Reducing Your Tax Rate
Although you can not literally lower your tax rate, there are certain actions you can take that will have a similar result. These include:
- Choosing the optimal form of organization for your business (such as sole proprietorship, partnership, LLC or corporation).
- Structuring a 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.
- Shifting income from a high tax bracket taxpayer (possible yourself) to a lower-bracket taxpayer (such as your children). One fairly simple way to do this is by hiring your family. Another possibility is to make one or more children or spouse part-owners of your business, so that net profits of the business are shared among a larger group.
When we say "tax bracket," we are 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 all.
In 2001, the tax laws were changed to lower the tax rates across the board and create a new 10 percent income rate. Beginning in 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates further tax rate reductions that were to take effect in 2006.
The dollar amounts at which each bracket begins are different for each filing status ( whether you file as single, head of household, married filing jointly, or married filing separately). The new tax rates for each year are:
|2002 to 2011 Tax Rates
||10% rate eliminated
The following link shows the income thresholds at which each tax bracket begins for 2002. Note that the dollar amount does not refer to your gross income, but it is your taxable income, income after you have subtracted any deductions and personal exemptions to which you are entitled.