Marginal income tax brackets

Elizabeth Rosen
by Elizabeth Rosen, Contributor

 

Many people do not understand marginal income tax and how it affects them. In turn, they can end up making financial decisions that are actually less beneficial in the long run. One of the most common misconceptions is that moving into a higher tax bracket (e.g., from a salary increase) has a negative impact for the taxpayer because more tax is due.

For example, if you move from the 25% tax bracket to the 28% tax bracket, you may think that all of your income is taxed at that higher rate. However, only the money that you earn within the 28% bracket is taxed at that rate.

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The marginal income tax rate system is known as a “gradual tax schedule.” That basically means: as you make more money, you pay more tax.

For tax year 2013, there are 7 marginal income tax brackets for each filing status:
10 %, 15 %, 25 %, 28 %, 33 %, 35 %, and 39.6%

Your marginal tax bracket is the highest tax rate that you will pay on your income.

2013 Income Tax Rates

Listed below are the 2013 individual income tax rates, organized by federal filing status.

Single

Taxable income between $0 and $8,925 ― 10% tax rate
Taxable income between $8,925 and $36,250 ― 15% tax rate
Taxable income between $36,250 and $87,850 ― 25% tax rate
Taxable income between $87,850 and $183,250 ― 28% tax rate
Taxable income between $183,250 and $398,350 ― 33% tax rate
Taxable income between $398,350 and $400,000 ― 35% tax rate
Taxable income of $400,000 and above ― 39.6% tax rate

Married Filing Jointly or Qualifying Widow(er)

Taxable income between $0 and $17,850 ― 10% tax rate
Taxable income between $17,850 and $72,500 ― 15% tax rate
Taxable income between $72,500 and $146,400 ― 25% tax rate
Taxable income between $146,400 and $223,050 ― 28% tax rate
Taxable income between $223,050 and $398,350 ― 33% tax rate
Taxable income between $398,350 and $450,000 ― 35% tax rate
Taxable income of $450,000 and above ― 39.6% tax rate

Married Filing Separately

Taxable income between $0 and $8,925 ― 10% tax rate
Taxable income between $8,925 and $36,250 ― 15% tax rate
Taxable income between $36,250 and $73,200 ― 25% tax rate
Taxable income between $73,200 and $111,525 ― 28% tax rate
Taxable income between $111,525 and $199,175 ― 33% tax rate
Taxable income between $199,175 and $225,000― 35% tax rate
Taxable income of $225,000 and above ― 39.6% tax rate

Head of Household

Taxable income between $0 and $12,750 ― 10% tax rate
Taxable income between $12,750 and $48,600 ― 15% tax rate
Taxable income between $48,600 and $125,450 ― 25% tax rate
Taxable income between $125,450 and $203,150 ― 28% tax rate
Taxable income between $203,150 and $398,350 ― 33% tax rate
Taxable income between $398,350 and $425,000 ― 35% tax rate
Taxable income of $425,000 and above ― 39.6% tax rate

Understanding Marginal Tax Brackets

The marginal tax bracket system is a gradual tax schedule, which essentially means the more you earn, the more tax you pay. The amount of taxable income that you earn determines which tax bracket(s) you fall into. While it is the goal of many taxpayers to keep their income in the lower tax bracket, remember that the gradual tax schedule ensures that not all of your income is taxed at a higher rate.

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The structure of federal income tax brackets was first implemented by the IRS in the early 1900s in an attempt to create a progressive tax system that would demand less from lower-income individuals. This system, plus a series of tax credits and tax deductions, have allowed nearly half of Americans to avoid owing federal income tax altogether [Source: The Tax Foundation].

If you understand marginal income tax brackets and how they work, you can use this knowledge to help save money on your income taxes. If you are close to one of the marginal tax bracket limits, you can actually avoid moving into the next tier by controlling the amount of income that you earn. However, it’s recommended that you run the numbers and consider your particular situation before implementing a specific tax strategy, because owing less tax means earning less income.

In order to properly file your federal income tax return and pay any tax that you owe, it is necessary to understand your income tax bracket, your filing status, and which income tax rate(s) apply to you.