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Although you can't literally lower your tax rate, there are certain actions you can take that will have a similar result. These include:
- Shifting income from a high-tax-bracket taxpayer (such as yourself) to a lower-bracket taxpayer (such as your child). One fairly simple way to do this is to shift investment assets to your children. If you have a small business, you can hire your children. Another possibility is to make one or more children part-owners of your small business, so that net profits of the business are shared among a larger group. The tax laws limit the usefulness of this strategy for shifting unearned income to children under age 19 (23 if dependent full-time student), but some tax-saving opportunities still exist.
- Structuring an investment or transaction so that payments that you receive are classified as capital gains. Long-term capital gains earned by noncorporate taxpayers are subject to lower tax rates than other income.
- Choosing the optimal form of organization for your business (such as sole proprietorship, partnership, or corporation). If your business income is under $75,000 and your business is not a personal service business like medicine, law, architecture, engineering, accounting, the arts, or consulting, you may be able to save tax dollars by incorporating. Otherwise, the sole proprietorship or pass-through entities (partnerships, LLCs, S corporations) usually offer more tax benefits. One reason for this is that the tax rate on corporate income jumps from 25% to 34% (for 2008) at $75,000, while the individual rates increase more gradually.
When we say "tax bracket," we're referring to the highest federal tax rate that you pay on any of your taxable income. This is the rate that will apply to each additional dollar that you earn, until you earn so much that you graduate to the next bracket. You need to know your current tax bracket in order to make wise tax planning decisions, since many decisions will make sense for those in certain brackets, but not for those in others.
In 2001, the tax laws were changed to lower the tax rates across the board and create a new 10 percent income tax rate. Beginning in 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates further tax rate reductions that were otherwise to take effect in 2006. The new tax rates for each year are as follows:
| 2003 to 2011 Tax Rates |
| Year |
Tax Rates |
| 2003-2010 |
10% |
15% |
25% |
28% |
33% |
35% |
| 2011 |
10% rate eliminated |
15% |
28% |
31% |
36% |
39.6% |
The dollar amounts at which each bracket begins is different for each filing status (that is, whether you file as single, head of household, married filing jointly, or married filing separately) and are adjusted for inflation each year.
The following chart shows the income thresholds at which each tax bracket begins. Note that the dollar amount does not refer to your gross income, but rather, your taxable income — that is, income after you've subtracted any deductions and personal exemptions to which you're entitled.
| 2007 Individual Income Tax Brackets |
| Tax Rate |
Single |
Married/Joint |
Married/Separate |
Head of Household |
| 10% |
$0.01 |
$0.01 |
$0.01 |
$0.01 |
| 15% |
$ 7,825 |
$15,650 |
$ 7,825 |
$11,200 |
| 25% |
$31,850 |
$63,700 |
$31,850 |
$42,650 |
| 28% |
$ 77,100 |
$128,500 |
$ 64,250 |
$110,100 |
| 33% |
$160,850 |
$195,850 |
$ 97,925 |
$178,350 |
| 35% |
$349,700 |
$349,700 |
$174,850 |
$349,700 |
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