Taxes

Now we'll shift to taxes. Everybody hears about taxes and most of us pay taxes, but few people know how their income is taxed and what they can do to reduce their tax burden. We pay social security tax, Medicare tax, sales tax, federal income tax and state income tax to name a few. To cope with this, you need to know the basic rules for taxing personal income so you don't lose "extra" dollars.

Tax brackets
The first step in tax planning is knowing your tax bracket. Your tax bracket is based on income and filing status. You should begin by figuring out your gross income, which is all of your income before any deductions or taxes have been subtracted. From your gross income, you may take a number of deductions to determine your taxable income. Using this figure, your taxable income, refer to the tax-rate tables below to determine your tax bracket.

2001 Federal Tax Rate Schedule
2001 State of Maine Individual Income Tax Rates

Once you know what tax brackets you are in, add your state and federal tax rates together for your Total Tax Bracket. For example, say you are married, filing jointly and your taxable income is $15,000. You will be taxed at a rate of 15% federally and the state will charge you $165 plus 4.5% of excess of $8,250. At this low income, your federal taxes are relatively straightforward. 15% x $15,000 = $2,250. If your income is higher, this calculation will be more similar to the state calculation below.

Your Maine state income tax calculation will look like this:
The amount in excess of $8,250 is $6,750 ($15,000 - $8,250 = $6,750)
Then, use the state tax equation, $165 + (4.5% x $6,750) = $165+$303.75=$468.75

Your total tax burden is $2,718.75 ($2,250 + $468.75).

Knowing your tax bracket is especially helpful when you receive extra money and wonder how much of it will go to taxes. Once you understand how to calculate your taxes precisely, you can also use this information to make a rough estimate.

If you get a bonus at work, you'll be able to estimate that (in this example) roughly 20% of that amount will be taxed (15% + 4.5%). If you are in a 23.5% tax bracket and receive an $800 bonus, you will pay $188 in taxes and have $612 left to spend. Another way to look at it is that you must earn $1.31 to bring home $1.

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