The Tax Implications of Financial Decisions

The Internal Revenue Code is a very complex, often confusing and constantly changing set of rules. Individuals sometimes let tax issues cloud their decision-making. Here are three areas where some simple reminders can help you make wiser financial decisions:

The Income Tax Rate Structure

Our marginal tax rate structure generally means that income at lower levels is taxed at lower rates than income at higher levels. There are complex rules about how to calculate taxable income, taking into account deductions and exemptions. The tax rates start at 10% and go up to 39.6%. Here are the tax tables for 2015 and 2016.

Income Tax Rate Schedules for 2015

2015 Single Return Rate Schedule2015 Married Filing Jointly Rate Schedule
Taxable income levelsTax rateTaxable income levelsTax rate
0 to $9,225 10% 0 to $18,450 10%
$9,226 to $37,450 15% $18,451 to $74,900 15%
$37,451 to $90,750 25% $74,901 to $151,200 25%
$90,751 to $189,300 28% $151,201 to $230,450 28%
$189,301 to $411,500 33% $230,451 to $411,500 33%
$411,501 to $413,200 35% $411,501 to $464,850 35%
Over $413,200 39.6% Over $464,850 39.6%

Income Tax Rate Schedules for 2016

2016 Single Return Rate Schedule2016 Married Filing Jointly Rate Schedule
Taxable income levelsTax rateTaxable income levelsTax rate
0 to $9,275 10% 0 to $18,550 10%
$9,276 to $37,650 15% $18,551 to $75,300 15%
$37,651 to $91,150 25% $75,301 to $151,900 25%
$91,151 to $190,150 28% $151,901 to $231,450 28%
$190,151 to $413,350 33% $231,451 to $413,350 33%
$413,351 to $415,050 35% $413,351 to $466,950 35%
Over $415,050 39.6% Over $466,950 39.6%

2015 and 2016 Taxation of Dividends and Long Term Capital Gains

For taxpayers in the 10% and 15% brackets, qualifying dividends and long term capital gains (assets held for more than a year) are taxed at 0%. For those in 25%, 28%, 33% and 35% tax brackets, the tax rate on dividends and long term capital gains is 15%. For those in the top 39.6% bracket, the tax rate is 20%.

2015 and 2016 Medicare Surtaxes

As part of the health care reform enacted in 2010, additional Medicare surtaxes apply to high income wage earners and high income investors. The surtaxes apply when a single taxpayer's Modified Adjusted Gross Income (MAGI) exceeds a threshold of $200,000 or joint return filers when their MAGI exceed $250,000.

  • For wage earners, an additional 0.9% Medicare surtax applies to wages (including bonuses and self-employment income) above the threshold amounts.
  • For investors, an additional 3.8% Medicare surtax applies to net investment income (taxable interest, dividends, capital gains, etc.) in excess of the thresholds.

Taxable vs. Tax-free Bonds

Those in higher tax brackets often benefit from tax-exempt interest income. To see if you should consider tax-exempt bonds, compare the after-tax yield of a taxable bond to the yield of a tax-exempt bond. Be sure the bonds have similar maturity dates and similar quality ratings. This chart can help with that comparison.

Tax-free yieldEquivalent taxable yield in these tax brackets
 15%25%28%33%35%39.6%
3.0% 3.5 4.0 4.2 4.5 4.6 5.0
3.5% 4.1 4.7 4.9 5.3 5.4 5.8
4.0% 4.7 5.3 5.6 6.0 6.2 6.6
4.5% 5.3 6.0 6.3 6.8 6.9 7.5
5.0% 5.9 6.7 6.9 7.5 7.7 8.3
5.5% 6.5 7.3 7.6 8.3 8.5 9.1

Based on 2015/2016 tax brackets

According to the chart, a tax-exempt bond yielding 4% has an equivalent after-tax yield of 6% for someone in the 33% tax bracket. For that person, a taxable bond yielding more than 6% will produce a better after tax return. Taking time to understand how the tax laws apply to your financial situation will enable you to make more informed decisions.

Note: You should always consult your tax advisor to determine how the rules apply to your situation and remember that state income taxes must be considered.

Contact Us

Call 800-BANK-BBT

(800-226-5228).

Locations