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

 

 

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.

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