Understanding Your Marginal Tax Rate
Ever wonder what the term “tax bracket” means? It refers to the top marginal tax rate that individuals are being taxed, not the average. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at your top marginal rate. Thus, if you are in the 25% marginal bracket and plan on signing up for your employer’s 401(k) plan, you will generally save $250 ($1,000 x .25) in federal taxes for each $1,000 contributed to the 401(k) plan. The reason we say “generally” is because sometimes a tax deduction can actually drop you into a lower marginal tax bracket.
The table below reflects the marginal tax bracket for various taxable incomes. Keep in mind that not all of your income is taxed. The amount equal to the sum of your deductions and exemptions is not taxed at all. If your income is below the sum of your deductions and exemptions, you would not have a taxable income, and your marginal rate would be zero.
However, once your income exceeds the sum of your deductions and exemptions, you will have taxable income and your marginal tax rate can be determined from the table. For example, let’s assume that your income for the year is $50,000. You are married with two dependent children and will take the standard deduction. The standard deduction in 2016 for a married couple is $12,600 ($12,700 in 2017). The exemptions for 2016 and 2017 are $4,050. Thus, your taxable income for 2016 would be $21,200 ($50,000 - $12,600 –$4,050 x 4)). For a taxable income $21,200, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%.
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2016 MARGINAL TAX RATES
TAXABLE INCOME BY FILING STATUS (Values shown are the top of each marginal tax bracket.) |
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Marginal
Tax Rate |
Single
|
Head of
Household |
Joint*
|
Married Filing
Separately |
|
10.0%
15.0% 25.0% 28.0% 33.0% 35.0% |
9,275
37,650 91,150 190,150 413,350 415,050 |
13,250
50,400 130,150 210,800 413,350 411,000 |
18,550
75,300 151,900 231,450 413,350 466,950 |
9,275
37,650 75,950 115,725 206,670 233,475 |
|
39.6%
|
Over the 35% amounts
|
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* Also used by taxpayers filing as Qualified Widow with dependent child
|
2017 MARGINAL TAX RATES
TAXABLE INCOME BY FILING STATUS (Values shown are the top of each marginal tax bracket.) |
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|
Marginal
Tax Rate |
Single
|
Head of
Household |
Joint*
|
Married Filing
Separately |
|
10.0%
15.0% 25.0% 28.0% 33.0% 35.0% |
9,325
37,950 91,900 191,650 416,700 418,400 |
13,350
50,800 131,200 212,500 416,700 444,550 |
18,650
75,900 153,100 233,350 416,700 470,700 |
9,325
37,950 76,550 116,675 208,350 235,355 |
|
39.6%
|
Over the 35% amounts
|
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* Also used by taxpayers filing as Qualified Widow with dependent child
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