2008 Federal Tax Brackets Explained

January 18, 2009

Federal tax brackets, tax deductions, tax credits… why does it have to be so complex? Wouldn’t it be eaiser to just have a flat tax or a higher sales tax to wipe out the complicated tax code?

Yes, a bunch of accountants would be out of business, but February and March would be much more enjoyable for us! Of course, we have to live with the system in place for so today we take a look at the 2008 federal tax brackets.

2008 Federal Tax Bracket

Below are links for your tax brackets for 2008 if you’re married filing separately, married filing jointly, or single (you’ll need to have Javascript enabled in your browser to see them) Opens in new window:

Understanding Adjusted Gross Income

The tax brackets can be easy to follow, except some people make the mistake of thinking that the income level is based on their gross base salary for the year. This is not true.

The tax bracket that you fall into is based on your adjusted gross income. To calculate your adjusted gross income, simply take your gross income for the year and subtract all eligible tax code deductions from it to come up with your adjusted gross income.

Let’s say that my wife and I made $50,000 in gross income during 2008, and we elect to take the standard marrried, filing jointly deduction of $10,900 and personal exemptioos of $3,500 each.

Assuming we did not qualify for any other deductions, (which is highly unlikely because there are so many in the tax code nowadays) our adjusted gross income would be $32,100:

  • $8,025 would be taxed at 10%
  • $24,075 ($32,100-$8,025) would be taxed at 15%

Taxes owed would be $4,436.25 for an effective tax rate of 13.82%

In that example, whether I based it on $50,000 or $32,100, my tax bracket would not have changed, but if I simply computed my tax liability based on $50,000, it would have been higher, rather than the accurate tax liability of $4,436.25. It’s important to remember adjusted gross income and how to compute it, because that is the income you will pay taxes on, not your gross income.

What Happens When the Bush Tax Cuts Expire?

You better get the phone number to the office of your local congressman or congresswoman, because you many want to call them after I describe this scenario. Before 2002, the tax bracket for a married couple filing jointly was as follows:

  • 15% for AGI up to $45,000
  • 27.5% for AGI up to $109,250
  • 30.5% for AGI up to $166,500
  • 35.5% for AGI up to $297,350
  • 39.1% for AGI above $297,350

compare that to the current bracket for a married couple filing jointly:

  • 10% for AGI up to $16,050
  • 15% for AGI up to $65,100
  • 25% for AGI up to $131,450
  • 28% for AGI up to $200,300
  • 33% for AGI up to $357,700
  • 38% for AGI above $357,700

As you can see, the Bush Tax Cuts of 2002, greatly affected middle and upper middle income earners between $45,000 and $131,450. Before 2002, they were paying 27.5% and 30.5% in taxes, but after 2002, they were paying 15 percent. These tax cuts are set to expire in 2010, and Congress has not extended them at this point.

This expiration of the tax cuts will greatly affect my family, because my tax liability will go from 15% to 27.5% unless Barack Obama passes his own tax bracket plan before 2010. How will it affect your tax bracket if the 2001 tax bracket is put back into affect in 2010?

Tax Reform?

I mentioned the part about the tax brackets changing in 2010 unless Obama and Congress change it, because it wiil greatly affect millions of Americans. A lot of people think our tax system needs simplification and reform, and I hope that the new administration realizes that the current tax code is too complicated for most Americans to understand.

Preparing Your Taxes

Of course in the meantime, this tax system is what we have to live with, and the best way to reduce your adjusted gross income, and your tax liability, is to take advantage of every tax deduction and tax credit you qualify for. 

Check out our other tax recent coverage on gathering your tax forms seeing if you qualify for free efile or online tax prep.

Erik

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Erik
Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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Comments

20 Responses to 2008 Federal Tax Brackets Explained

  • Anonymous

    I might be wrong here, but I think you’re confusing taxable income with adjusted gross income. AGI does not include all eligible deductions/exemptions – only a few items are deducted to get to AGI. AGI is the number at the bottom of the front of the 1040 form. The tax tables are based on taxable income, which is after all eligible deductions. A lot of laws are based on AGI, but unfortunately they’re not the same thing.

  • Liam

    What a nice simple explanation!
    Do you have the same tax bracket breakdown for single head of household?

  • Matt

    If the previous tax brackets are reinstated, it will cost me another 4% of my paycheck. :(

  • Kyle

    Excellent break-down of the tax brackets and how taxes are actually calculated. Thank you for making a topic, that most make complex, very easy to understand. I speak to a vast population of young adults, they would not only benefit but enjoy such great content. I will link to this article, along with other well-done pieces you construct.

    Good Work!

    Kyle-

  • Ben

    Thanks for pointing that out Josh, I’ve updated the numbers.

  • Josh

    Before I criticize, I would like to first mention I love your blog and read it daily.

    I think your calculation for taxes are wrong since it doesn’t account for the fact that the US tax system is progressive. The tax rates you list are marginal tax rates. Here’s how it would work if your AGI is $32,100:

    $8,025 would be taxed at 10%
    $24,075 ($32,100-$8,025) would be taxed at 15%

    Taxes owed would be $4,436.25 for an effective tax rate of 13.82%

  • Ryan@Spillingbuckets

    Great research and summary, Thank you!

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