Understanding Your Marginal Tax Rate

• Posted on April 24, 2008
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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 2010 for a married couple is $11,400 (same as in 2009). The exemptions for 2010 are $3,650 (same as in 2009). Thus, your taxable income would be $24,200 ($50,000 - $11,400 – ($3,600 x 4)). For a taxable income of $24,200, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%.

2011 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS (Values shown are the top of each marginal tax bracket.)
Marginal Tax Rate	Single	Head of Household	Joint*	Married Filing Separately
10.0% 15.0% 25.0% 28.0% 33.0%	8,500 34,500 83,600 174,400 379,150	12,150 46,250 119,400 193,350 379,150	17,700 69,000 139,350 212,300 379,150	8,500 34,500 69,675 106,150 189,575
35.0%	Over 379,150			Over 189,575

2010 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS (Values shown are the top of each marginal tax bracket.)
Marginal Tax Rate	Single	Head of Household	Joint*	Married Filing Separately
10.0% 15.0% 25.0% 28.0% 33.0%	8,375 34,000 82,400 171,850 373,650	11,950 45,550 117,550 190,550 373,650	16,750 68,000 137,300 209,250 373,650	8,375 34,000 68,650 104,625 186,825
35.0%	Over 373,650			Over 186,825