Taxes and Options Second, you would pay 28 percent on the remaining \$1,950: \$1,950 × 28% = \$546 Total taxes: \$7,003.50 44 Fortunately, moving into the next higher tax bracket doesn't mean all your taxable income is subject to the higher rate. The higher rate only applies to the amount over the bracket limit. However, you are in that higher bracket. Using the example above, you and your spouse are in the 28 percent bracket. This means that you pay the 28 percent rate on any additional income. Although you are in the 28 percent bracket, you are not paying that on all your income. Your actual rate is a blend of the two brackets. For example, your total taxes are \$7,003.50 on taxable income of \$45,000. Your actual tax rate is 15.56 percent (\$7,003.50 ÷ \$45,000 = 0.1556). It is important to know your tax bracket because it tells you the rate for any increase in income. Continuing our preceding example, say you had the opportunity to exercise and immediately sell stock through nonqualified stock options for a \$10,000 profit; you know \$2,800 will go to taxes. Basis Basis is the starting point for figuring out capital gains tax. For example, if you paid \$5,000 for stock bought through a broker, the purchase price plus broker's fees (\$20) establishes your basis (\$5,020). Tip Your stockbroker will provide you with a 1099 form showing the amount you received when you sell stock. You need the supporting documentation to show what you paid for the stock. This establishes your basis.