Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Progressive Tax Rates

Posted by taxguru on August 25, 2007

Q:

Subject: Tax Question and Great Thanks!

 

Let me first say Thank You for your taxguru.org site and your blog. I have been reading the material several times over to get it to sink. Of course, I am consulting my two knowledgeable colleagues and reading IRS doc/online resources to augment your articles.

 

Currently I am an IT consultant but I want to be my own business and try to make my own fortune. The problem is, when I want to learn something new I attack it hard. This means I am in serious study mode right now. Okay , onto the question..:)

 

Question

I have a question regading the following verbiage taken from this link

“A C corporation has its own progressive tax rate structure, ranging from 15% on the first $50,000 of net income, to as much as 39%.   My philosophy is to look at the overall tax picture for individuals and their companies by smoothing income over the personal (1040) and corporate (1120) tax returns.   For 2000, a married couple’s 15% tax bracket ends at $43,850 of taxable income.  It then jumps to 28%, almost double the rate.  However, if you consider that the couple’s C corporation has its own $50,000 15% bracket, their overall combined 15% bracket has more than doubled to $93,850.   That alone can save several thousands of dollars per year in income taxes.”

 

What is some good study material to get some practical examples for dividing my income from my business (when I start it) and my personal income to keep me in the lowest possible tax bracket for both?

 

In regards to the very first sentence, why would the tax rate be “flexible” and range from15% to 39%? Why isn’t a static figure? Where can I read more to understand this? Or did you mean that the maximum

 

I actually have two more questions but on a different topic but I’ll save that for a future correspondence if there is one. I sincerely appreciate any information/advice you can offer.

 

Thank you,

 

A:

One of the basic fundamental aspects of the income tax system in this country has long been the use of “progressive” tax rates, which penalize those who earn more money by taking a larger percentage of their income away from them.  You can see the current tax rate schedules on my website:

Individuals   

C Corps   

If we had just one single flat tax rate, there wouldn’t be as much opportunity for tax savings by the income smoothing strategies I mentioned on my website.  Unfortunately, the pervasive “hate the rich” mentality in this country will never allow such a change. 

Studying issues like this and discussing them with colleagues can only take you so far in understanding how to best maneuver within the tax system.  You need to be working with an experienced professional tax advisor who can help you apply these and other strategies to your particular circumstances.  There is no one size fits all solution to proper tax planning.  What may be a good plan for a colleague could very well end up costing you a lot of needless additional taxes because such things as family members (spouses and kids) and personal likes and dislikes can have huge impacts on any tax saving plans.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

 

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