# marginal tax rate

Also found in: Dictionary, Thesaurus, Legal, Acronyms, Encyclopedia.

## Marginal tax rate

The tax rate that would have to be paid on any additional dollars of taxable income earned.

## Marginal Tax Rate

A percentage of one's income that one must pay in taxes. Marginal tax rates vary according to income levels. One who makes \$100,000 per year has a higher marginal tax rate than one who makes \$25,000. However, the marginal tax rate does not increase for one's entire income, merely each dollar over a certain threshold. Suppose one pays 10% of one's income up to \$25,000, and 20% thereafter. The taxpayer making \$25,001 does not suddenly have to pay 20% of his/her entire income, only on the one dollar over \$25,000. That is, he/she owes 10% of \$25,000 (\$2,500) and 20% of the \$1 over that (or \$0.20). All things being equal, this taxpayer owes \$2,500.20 in taxes.

## marginal tax rate

The percentage of extra income received that must be paid in taxes. It is crucial for an investor to know his or her marginal tax rate in order to make intelligent investment decisions. For example, a decision whether or not to purchase municipal bonds is primarily a function of the investor's marginal tax rate. Also called tax bracket. See also progressive tax.
How to calculate your marginal tax rate and how to use that rate for making sound investment decisions.

Taxes are determined by calculations based on taxable income. Tax rates (or brackets) start at 10%, rising as high as 39.1% currently. Taxable income is broken down into certain levels, each to which a tax bracket applies. The highest bracket relative to taxable income is called your marginal tax rate. Each additional dollar of income or deduction increases or reduces tax by the percentage determined to be your marginal tax bracket. Use the calculations in investment decisions by comparing aftertax returns to tax-free securities or to growth securities that might be held until retirement, when tax brackets may be lower.

Jeffrey S. Levine, CPA, MST, Alkon & Levine, PC, Newton, MA

## Marginal tax rate.

Because the US income tax system is progressive, your tax rate rises as your taxable income rises through two or more tax brackets.

Your marginal tax rate is the rate you pay on the taxable income that falls into the highest bracket you reach: 10%, 15%, 25%, 28%, 33%, or 35%.

For instance, if you have a taxable income that falls into three brackets, you would pay at the 10% rate on the first portion, the 15% rate on the next portion, and the 25% federal tax rate on only the third portion. Your marginal rate would be 25%.

However, your marginal tax rate is higher than your effective tax rate, which is the average rate you pay on your combined taxable income. That's because you're only paying tax at your marginal, or maximum, rate on the top portion of your income.

Keep in mind that your marginal tax rate applies only to tax on ordinary income and does not take into account other tax liabilities -- such as realized long-term capital gains, which are taxed at your long capital gains rate, or tax credits for which you may be eligible, which may reduce the actual tax you pay.

## marginal tax rate

the fraction of the last pound of a person's income that is paid in TAX. High marginal tax rate may act as a disincentive to working longer hours when the incremental DISPOSABLE INCOME from such extra effort is small. See LAFFER CURVE, POVERTY TRAP.

## marginal tax rate

The percentage of income that must be paid to the IRS for a particular range of incomes, called tax brackets.As one's income increases, the marginal tax rate increases but only for that portion of one's income within the higher bracket.Portions of income within the lower brackets are taxed at the lower marginal tax rates.
References in periodicals archive ?
Recent research from the CBO and JCT (Dowd, McClelland, and Muthitacharoen 2012) estimates the permanent elasticity with respect to the marginal tax rate at-0.
A taxpayer's marginal tax rate is the rate at which that taxpayer's last dollar of income is taxed.
5% in Hungary in 2004 and 2005, for marginal tax rates.
The paper's first novelty is that it uses for the first time original data for marginal tax rates from a group of European South-Eastern countries, i.
In response to the claim that the CRS study was flawed because it did not allow enough time for tax changes to have effects on behavior, specification (2) replaces the tax variables with two dummy variables: Tax Cut Dummy 4 Years takes on a value of 1 the year the top marginal tax rate is cut and the three years that follow, while Tax Increase Dummy 4 Years takes on a value of 1 the year of an increase in the top marginal rate and the three years that follow.
In any event, they suggest that if most of these deductions and credits were eliminated, the existing system of a schedule of marginal tax rates could be replaced with a single and relatively low tax rate.
Allowing for a marginal tax rate on investors will tend to increase the value of land and mean that the imposition of a land tax has a bigger effect on land values.
Returns with modified taxable income in the 15-percent (ordinary income) marginal tax rate bracket contained the largest share of returns for 2007, at 38.
They state that the marginal tax rate is a key determinant between tax benefits and tax deductions in the framework of increased depreciation deductions achieved by step-ups.
This income was subject to a 25 percent marginal tax rate, far greater than the marginal rate of 1 percent for 1913 and even the 15 percent rate for 2006.
In other words, the benefit of making the contribution in December 2009 is even greater because the tax savings are received sooner and at a higher marginal tax rate.
I'd say a 50 percent marginal tax rate on the very rich (earning over \$500,000 a year).

Site: Follow: Share:
Open / Close