• Choosing the optimal form of organization for your business (such as sole proprietorship, partnership, or corporation). If your business income is under $75,000 and your business is not a personal service business like medicine, law, architecture, engineering, accounting, the arts, or consulting, you may be able to save tax dollars by incorporating. Otherwise, the sole proprietorship or pass-through entities (partnerships, LLCs, S corporations) usually offer more tax benefits. One reason for this is that the tax rate on corporate income jumps from 25% to 34% (for 2008) at $75,000, while the individual rates increase more gradually.

When we say "tax bracket," we're referring to the highest federal tax rate that you pay on any of your taxable income. This is the rate that will apply to each additional dollar that you earn; until you earn so much that you graduate to the next bracket. You need to know your current tax bracket in order to make wise tax planning decisions, since many decisions will make sense for those in certain brackets, but not for those in others.

In 2001, the tax laws were changed to lower the tax rates across the board and create a new 10 percent income tax rate. Beginning in 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates further tax rate reductions that were otherwise to take effect in 2006. The new tax rates for each year are as follows:

2003 to 2011 Tax Rates Year Tax Rates 2003-2010 10% 15% 25% 28% 33% 35% 2011 10% rate eliminated 15% 28% 31% 36% 39.6%

The dollar amounts at which each bracket begins is different for each filing status (that is, whether you file as single, head of household, married filing jointly, or married filing separately) and is adjusted for inflation each year.

The following chart shows the income thresholds at which each tax bracket begins. Note that the dollar amount does not refer to your gross income, but rather, your taxable income — that is, income after you've subtracted any deductions and personal exemptions to which you're entitled.