One thing that’s common with most Americans when it comes to tax planning is their confusion in understanding the marginal tax rate. If the varying tax slabs, values, figures confuse you as well, you've come to the right place!
The marginal tax rate is the tax applied to your income for each tax slab in which you qualify. Sound knowledge of the marginal tax rate can help predict rather plan your upcoming tax bills. This, in turn, will help you get closer to your financial goals. To know how the calculation of marginal tax works, read on.
Touchpoints
- What is Marginal Tax Rate?
- How to Calculate Marginal Tax Rate
- Things to Know About Marginal Tax Rates
- Additional Resources
What is Marginal Tax Rate?
A marginal tax rate is a rate at which tax is levied on additional income i.e, the next dollar income that brings changes to the tax slab one falls into. In the United States, the federal marginal tax rate is directly proportional to an individual’s income. As the income increases, the tax incurred on the same also increases. This method of taxation is called progressive taxation and is aimed at bringing some level of economic parity in society.
Marginal tax rates are classified under seven brackets of income levels. Low-income earners are taxed at a lower rate and vice versa. The majority of U.S citizens support this system as an equitable method of taxation, a few others feel it takes away the incentive for working harder to earn more.
Taxpayers are divided into tax brackets or income ranges that help determine the tax rate applied to their taxable income. As the income increases, the last dollar earned is taxed at a higher rate than the first dollar earned. Quite understandably, the first dollar earned falls under the lowest tax bracket and is taxed at a lower rate, the last dollar earned is taxed according to the income bracket that the total income comes under.
Marginal tax rates are more often than not changed by new laws. The most recent marginal tax rates that went into effect in the United States as of Jan 1, 2018, with the passage of the Tax Cuts and Jobs Act (TCJA) have not been changed until now. As per the previous law, the seven brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The present plan signed into law by President Donald Trump in Dec. 2017, instructs the same seven bracket model. However, amendments were made to the tax rates and income levels. Under the TCJA, the new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. No need to worry, if you aren’t adept with the numbers, TaxAct can help you out. It is the critically acclaimed leader of affordable online and downloadable tax preparation solutions for consumers and business owners.
How to calculate Marginal Tax Rate
Taxpayers with the lowest income range are placed into the lowest marginal tax rate bracket, while individuals with higher income are placed into the higher marginal tax rates. The marginal tax bracket under which a taxpayer is placed does not tell us how the total income is taxed. Income taxes are further calculated on a progressive level. Each slab has a designated range of income values that are taxed at a particular rate. If you don’t want to get into the complexities of the math and need a smooth tax filing this year, we suggest you go with LibertyTax. Liberty Tax is an online preparation service that offers a convenient, easy-to-use, browser-based tax filing system.
The table below shows the rates and income brackets for each type of filer in 2020 – single, married filing jointly and heads of household.
| Rate | For Singles With Taxable Income Over | For Married Filing Jointly With Taxable Income Over | For Heads of Household With Taxable Income Over |
| 10% | $0 | $0 | $0 |
| 12% | $9,700 | $19,400 | $13,850
|
| 22% | $39,475 | $78,950 | $52,850 |
| 24% | $84,200 | $168,400
|
$84,200
|
| 32% | $160,725 | $321,450 | $160,000
|
| 35% | $204,100 | $408,200 | $204,100
|
| 37% | $510,300 | $612,350
|
$510,300 |
Things to know about Marginal Tax rates
Let suppose Mr. A, an individual taxpayer earned $155,000, he would require to pay the below income taxes in the year 2020 –
10% Bracket: ($9,700 – $0) x 10% = $970.00
12% Bracket: ($39,475 – $9,700) x 12% = $3,573.00
22% Bracket: ($84,200 – $39,475) x 22% = $9,839.50
24% Bracket: ($155,000 – $84,200) x 24% = $16,992.00
32% Bracket: Not applicable
35% Bracket: Not applicable
37% Bracket: Not applicable
Now, you would need to add these up to arrive at the total tax liability.
The total tax liability for Mr. A would be $31,174 ($970.00 + $3,573.00 + $9,839.50 + $16,992.00).
The Marginal tax brackets do not change according to the taxpayer’s income. But, the dollar ranges i.e, the values at which a taxpayer’s income is taxed at a particular rate vary depending on whether the taxpayer is a single person, a married joint filer, or a head of a household filer. The dollar range of each bracket tends to increase annually to match the inflation rate.
Additional Resources
If you find the entire process tedious, and you’re only looking for tax extensions, head over to TaxExtension.com. It offers easy, online IRS income tax extensions for citizens hunting for more time to finish their income taxes. In as little as five minutes, users can get up to six more months to finish their taxes and without any interventions by the IRS.
In case your worry surrounds the money you owe to the IRS, you can rely on Tax Group Center for efficient tax solutions.
We hope the above article helped you in understanding the nitty-gritty of the marginal tax rate in the U.S. For knowing more about other taxes, like social security tax, read What is Social Security Tax.