Marginal Tax Rate
Candlefocus EditorA taxpayer's marginal tax rate is based on the total sum of all taxes they owe on their taxable income, including federal, state and local taxes. It is the rate at which the last dollar of income is taxed. In other words, the marginal tax rate is the tax levied on the highest tax bracket of income for a particular taxpayer, and all the tax brackets preceding it. This means that any additional income a taxpayer earns will be taxed at the specified marginal rate.
In the United States, all income tax is collected under a seven-bracket system: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. This system is also referred to as a progressive tax, as it taxes high-income earners at a higher rate than low-income earners. For example, someone with an annual income at the top of the 10% bracket will pay 10% in taxes on all of their income, while someone with an annual income at the top of the 35% bracket will pay 35% in taxes on all of their income.
Marginal tax rate is an important concept to understand when planning and managing your finances, since it has an impact on the amount of taxes you pay. For example, if you are in the highest tax bracket and you receive a pay raise or additional income, you will be required to pay the highest marginal tax rate on the additional income.
Tax planning should also be done in light of the marginal tax rate. Since tax brackets are progressive, it might make more sense to invest more money and spread income tax over various tax brackets if you can. This approach can result in reducing your overall tax liability and save you money.
In conclusion, the marginal tax rate is a useful concept for tax planning and budgeting because it can help to maximize the amount of money you keep with each additional dollar you receive. Understanding how marginal tax rate works can help to make more informed decisions regarding financial planning.