Marginal Tax Rate

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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?]