What is a 'marginal tax rate?'
So glad you asked! Published tax rates are confusing, and cause many people to think they are paying more in taxes than they really are.
Your “marginal tax rate” is generally the same as your tax bracket. You pay that rate only on your taxable income above a certain dollar amount. The rest of your income is taxed at lower rates.
To understand this, think of your taxable income as a cake with six layers. Each layer is taxed at a different rate. If you’re married and filing jointly, here are the brackets (marginal rates) for 2012. You pay:
10 percent on your taxable income up to $17,400
15 percent on your taxable income over $17,400 to $70,700
25 percent on your taxable income over $70,700 to $142,700
28 percent on your taxable income over $142,700 to $217,450
33 percent on your taxable income over $217,450 to $388,350
35 percent on your taxable income over $388,350.
To show you how to use the table, I’ll use the example of a married couple with a taxable income of $75,000. That puts them into the 25 percent bracket. They do NOT pay 25 percent on their entire income, as some people think. Instead, they’ll pay 25 percent on just $4,300 (the amount exceeding $70,700). The two lower layers of their income are taxed at 15 percent and 10 percent.
These marginal rates apply even to the very rich. For example, the first $17,400 earned by a millionaire is also taxed at only 10 percent.
P.S. Your taxable income is your gross income minus your personal exemptions and deductions. So your actual earnings will be even higher than the table shows. You might earn $100,000 gross and still be in the 25 percent bracket, after your tax calculation.
Income taxes are confusing, but the marginal rate is the most mysterious of all. I hope this clears it up.