Taxing the rich - what is the cutoff?

[Schneed10]

Originally Posted by onlydarksets

I'll be the first to admit that I am awful with taxes, but I'm trying to understand the chart, because I think it's a useful framework for this discussion. Are you saying that the total federal income tax liability for a couple making $250k is about $40k? I'm seeing a $61k federal tax expense and a $21k federal tax return.

Yes that's exactly right, you've got it.

If you take the federal tax bracket tables, if you make $250,000 in TAXABLE income, your liability comes out to $61K.

But not all of your $250K income is taxable. On your tax return, you'd deduct mortgage interest, healthcare premiums if they weren't already reflected on your W-2 (as is the case here), take the deductions for your dependents, and retirement savings (assuming you're ineligible for Roth benefits because you make too much).

In the end, the $250K in pretax income comes down to about $138K in Taxable income, so their tax return would be $35K. But then the AMT kicks in, because the government says this couple needs to pay their fair share, so they reduce the tax return down by about $14K in this example, to help balance things out. So the tax return comes out to $21K.

So the $61K liability, minus the $21K tax return, means they pay $40K in federal taxes.