Understanding Your Marginal Tax Bracket
I have titled Exhibit 2 "Your Tax Liability and Marginal Tax Bracket." By looking at Exhibit 2, you see that the percentage rate of taxation goes up as your Taxable Income goes up (this is known as a "progressive" rate structure). Your marginal tax bracket is the highest rate of taxation your Taxable Income is being taxed at. The relevance of this is that we need to know our marginal tax bracket to determine the value of an additional dollar of deduction or the tax cost of an additional dollar of income. Look at the rates below. If I am in the 28% marginal tax bracket and I increase my deductions by one dollar, I reduce my Taxable Income that would be subject to that 28% rate of taxation by a dollar, thus saving 28 cents in tax payable. Conversely, if I increase my income by a dollar, I add a dollar to my Taxable Income subject to the 28% rate, thus increasing my tax liability by 28 cents.
Using the information from your last tax return, determine what your Taxable Income number was last year or estimate what it will be this year. Now go to the Exhibit 2 tax rate schedules and plug your Taxable Income number into the appropriate tax rate schedule. Again, the highest percentage rate of taxation that your Taxable Income is subject to is your marginal rate of taxation.
Exhibit 2 - Your Tax Liability and Marginal Tax Bracket
2003 Tax Rate Schedules Single – Schedule X If taxable The tax is: of the Income is: But not amount Over -- over -- over – $0 $7,000 …… 10% $0 7,000 28,400 $700.00 + 15% 7,000 28,400 68,800 3,910.00 + 25% 28,400 68,800 143,500 14,010.00 + 28% 68,800 143,500 311,950 34,926.00 + 33% 143,500 311,950 ……… 90,514.50 + 35% 311,950 Head of household – Schedule Z If taxable The tax is: of the Income is: But not amount Over -- over -- over – $0 $10,000 …….. 10% $0 10,000 38,050 $1,000.00 + 15% 10,000 38,050 98,250 5,207.50 + 25% 38,050 98,250 159,100 20,257.50 + 28% 98,250 159,100 311,950 37,295.50 + 33% 159,100 311,950 ……….. 87,736.00 + 35% 311,950 Married filing jointly or Qualifying Widow(er) – Schedule Y-1 If taxable The tax is: of the Income is: But not amount Over -- over -- over – $0 $14,000 …… 10% $0 14,000 56,800 $1,400.00 + 15% 14,000 56,800 114,650 7,820.00 + 25% 56,800 114,650 174,700 22,282.50 + 28% 114,650 174,700 311,950 39,096.50 + 33% 174,700 311,950 ……… 84,389.00 + 35% 311,950 Married filing separately – Schedule Y-2 If taxable The tax i s of the Income is: But not amount Over -- over -- over – $0 $7,000 …… 10% $0 7,000 28,400 $700.00 + 15% 7,000 28,400 57,325 3,910.00 + 25% 28,400 57,325 87,350 11,141.25 + 28% 57,325 87,350 155,975 19,548.25 + 33% 87,350 155,975 ……… 42,194.50 + 35% 155,975
2003 Tax Rate Schedules
Single – Schedule X
If taxable The tax is: of the
Income is: But not amount
Over -- over -- over –
$0 $7,000 …… 10% $0
7,000 28,400 $700.00 + 15% 7,000
28,400 68,800 3,910.00 + 25% 28,400
68,800 143,500 14,010.00 + 28% 68,800
143,500 311,950 34,926.00 + 33% 143,500
311,950 ……… 90,514.50 + 35% 311,950
Head of household – Schedule Z
$0 $10,000 …….. 10% $0
10,000 38,050 $1,000.00 + 15% 10,000
38,050 98,250 5,207.50 + 25% 38,050
98,250 159,100 20,257.50 + 28% 98,250
159,100 311,950 37,295.50 + 33% 159,100
311,950 ……….. 87,736.00 + 35% 311,950
Married filing jointly or Qualifying
Widow(er) – Schedule Y-1
$0 $14,000 …… 10% $0
14,000 56,800 $1,400.00 + 15% 14,000
56,800 114,650 7,820.00 + 25% 56,800
114,650 174,700 22,282.50 + 28% 114,650
174,700 311,950 39,096.50 + 33% 174,700
311,950 ……… 84,389.00 + 35% 311,950
Married filing separately – Schedule Y-2
If taxable The tax i s of the
28,400 57,325 3,910.00 + 25% 28,400
57,325 87,350 11,141.25 + 28% 57,325
87,350 155,975 19,548.25 + 33% 87,350
155,975 ……… 42,194.50 + 35% 155,975
Example: In the prior Example, Mark and Debbie (married, filing jointly) have Taxable Income of $77,600 in 2003. Using the tax rates noted in Exhibit 2, we see that their actual federal income tax liability for the year is $13,020 (the first $14,000 of taxable income x 10% ($1,400) and the next $42,800 x 15% ($6,420) and then $20,800 x 25% ($5,200)). Mark and Debbie are in the 25% marginal income tax bracket as that is the highest rate of taxation to which any of their Taxable Income is subjected.
The 360 Degrees of Financial Literacy Web site offers general information for managing personal finances and does not recommend specific financial actions. For financial advice tailored to your situation, please contact an expert such as a CPA or a personal financial advisor.