marginal tax rate

Marginal Tax Rate

The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate.

Notes:

Many believe this discourages business investment because you are taking away the incentive to work harder.

See also: Income, Income Tax, Internal Revenue Service - IRS, Tax Bracket, Tax Shield

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Marginal tax rate

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

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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