Understanding Your Marginal Tax Rate

Ever wonder what the term “tax bracket” means? It refers to the top marginal tax rate that individuals are being taxed, not the average. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at your top marginal rate. Thus, if you are in the 25% marginal bracket and plan on signing up for your employer’s 401(k) plan, you will generally save $250 ($1,000 x .25) in federal taxes for each $1,000 contributed to the 401(k) plan. The reason we say “generally” is because sometimes a tax deduction can actually drop you into a lower marginal tax bracket.

The table below reflects the marginal tax bracket for various taxable incomes. Keep in mind that not all of your income is taxed. The amount equal to the sum of your deductions and exemptions is not taxed at all. If your income is below the sum of your deductions and exemptions, you would not have a taxable income, and your marginal rate would be zero.

However, once your income exceeds the sum of your deductions and exemptions, you will have taxable income and your marginal tax rate can be determined from the table. For example, let’s assume that your income for the year is $50,000. You are married with two dependent children and will take the standard deduction. The standard deduction in 2016 for a married couple is $12,600 ($12,700 in 2017). The exemptions for 2016 and 2017 are $4,050. Thus, your taxable income for 2016 would be $21,200 ($50,000 - $12,600 –$4,050 x 4)). For a taxable income $21,200, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%. 

2016 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS (Values shown are the top of each marginal tax bracket.)
Marginal Tax Rate	Single	Head of Household	Joint*	Married Filing Separately
10.0% 15.0% 25.0% 28.0% 33.0% 35.0%	9,275 37,650 91,150 190,150 413,350 415,050	13,250 50,400 130,150 210,800 413,350 411,000	18,550 75,300 151,900 231,450 413,350 466,950	9,275 37,650 75,950 115,725 206,670 233,475
39.6%	Over the 35% amounts

2017 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS (Values shown are the top of each  marginal tax bracket.)
Marginal  Tax Rate	Single	Head of  Household	Joint*	Married Filing  Separately
10.0% 15.0% 25.0% 28.0% 33.0% 35.0%	9,325 37,950 91,900 191,650 416,700 418,400	13,350 50,800 131,200 212,500 416,700 444,550	18,650 75,900 153,100 233,350 416,700 470,700	9,325 37,950 76,550 116,675 208,350 235,355
39.6%	Over the 35% amounts

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