marginal tax rate


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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 ?
If the marginal tax rate is close to 100%, any rise in gross income will not increase net income.
The lower corporate income tax rate, lower marginal tax rates on pass-through income, and the switch from 50 percent bonus depreciation to 100 percent expensing for assets with lives of 20 years or less are also important.
Other studies examined the elasticity of taxable income with respect to marginal tax rates (Saez, Journal of Economic Literature, 2012; Giertz, Southern Economic Journal, 2010; Chetty, American Economic Journal: Economic Policy, 2009; Kopczuk, Journal of Public Economics, 2005).
A taxpayer's marginal tax rate can be negative if an additional dollar earned reduces the taxpayer's tax liability.
Progressivity measures are constructed for average and marginal tax rates. Thus, there are four progressivity measures, low and high progressivity based on average tax rates (avtax_progresivty_low and avtax_progresivty_high), and low and high progressivity based on marginal tax rates (margtax_progresivty_low and margtax_progresivty_high).
(2006) show that for the G7 countries, marginal tax rates have a substantial effect on hours worked in the U.S.
The tax benefits of the simplified method decrease as the cost of the residence increases and as the taxpayer's marginal tax rate increases.
They found that although marginal tax rates do not affect GDP growth rates, a 1 percent tax cut would raise the level of per capita GDP by between 0.6 and 1.3 percent--creating a parallel shift in a nation's growth path.
There is, however, a stronger connection between marginal tax rates
Romer and Romer therefore argue that to the extent the changes mattered, it was likely through the incentive effects of changes in marginal tax rates. They analyze the short-run effects of marginal rates by examining the response of reported taxable income, and the long-run effects by studying the behavior of investment.
This technique, known as Marginal Tax Rate Analysis, is explained in more detail in the accompanying article titled "Managing Marginal Tax Rates: A Basic Tax Reduction Tool."
This generates a similar top marginal tax rate to that in the second scenario, 52.8 percent.