s neither too early nor too late to plan and strategize your income taxes for 2009. New year brings new tax laws. Plan now, not later because when the year is over, there is not much you can do anymore. Quite frankly, tax planning should take all year long.
Tax brackets
You might be on your last dollar, but it’s not always a reason to sing the blues. In fact, in the strange world of taxation, your last dollar could actually put you in a higher tax bracket. Put on your shades, grab your guitar, and read on.
A tax bracket is a range of incomes taxed at a specific rate. For example, in 2008, the lowest tax bracket might be $0-$8,025; the second might be $8,026-$32,550; the third $32,551-$78,850. When your income moves above or below the range limits (from $8,025 to $8,026 for example), you switch to a different tax bracket
Tax brackets are components of a progressive income system, in which taxes increase progressively as income increases. The idea is that high-income taxpayers can shoulder the burden of a high tax rate. Low-income taxpayers pay less because they can’t afford to pay high taxes.
2009 Exemptions
The Wall Street Journal has issued an official IRS table for 2009 income tax season. To summarize, here is a run through of some of the more notable tax rate changes for 2009 and even a quick blurb about some of the key tax benefits that did not change based on official IRS releases thus far:
Personal Exemption and Exemption For Dependents. Increased to $3,650 from $3,500 (up $150) from 2008, but is phased out at higher income levels.
Standard Deduction. The great majority of American taxpayers take the standard deduction rather than itemizing deductions for expenditures such as mortgage interest, charitable contributions, and state & local taxes. The standard deduction increased to $11,400 from $10,900 (up $500) for married couples filing a joint tax return, increased to $5,700 from $5,450 (up $250) for singles and married individuals filing separately, and increased to $8,350 from $8,000 (up $350) for heads of household.
Overall Tax Bracket Thresholds. Increased across the board for all tax filing statuses. This means that if your annual income did not increase since last year or if you did not receive inflation based pay raise, you may likely pay a little less in taxes in 2009 than in 2008. As the IRS notes as an example on one of its press releases, in regards to a married couple filing a joint return, the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $67,900, up from $65,100 compared to tax year 2008.
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