NEW YORK (AP) — Millionaires can be just like everyone else. At least when it comes to paying taxes.
Mitt Romney released records this week that show he pays a tax rate of about 15 percent of his income. The relatively low figure is raising eyebrows because it's on par with the rate paid by many middle-class households. That's despite the Republican presidential candidate's impressive income of $45 million over the past two years.
The disparity seems to fly in the face of the basic rule that tax rates move in tandem with wages; the more you earn, the more you pay. So Romney's disclosure may stir suspicions that the system is tilted toward the rich.
In his State of the Union speech Tuesday night, President Barack Obama focused on the issue by noting that a quarter of all millionaires pay lower tax rates than millions of middle-class households.
"We need to change our tax code so that people like me, and an awful lot of members of Congress, pay our fair share of taxes," Obama said in a speech that repeatedly touched on the gap between the rich and poor.
On average, the wealthy pay taxes at a much higher rate than the middle-class individuals. But the primary reason that many pay a lower tax rate is that more of their income comes from investments, which is generally taxed at a far lower rate than wages.
Even if investment income doesn't play a big role in your finances, understanding the basics of how tax rates work can help even the average wage earner save hundreds, if not thousands of dollars a year.
Here's an overview of what you need to know:
Tax rate basics
Although it's common to grumble about taxes, taxpayers often don't know precisely what percentage of their income goes to the government. So an essential starting point is to look at how tax rates are applied.
Taxpayers can currently fall into one of six federal tax brackets depending on their taxable income. This amount includes items such as wages and distributions from retirement accounts. The tax rate for each bracket ranges from 10 percent to 35 percent. This is the most basic building block of tax planning because your taxable income can be reduced considerably by various credits, exemptions and deductions.
Here's the breakdown of how much single filers would pay in federal income taxes depending on their taxable income for 2011:
1. 10 percent – income up to $8,500
2. 15 percent – over $8,500 up to $34,500
3. 25 percent – over $34,500 up to $83,600
4. 28 percent – over $83,600 up to $174,000
5. 33 percent – over $174,400 up to $379,150
6. 35 percent – amount over $379,150
