Marginal Tax Rate

Loading the player...

What is a 'Marginal Tax Rate'

A marginal tax rate is the amount of tax paid on an additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low income earners being taxed at a lower rate than higher income earners.

BREAKING DOWN 'Marginal Tax Rate'

Under a marginal tax rate, tax payers are most often divided into tax brackets or ranges, which determine the rate applied to the taxable income of the tax filer. As income increases, what is earned will be taxed at a higher rate than the first dollar earned. While many believe this is the most equitable method of taxation, many others believe this discourages business investment by removing the incentive to work harder.

Marginal Tax Rates and Example

For 2016, in the United States, there are seven different marginal tax rates based on an individual's income. They are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Individuals who make the lowest amount of income are placed into the lowest marginal tax rate bracket, while higher earning individuals are placed into higher marginal rate tax brackets. However, the marginal tax bracket in which an individual falls does not determine how the entire income is taxed. Instead, income taxes are assessed on a progressive level. Each bracket has a range of income values that are taxed at a particular rate. For example, in 2016, for a single taxpayer, the marginal tax rates have the following income ranges:

10% Bracket: $0 to $9,275

15% Bracket: $9,275 to $37,650

25% Bracket: $37,650 to $91,150

28% Bracket: $91,150 to $190,150

33% Bracket: $190,150 to $413,350

35% Bracket: $413,350 to $415,050

39.6% Bracket: $415,050+

If an individual taxpayer earned $150,000 in income, they would owe the following income taxes, as shown below:

10% Bracket: ($9,275 - $0) x 10% = $927.50

15% Bracket: ($37,650 - $9,275) x 15% = $4,256.25

25% Bracket: ($91,150 - $37,650) x 25% = $13,375

28% Bracket: ($150,000 - $91,150) x 28% = $16,478

33% Bracket: Not applicable

35% Bracket: Not applicable

39.6% Bracket: Not applicable

Totaling these up, the entire tax liability for this individual would be $35,036.75. Though the actual marginal tax rate brackets remain constant regardless of a person's filing status, the dollar ranges at which income is taxed at each rate can change depending on whether the filer is a single person, married joint filer or head of household filer.

To learn more about how the marginal tax rate system works, read Can moving to a higher [tax bracket cause me to have a lower net income?]

RELATED TERMS
  1. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  2. Federal Tax Brackets

    Income tax groupings specified by the Internal Revenue Service ...
  3. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  4. Bracket Creep

    A situation where inflation pushes income into higher tax brackets. ...
  5. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  6. Vertical Equity

    A method of collecting income tax in which the taxes paid increase ...
Related Articles
  1. Personal Finance

    Why Your Tax Bracket Is Not the Tax Rate You Pay

    Understanding how federal and state tax brackets work is important for tax planning – and for making sense of the political conversation around tax reform.
  2. Personal Finance

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  3. Personal Finance

    How Are Capital Gains And Dividends Taxed Differently?

    Individuals in the 25% or higher tax bracket pay a 20% tax on long-term capital gains.
  4. Personal Finance

    Income Tax Brackets for 2015-2016

    Learn about the 2015-2016 tax brackets, how to calculate your marginal tax rate, the five types of filing status and how to qualify for them.
  5. Personal Finance

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  6. ETFs & Mutual Funds

    7 Ways to Create a Tax-Efficient Portfolio

    Taxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
  7. Personal Finance

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  8. Personal Finance

    How Will Raising Taxes on the 1% Make a Difference?

    What would happen if taxes were raised (even by a small degree) on the highest earners?
  9. Managing Wealth

    5 Ways to Reduce Your Taxes After a Windfall Gain

    Windfall income is a welcome padding to any bank account, but plan for the government's share before you start spending.
  10. Retirement

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
RELATED FAQS
  1. If I have 5 tax years before I must take an RMD, how much tax benefit will it be ...

    My effective tax bracket for 2016 is 1.28% due to being retired with only pension and SS income.  ... Read Answer >>
  2. How can I find out which income tax bracket I am in?

    Find out how to determine your federal income tax bracket and calculate how much you will owe in federal taxes with online ... Read Answer >>
  3. Are tax brackets adjusted for inflation?

    Learn about U.S. tax brackets and how the U.S. Internal Revenue Service (IRS) makes annual inflation-based adjustments for ... Read Answer >>
  4. How do I find out what my tax bracket is?

    Learn the information you need to determine what your tax bracket is. Read Answer >>
  5. Can moving to a higher tax bracket cause me to have a lower net income?

    Many people think that when their income increases by enough to push them into a higher tax bracket, their overall take-home ... Read Answer >>
  6. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center