1.2 Tax Rates Based on Filing Status

The most favorable tax brackets apply to married persons filing jointly and qualifying widow(er)s (1.11), who also use the joint return rates. The least favorable brackets are those for married persons filing separately, but filing separately is still advisable for married couples in certain situations (1.3). See Table 1-1 for a comparison of the 2012 tax rate brackets.

Table 1-1 Taxable Income Brackets for 2012

If you have children and are unmarried at the end of the year, do not assume that your filing status is single. If your child lives with you in a home you maintain, you generally may file as a head of household (1.12), which allows you to use more favorable tax rates than a single person. If you were widowed in either of the two prior years and maintain a household for your dependent child, you generally may file as a qualified widow(er), which allows you to use favorable joint return rates (1.11).

If you are married at the end of the year but for the second half of the year you lived with your child apart from your spouse, and you and your spouse agree not to file jointly, you may use head of household tax rates, which are more favorable than those for married persons filing separately.

What is your top tax bracket and effective tax rate?

For 2012 your top marginal tax rate can be either 10%, 15%, 25%, 28%, 33%, or 35%, depending on your taxable income (22.1). The rate brackets for 2012 are shown in Table 1-1. If your top bracket is 25%, for example, this means that each additional dollar of ordinary income (such as salary or interest income) will be taxed at 25% for regular income tax purposes. However, because the rate brackets are graduated, your effective tax rate may be significantly lower than your top (marginal) rate. For example, if in 2012 you are single with taxable income of $37,180, all of which is ordinary income, your marginal rate is 25%, but the first $8,700 is taxed at 10%, the next $26,650 ($35,350 − $8,700) is taxed at 15%, and only the last $1,830 ($37,180 − $35,350) is taxed at 25%. The total tax is $5,325 which represents an “effective rate” of 14.32% ($5,325/$37,180 taxable income), reflecting the fact that most of your taxable income is taxed in the 10% and (especially) the 15% brackets.

The tax rate on qualified dividends (4.2) and net capital gains (5.3) is generally lower than your top bracket rate on ordinary income.

Qualified dividends and net capital gains are generally subject to a maximum 15% tax rate, but for taxpayers whose top rate bracket for 2012 (Table 1-1) is 10% or 15%, there is no tax; the rate on qualified dividends and net capital gains is zero (0%). For 28% rate gains or unrecaptured Section 1250 gains (5.3), the zero and 15% rates do not apply, but the rate cannot exceed 25% for unrecaptured Section 1250 gains or 28% for 28% rate gains.

To actually compute your 2012 regular income tax, you will look up your tax in the Tax Table or use the Tax Computation Worksheet if you do not have net capital gains or qualified dividends. If you have 2012 net capital gains or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax Worksheet. Chapter 22 explains these alternatives.

AMT.

If you are subject to alternative minimum tax (AMT) on Form 6251, you generally apply either a 26% or 28% rate to your AMT taxable income (as reduced by the applicable AMT exemption), but the favorable regular tax rates for net capital gains and qualified dividends also apply for AMT purposes (23.1).