# Marginal Tax Rates and Federal Income Tax Brackets

Tax season is here and one of the topics I hear frequently discussed at work is the current income tax bracket people are in. One common misconception is that receiving a raise can put you into a higher tax bracket, and the net effect of your raise has a negative impact on your bottom line.

For example, a raise from the 15% tax bracket to the 25% tax bracket doesn’t expose all of your income to the 25% tax bracket – only the income earned within that range is taxed at 25%.

## Understanding Marginal Tax Rates

This “gradual” tax schedule is called a marginal tax rate system. In effect, the amount of taxes you pay rises as your income rises. The IRS places the marginal tax rates into brackets, making the marginal tax formula easier to understand and compute by hand. Let’s look at the 2010 Federal Tax Brackets to see this in action.

## 2012 Federal Income Tax Brackets

Marginal Income Tax BracketsSingleMarried Filing JointlyHead of Household
10% Tax Bracket\$0 β \$8,700\$0 β \$17,400\$0 β \$12,400
15% Tax Bracket\$8,700 β \$35,350 \$17,400 β \$70,700\$12,400 β \$47,350
25% Tax Bracket\$35,350 β \$85,650\$70,700 β \$142,700\$47,350 β \$122,300
28% Tax Bracket\$85,650 β \$178,650\$142,700 β \$217,450\$122,300 β \$198,050
33% Tax Bracket\$178,650 β \$388,350\$217,450 β \$388,350\$198,050 β \$388,350
35% Tax Bracket\$388,350+\$388,350+\$388,350+

## Applying Federal Tax Brackets to Your Situation

As you can see from the above federal tax bracket table, there are tax brackets for income ranges. For example, a married individual will pay the following taxes:

• 10% federal income tax on the first \$17,400 of income;
• 15% federal income tax on income from \$17,400 – \$70,700;
• 25% federal income tax on income from \$70,700 – \$142,700;
• and so on.

This is a gradual tax system, and does not mean that you will pay the corresponding income tax rate if you break the threshold by \$1. For example, receiving a raise from \$70,000 to \$70,701 will not subject all of your income to the 25% tax bracket – it will only apply to income earned within that range. These gradual tax rates add up to your effective tax rate.

## How to Your Calculate Effective Tax Rate

Let’s use an example of a married couple filing jointly with \$100,000 of taxable income (after deductions, exemptions, etc.). They are in the 25% tax bracket, but don’t actually pay \$25,000 in federal taxes. They would pay:

• 10% on first \$16,750 of income (\$1,675)
• 15% on income from \$16,750 – \$68,000 (\$7,687)
• 25% on income from \$68,000 – \$137,300 (\$8,000)
• for a total ofΒ  \$17,362

In this example, the weighted, or effective tax bracket, is 17.36% (note this is effective federal tax only, and does not include state or local taxes. You should be able to find a state tax calculator to assist your calculations). This is easy to figure out when you file your taxes, ans most tax software programs, including TurboTax and H&R Block @ Home, can give you these calculations when you use their program.

## Using Marginal Tax Rates for Tax Planning

Using your knowledge of the marginal tax rate system, you can use them to help reduce your taxes if you are near one of the tax bracket limits. All you need to do is bring your final number below the tax bracket. For example, if you are married filing jointly and earn \$70,000, you can contribute \$2,000 to your 401k and avoid paying the higher tax rate on \$2,000. The tax savings can easily add up to a couple hundred dollars to several thousand, depending on how much you can shave from your marginal tax rate.

Published or updated March 29, 2016.

1 fredct

Don’t forget the o% tax bracket! That is, all income below the amount of your total personal exemption plus your standard or itemized deductions plus any ‘above the line’ deductions you can claim!

To put it in English, at least the first \$8000+ for individuals or \$16,000+ for married couples (and maybe much more, especially if you own a home) is taxed at 0% before you even get to the 10% bracket.

Also subtract off anything you put into a 401k or IRA as part of that 0% bracket.

2 Financial Samurai

And don’t forget the 40% tax bracket starting in 2011! We are going to tax people to oblivion, and we’re goig to like it! Go big government!

I encourage all of you big earns to move your 2011 income to 2010 if possible.

3 fredct

If my income is anywhere approaching \$400K in 2011, I’ll be thrilled, not dreading it.

4 Financial Samurai

Better start cracking! You got 1 year π

5 Ryan

I’ll be happy to make \$400k in any year, not just 2011. π

6 Ryan

FS, If I’m bringing in that much money, I will have a kick ass accountant help me find ways to shelter a goodly portion of it. If I’m earning \$400,000 after every possible deduction and credit, then wow… that would be an amazing year. Sure, paying a lot of taxes isn’t fun… but my expenses are pretty minimal, so that would be amazing cash flow as far as I’m concerned. π

7 Financial Samurai

But let me ask you Ryan, would you still be happy when you have to pay \$120,000 in taxes and only take home \$280,000? That is the issue at hand. Work more, pay MORE tax!

8 Tyler WebCPA

Thanks for dispelling a very popular myth; I have people refuse to believe me when I tell them that because the belief is so deeply entrenched. Being sensitive to your tax bracket can be very important to your financial planning. For example, I think that most younger people would be better off with a Roth retirement plan than a traditional IRA or 401(k),

9 Financial Samurai

Your tax account won’t be able to hide much, other than deduct some business expenses and mortgage interest. That’s what you will find my man. All the deductions “regular folks” get, all are PHASED OUT for the highest tax brackets! And then there’s AMT.

It may be good for the ego to earn 400K+, but you will start to wonder why bother trying with such high taxes.

Flat tax for all!

10 fredct

But Financial Samurai has missed the main point of this post! *At* \$400K (or whatever the specific threshold is), how much extra money do you pay? \$0! Its only the money *over* that amount that is taxed any higher

If you make \$600K, then the difference between the current 35% bracket and increase to 40% after the current law expires, costs you how much? 5% times the \$200K that you’re over the \$400K cutoff. Or… \$10K.

A nice chunk of change, no doubt… but are you telling me that people making \$600K are going to stop working so hard and drop back to < \$400K over a \$10,000 change? Hogwash.

11 Financial Samurai

Eh? I used a 30% effective tax rate on 400K (400K X 30% = 120K).

Yes, if someone has to pay a whopping 40% tax on any income above \$370,000 they will definitely try and work less and spread their money in various vehicles to avoid. Your argument is off. An extra \$12,000 in taxes b/c of the 5% bump IS a lot. You can then say, at 45% it’s still ok b/c it’s only another \$12,000 in taxes at \$600,000 vs. \$370,000. It never ends.

You don’t know, b/c you don’t make 600K.

12 Ronnie

Honestly, if I’m making \$400,000 and have to pay \$120,000 in taxes, I’m still really okay with that. I can make do JUST FINE on that \$280,000 in income. I think the problem comes when people forget that they will have to pay taxes on the \$400,000. My and my boyfriend’s combined incomes will approach that in the not too distant future, once he finishes his residency, and we’ll figure out a way to make do :D!

13 John

Ronnie, I use to say the some things when I was making very little money. I remember being in the Army in the early 80s, making about 18,000 a year and saying if I could just make 40,000 I could make due. The fact is that with more earnings comes an increased lifestyle for you and your family. In addition, to make that kind of money requires a lot of hard work, valuable time and physical stresses of daily life. When you see what it takes to make that kind of money and how easily people will vote their own interests to take it from you and villify you in doing so, that \$120000 will become more important to you. Making due will not be so fine then. Your hard work and accomplishments will become of so much valuable to you.

14 fredct

If you continue to increase your living standard dollar-for-dollar with your income, then you have no one but yourself to blame. Its called living below your means and not doing so is foolhardy.

If your values change such that money and keeping-up-with-the-jones’ is more important to you than financial security, then there’s no reason the federal government should indulge you in that.

15 fredct

A “40% tax rate will *definitely* make people work less”. When I’m at a work my level of motivation is due to a lot of things… how I’m treated by my supervisors, your level of commitment to the particular project, your intellectual interested in your tasks, your scheduled commitment… I can’t say I’d ever thought ‘hmmm, whats my marginal tax bracket again?’

The idea that a historical very-moderate top tax bracket (it’s been as high as 94% in the 40’s and 90% in the 50’s) will prevent people from working hard is ideology-based nonsense. (Here’s a graph of top tax rates over time – http://en.wikipedia.org/wiki/File:MarginalIncomeTax.svg

By the way, when you consider the employee & employer portions of payroll taxes, the 25% bracket actually pay a higher marginal rate than the 35% tax bracket payers.

16 Financial Samurai

Fredct – Just let me know how you feel when you start making \$400,000+.

17 fredct

I doubt I ever will, but if I do, I will be very grateful to this country for allowing me to be in a position when I am so well off, and also recognize that I’m lucky to be in a country where making \$400K lets me keep over \$280K of it, a situation that would be hard to find in nearly every other developed country in the world.

18 fredct

In case you doubt that the US is one of the least taxed countries… http://www.forbes.com/global/2006/0522/032a.html

Unless you want to move to Mexico, you’re not going to really find a significant improvement. Its not always income taxes, there’s VAT, payroll taxes, etc, but overall the US is about tied with Japan & Korea, and less than basically everyone else.

19 Financial Samurai

I wonder why forbes excludes Singapore or Hong Kong with their 20%, and 15% flat tax structures. Those guys have budget surpluses and are thriving. Another vote for the flat tax.

I really hope you do make \$400k+ one day.

20 John

That would be fine if that money were being used efficiently. The reality is that the balance of your 400K is just being squandard. It is not even needed by the Fed, just the big spenders on the hill. And the government will not control or cut their spending. They will just come after more of your money. For you to keep that 400K and invest it accordingly makes you independent. No need for the Big Gubament. But the question is FRED, can you survive without Big Guberment taking care of you. Be careful – you will have no one to blame but yourself if you fail.

21 Joe Plemon

Ryan,

While the banter about paying taxes on \$400,000 is intriguing, I simply want to thank you for putting the brackets and explantions on this post. This is stuff I know, but sometimes things I “know” start to get fuzzy. It is always good for me to refresh my brain by reading it fresh.

22 fredct

> I wonder why forbes excludes Singapore or Hong Kong with their 20%, and
> 15% flat tax structures.

I don’t know. Good question. Although I’d be interested what their *total tax burden* is. For instance, Singapore has a 7% Value-Added-Tax as well.

Here’s another more-inclusive chart, although I don’t know their methods:
http://www.photius.com/rankings/tax_burden_country_ranks_2009.html

According to that, Singapore does have a lower tax burden than the US by about 8%, but that’s not a gigantic difference. And of course they don’t have nearly the military technology or military presence that the US does.

Hong Kong’s tax rate is indeed very low (about half the US’s). I’d be interested to find out more about that, but my google searches have been inconclusive. Hong Kong of course hasn’t been an independent country in over a decade, so I have to wonder if its really an apples-to-apples comparison or not.

> I really hope you do make \$400k+ one day.

So do I! And if I do, I’ll be more than accepting of the taxes paid to live in this country. I’ll live well below my means and it won’t be an issue.

Heck, sometimes I feel that to own a nice home in the greater NYC area, you need to make that much! π

23 fredct

“That would be fine if that money were being used efficiently. The reality is that the balance of your 400K is just being squandard.”

John, defined squandered? In what way? Where is it going? Just being used for something you don’t like? Being used for something poorly? What projects? What would you cut?

Or is it just ideology? Do you just have a generally ‘feeling’ that you know to be true without any facts or definitions?

24 Rahul

Get some perspective folks !
When you look around in the world and see how easy we have it in USA — and I don’t just mean lower tax rates — a great majority of us would stop whining !

25 Kate Horrell

Wow, Ryan. I knew that changes were possible, but I didn’t realize how big the possible changes are. In theory, my family could be paying WAY more taxes next year. (And we’re already dealing with a huge increase this year.)

Every year, I estimate what our tax liability will be in hopes of coming out with close to the right amount of withholding. Every year, our situation or the law changes and my estimates are useless. I’m about to give up π

26 Ryan

Kate, I gave up trying to match withholdings as soon as I became a business owner. π

These potential changes are huge and I can’t think many of them will change in some form before they are allowed to expire. Reverting to the pre 2001 taxes would be the most unpopular move President Obama would have made to that point in his administration. I think we will see some extensions and modifications, but who knows how many, when, and in which form.

27 fredct

Unless your income has gone well up (then good for you π ), I don’t know why that would be. There were few significant tax changes from last year to this, and those I know of generally were lower taxes.

28 fredct

To be clear, my last post was in response to Kate’s comment: “And weβre already dealing with a huge increase this year.”

29 Kate Horrell

You are right, Fred. Due to my husband’s military service, our taxable income is erratic. He was in a tax-exempt combat zone for all of 2009, so we are facing a huge jump in taxable income for 2010.

We appreciate the tax-exempt status – it makes the whole “imminent danger” thing slightly more palatable – but it also makes tax planning nearly useless.

The whole tax code needs to be rewritten. I think they need to end all deductions and go to a flat tax. I will pay more obviously (got more than I had withheld last year), but the country will be the better for it. Plus we can get rid of the IRS and save money in government. There might be a few people losing jobs, but do we really need that many tax lawyers? It is time for DC to quit pandering to the voters, not worry about getting re-elected and do what is right for the country not themselves.

31 Greg McFarlane

It’s a crying shame Jarhead’s idea isn’t on the top of the national dialogue.

Tell me what would be wrong with this: a standard \$20,000 deduction for everyone, 17% on the remainder. That way a guy making \$20,000 pays nothing, a guy making \$20,001 pays 17Β’, and Kobe Bryant pays \$4,213,662.50 (on the \$24,806,250 he receives from the Lakers, excluding other sources.)

In theory, this idea of One Deduction/Constant Rate On The Remainder should have bipartisan support between the tax-and-spend Democrats and the ostensibly fiscally conservative Republicans. The only thing they’d need to reach a consensus on is the numbers; how big a deduction to grant, and how big a rate to charge on the rest. Perhaps Henry Waxman would argue that the numbers should be \$100,000 and 40%, while Ron Paul would prefer \$0 and 1%; Congress could debate the final numbers for as long as it takes.
But anything’s better than we’ve got now, at least until we see next year’s even more complex tax code.

Greg, I like your idea a lot. I would say the line to make the cutoff at would be the poverty line. If I am not mistaken they set a poverty line for any family size from single to however many kids you have.

I also think that you shouldn’t get more than you pay in. Last year my return was nearly half of my taxable income and more than 10,000 dollars more than I had withheld from my check. Basically whoever didn’t get all that they paid in back gave me more than 10,000 dollars mostly because I bought a house. I am not going to not take it but I still don’t think it makes fiscal sense for the G’met to give me that kind of money.

33 Don Devaney

What do I do with my TSP money when I retire next year? (about \$8OOK)

34 fredct

Well you need an overall retirement plan, but the easiest answer is probably leave it where it is, and just make sure it’s in a reasonable mix. You are to be congratulated for saving that much. A simple rule of thumb is you can withdraw 4% of your assets with a good chance that they will last in perpetuity. So that gives you \$32K of income per year from that account. Not sure what other accounts or other sources of income (pension, SS) you have available.

35 Chris

I’m in the top 1% this year. Last year I lost \$600,000. The year before that, I lost \$200k. The year before that I was in the top 1%. I make a living by being an entrepreneur and taking risk. Without risk I could have a more steady income stream, but I would never make a lot of money. Its a necessary evil. Most in the Top 1% are entrepreneurs like me. If you jack the marginal tax rates to the moon, I am that much less incentivized to take that risk and make that money. At some point, I will take what savings I have left, and go to the golf course. Why would I risk a penny, if I get little of the upside? Between state taxes in 4 states, county taxes, city taxes, franchise taxes, “nominal fees”, accounting fees to prepare for it (over \$40,000 to accountants, and some other huge number to attorney’s), opportunity cost in lost time making deals which was spent prepping for taxes, not counting any property taxes, vehicle, gas taxes etc etc…I paid over 55% of my income to some government. After next year, that same number would be close to 65%. Then you throw in all the other taxes that aren’t “income taxes”, and its a huge percent of my income paying for government junk. Those 90% tax brackets of the 50’s are not the same, because they had a million deductions and exceptions. The top earners still paid in less total income to the government than we do now.

Why put myself through all that headache? If I can earn a living off my savings I won’t have to take any real risk, I can sleep well at night, I can hang out with friends and family. At some point, I will go home instead of providing for everyone else and the government largess.

By making only high earners pay the tax, you effectively shut the door to the path to the upper class. I was not born in the upper class, but I want to get there. To do that I must take risks. If there is no pay off, I will never attempt it. America becomes France.