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 the 2016 tax year (taxes due in 2017), 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.

In October 2016, the IRS released the 2017 Federal tax rates for taxes due in April 2018. To see those new rates, see the IRS's website and 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. Federal Tax Brackets

    Income tax groupings specified by the Internal Revenue Service ...
  2. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  3. Bracket Creep

    A situation where inflation pushes income into higher tax brackets. ...
  4. Vertical Equity

    A method of collecting income tax in which the taxes paid increase ...
  5. Income Shifting

    A strategy of moving a person's income from a high income bracket ...
  6. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
Related Articles
  1. Taxes

    Breaking Down Taxes For Different Income Brackets

    Here is a useful rundown of how much you will pay in taxes based on your income.
  2. Taxes

    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. Taxes

    How Trump’s Proposals Will Impact Your Taxes

    How Trump's proposed tax changes could affect your taxes depends on your current tax bracket.
  4. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  5. Taxes

    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. Taxes

    How to Reduce Risk With Tax Diversification

    Is your retirement income adequately diversified from a tax standpoint?
  7. Taxes

    How Getting A Raise Affects Your Taxes

    Many people think they may actually make less overall because they are paying more taxes.
  8. Taxes

    Preparing for Potential Tax Policy Changes

    Here is a comprehensive guide to tax planning in an environment where policies could dramatically change under new leadership in Washington.
  9. Taxes

    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. 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 >>
  2. How do I find out what my tax bracket is?

    Learn the information you need to determine what your tax bracket is. Read Answer >>
  3. 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. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  2. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  3. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  4. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  5. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  6. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
Trading Center