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%.

 

2016 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%
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
* 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.)
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
* Also used by taxpayers filing as Qualified Widow with dependent child
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