Incentives drive behavior. How does the United States incentivize taxpayers?

Federal tax tables define distinct tax brackets with tax rates ranging from 10-39.6%. Note that in 2013 the highest tax bracket jumped a remarkable 4.6%. If you earn well over $400k, then your tax bill will be much larger. A plot condensing tax tables into one graph is presented in Figure 1 (Click to see larger view).

What incentives exist based on Figure 1?

1. Marriage: It pays to be married and file jointly. Assuming benefits compound with time, it pays to marry early (from a purely financial perspective).

As an example, let's assume that you make $100,000 in taxable income. If you are single you will pay $21,293 in taxes for the 2013 tax year. If you were to file with status married filing jointly, you would pay only $16,857. Your 1 year savings would be $4,436. Assuming you could save that amount each year, and stay married for 10 years, earning a 5% return on your newly found savings, you would save over $58,000 by year ten.

Note: This calculation does not include the additional costs associated with your new spouse, or the potential for your new spouse to generate additional income.

2. Married (filing separately): Separation and divorce are discouraged. It pays to maintain a good relationship with your spouse and avoid spouses who refuse to file (forcing you to file your return separately).

3. Head of household: It pays to change your situation such that you can file jointly with a spouse.

As shown in Figure 2, marriage and joint filing savings can be substantial (approaching $10,000 in higher tax brackets).

Complicating the matter, the Alternative Minimum Tax (AMT) is a parallel tax system ensuring deductions like California king size mortgage interest payments, financial instrument exclusions, or asset/property dispositions do not generate an unusually favorable tax situation.

This system is triggered when taxpayers have high income. Many life circumstances influence AMT calculations. Consult your tax advisor if you earn enough to have such a predicament. Alternatively, the IRS offers an on-line AMT Assistant.

Looking forward, expect taxation to increase. Baby boomer commitments are due in the next two decades with 79 million estimated to retire (video requires Adobe® Flash).

For a brief overview of taxation changes that may affect you on your 2013 return, US Trust has produced the following video.

If you're looking for simple tips to reduce your tax burden, the New York Times recently published an article on Steps Towards Financial Fitness.

Disclaimer: Onyx Research, Inc. does not provide tax advice. Consult your tax advisor to optimize your tax situation.

Data Source: Internal Revenue Service

         

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