DEFINITION of 'Incremental Tax'

A tax that increases in increments based on income levels. Incremental taxes must be considered when evaluating new investment opportunities, especially for individuals or companies in the upper end of their current tax brackets.

BREAKING DOWN 'Incremental Tax'

Incremental taxes may turn a seemingly profitable investment into a bad decision. For example, let's say an investor earns just below the maximum earnings allowable in his or her current tax bracket. A new investment opportunity is offered, which promises to earn a significant return. The investor must weigh the additional revenues against the incremental taxes associated with moving into the higher tax bracket. He or she may find that paying the higher tax rate on all or part of his or her income does not warrant investing in the profitable project.

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