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 2013 for a married couple is $12,200 (up from $11,900 in 2012). The exemptions for 2013 are $3,900 (up from $3,800). Thus, your taxable income would be $22,200 ($50,000 - $12,200 $3,900 x 4)). For a taxable income of $22,200, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%.

Increased Tax Rates: The 2013 Marginal Tax Rates Table below reflects the increased tax rates for higher income taxpayers as the result of the American Taxpayer Relief Act of 2012 (ATRA). ATRA added the 39.6% bracket.


2013 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%

8,925
36,250
87,850
183,250
398,350
400,000

12,750
48,600
125,450
203,150
398,350
425,000

17,850
72,500
146,400
223,050
398,350
450,000

8,925
36,250
73,200
111,525
199,175
225,000

39.6%

Over the 35% amounts

* Also used by taxpayers filing as Qualified
Widow(er) with dependent child

2012 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%

8,700
35,350
85,650
178,650
388,350

12,400
47,350
122,300
198,050
388,350

17,400
70,700
142,700
217,450
388,350

8,700
35,350
71,350
108,725
194,175

35.0%

Over 388,350

Over 194,175

* Also used by taxpayers filing as Surviving Spouse