1

Not talking about for businesses or fancy legal setups or anything - just someone who's working for somebody and needs to pay income tax, whether any has been withheld through the year or not. Is 5% the maximum they would have to pay? This seems to indicate that, but I wanted to make sure there wasn't something that was being missed:

•  What are Alabama's individual income tax rates?

For single persons, heads of families, and married persons filing separate returns:

2%    First $500 of taxable income  4%    Next $2,500 of taxable income  5% All taxable income over $3,000

For married persons filing a joint return:

2%    First $1,000 of taxable income  4%    Next $5,000 of taxable income  5% All taxable income over $6,000

src: https://revenue.alabama.gov/incometax/itfaq01.cfm

2

You are correct. The amount of tax given as a function is:

  • tax(income) = 0.02 x income if income <= 500
  • tax(income) = 10 + 0.04 x (income - 500) if income <= 3000
  • tax(income) = 110 + 0.05 x (income - 3000) if income > 3000

The limit of tax rate as the income grows without bound is found thus:

  • lim tax(income) / income
  • = lim (110 + 0.05 x (income - 3000)) / income
  • = lim (110 + 0.05 x income - 150) / income
  • = lim 110/income + lim (0.05 x income) / income - lim 150/income
  • = 0 + lim 0.05 - 0
  • = 0.05

This means nobody actually pays 5%, but high-income taxpayers can get arbitrarily close to it. For instance, the effective tax rate on a taxpayer with a taxable income of $200k is 4.98%.

In particular, you didn't miss anything, with the possible exception of penalties (e.g., failure to pay tax on time and in the proper amounts, potentially penalties on the early withdrawal of tax-advantaged savings, etc.) Those could easily raise the effective tax rate above 5%.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.