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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

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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%.

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