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What's the Highest Tax Rate I Will Pay This Year?Jan 11 '02 (Updated Jul 14 '09) Write an essay on this topic.The Bottom Line Marginal tax rate is the highest tax rate that an individual pays according to the IRS tax table. Tax rates in the United States are progressive, which means that the rate paid in taxes gradually increases as the taxable income increases. These different tax levels do not represent a tax rate on the entire taxable income. Rather, they represent the tax rate on a specific margin of income. The highest tax level that your taxable income falls into is called the marginal tax rate. How do Marginal Taxes Work?: Since there are several different tax rates, each one progressively higher, an individual must compute the taxes on each margin of income separately. In other words, if your marginal tax rate is, say, 35.5 percent, this doesn't mean that you will owe 35.5 percent of your entire taxable income, to the IRS. It means that you will owe tax at various rates, with 35.5 percent being the top rate that you will pay. Tax Tables for 2001: If you're wondering where your taxable income falls in 2001, the official IRS tax tables for single and married filing jointly will help you determine your tax. Here are the tables: Single Tax Filers: Taxable Income, Tax Amount 0 to 27,050.......15 percent of taxable income 27,050 to 65,550....4,057.50 plus 27.5 percent of excess over 27,050 65,550 to 136,750.....14,645 plus 30.5 percent of excess over 65,550 136,750 to 297,350.....36,361 plus 35.5 percent of excess over 136,750 297,350 and up.........93,374 plus 39.1 percent of excess over 297,350 Married Tax Filers, Filing Jointly: Taxable Income, Tax Amount 0 to 45,200......15 percent of taxable income 45,200 to 109,250......6,780 plus 27.5 percent of excess over 45,200 109,250 to 166,500.....24,393.75 plus 30.5 percent of excess over 109,250 166,500 to 297,350...41,855 plus 35.5 percent of excess over 166,500 297,350 and up.......88,306.75 plus 39.1 percent of excess over 297,350 Remember, before you start to use these tables, that you must compute your taxable income. Taxable income is the income remaining after you have deducted your standard deduction, personal exemptions, itemized deductions, etc., from your total gross income. (Note: If you are married and file separately, or head of household, these tables will not apply. You will need to lookup the appropriate table). Here's an example. Suppose I'm a single person with $75,000 in gross income for the year. I have itemized deductions worth 12,000 and my personal exemption is worth 2,900. This would make my taxable income for the year equal to 60,100 (75,000, less 12,000, less 2,900). Looking this up on the tax table, my marginal tax rate (the highest rate I will pay) is 27.5 percent. My total tax owed will be: 4,057.50 plus .275 (60,100 - 27,050) = 13,146.25 As you can see, a portion of my taxable income (27,050) was taxable at 15 percent (the lower bracket) and the remaining income (33,050) was taxable at my marginal rate of 27.5 percent. This is how progressive marginal tax rates work. Final Thoughts: Progressive marginal tax rates have been in effect for quite some time now, and there is no talk of changing the system anytime soon. Some individuals have proposed that we switch to a flat tax rate, but political quarreling over exactly what that rate should be and how it would impact the economy have resulted in our continued use of progressive marginal tax rates, for the time being. It's important to remember that your marginal rate is always going to be higher than your average tax rate (unless you're in the lowest bracket, in which case marginal and average will be the same) because you will have different, lower rates applied to your lower levels of income. Using my example above, the marginal rate is 27.5 percent, but the average tax rate for this person would be 13,146.25 divided by 60,100, which would equal an average rate of 21.87 percent. Using the above tables, you can quickly estimate whether or not you had sufficient tax withheld in 2001to cover your Federal tax burden. Just remember to add up all types of taxable income first (income from your job, short- term capital gains, bank interest earned, and any other taxable income) and then subtract the standard deduction (or your itemized deductions) and your exemptions. The result will be your taxable income for 2001. This can help to prepare you for tax time, which is just around the corner. Have fun computing your taxes! For more tax information, check out these other reviews/essays: www.moneysavingparent.com Federal Tax Withholding Federal Exemptions Standard Deductions Short Term Capital Gains and Losses Long Term Capital Gains and Losses Capital Losses and Tax Treatment Charitable Contributions Interest Income  |
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