When someone refers to her tax bracket, she usually means the highest federal income tax rate that applies to any of her income. Income tax is levied on your taxable income, which is the amount left after you subtract deductions from your gross income. When you have dependents, you get a tax exemption for each. Dependent exemptions may lower your taxable income enough to put you in a lower tax bracket.
The federal income tax is progressive, meaning there is a series of increasing tax rates. The lowest rate is applied to the first dollars you make. As your income goes up, the rate increases in a series of tax brackets. As of 2012, there were six tax brackets, starting with 10 percent. The next bracket was 15 percent, followed by 25 percent, 28 percent, 33 percent and 35 percent. The exact income levels at which each tax bracket kicks in varies depending on your filing status. These levels are adjusted each year for inflation. In addition, Congress changes the tax rates from time to time. The rates used here are for 2012. Check the IRS website for current figures.
When you do your taxes each year, you start by adding up all the money you made to find your gross income. However, you pay income tax only on your taxable income, and that’s where dependents can change the tax bracket you are in. Each dependent gives you an exemption of $3,800 as of 2012. To figure your taxable income, subtract your dependent exemptions and other deductions from your gross income. Since you won’t pay taxes on that $3,800, you lower your tax bill. If dependent exemptions reduce your taxable income below a tax bracket threshold, you end up with a lower maximum tax rate.
Find Your Bracket
To determine your tax bracket with dependents, calculate your taxable income. For example, suppose you are married, file a joint return and have a gross income of $180,000. Subtract a personal exemption of $3,800 each for yourself and your spouse. You might subtract another $25,000 in deductions for contributions to IRAs, charitable donations and other tax write-offs. This leaves taxable income of $147,400. In 2012, this amount put you in the 28 percent tax bracket. However, if you have two dependent children, you can subtract another $3,800 for each child. These dependent exemptions reduce your taxable income to $139,800. The threshold for the 28 percent bracket is $142,700, so you are now in the 25 percent tax bracket.
Payroll Tax Brackets
The amount of tax your employer withholds is an estimate of what you will actually owe at year’s end, based on your pay and the information you provide on your W-4 form. Each withholding allowance you claim is equal to one $3,800 exemption divided by the number of pay periods where you work. For example, if you are paid weekly, this works out to $73.15. The value of your claimed allowances is subtracted from your gross pay to determine your taxable earnings. Income tax is calculated on taxable income. When you have dependents, you can claim more withholding allowances, which may put you in a lower tax bracket when income tax is calculated.