What is a 'Marginal Tax Rate'

A marginal tax rate is the amount of tax paid on an additional dollar of

income. The marginal tax rate for an individual will increase
as income rises. This method of taxation aims to fairly tax individuals
based upon their earnings, with low-income earners being taxed at a
lower rate than higher income earners.

BREAKING DOWN 'Marginal Tax Rate'

Under a marginal tax rate, tax payers are most often divided into tax
brackets or ranges, which determine the rate applied to the taxable
income of the tax filer. As income increases, what is earned will be
taxed at a higher rate than the first dollar earned. While many believe
this is the most equitable method of taxation, many others believe this
discourages business investment by removing the incentive to work
harder.

Marginal Tax Rates and Example

For the 2016 tax year (taxes due in 2017), in the United States, there
are seven different marginal tax rates based on an individual's income.
They are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Individuals
who make the lowest amount of income are placed into the lowest
marginal tax rate bracket, while higher earning individuals are placed
into higher marginal rate tax brackets. However, the marginal tax
bracket in which an individual falls does not determine how the entire
income is taxed. Instead, income taxes are assessed on a progressive
level. Each bracket has a range of income values that are taxed at a
particular rate. For example, in 2016, for a single taxpayer, the
marginal tax rates have the following income ranges:

10% Bracket: $0 to $9,275

15% Bracket: $9,275 to $37,650

25% Bracket: $37,650 to $91,150

28% Bracket: $91,150 to $190,150

33% Bracket: $190,150 to $413,350

35% Bracket: $413,350 to $415,050

39.6% Bracket: $415,050+

If an individual taxpayer earned $150,000 in income, they would owe

the following income taxes, as shown below:

10% Bracket: ($9,275 - $0) x 10% = $927.50

15% Bracket: ($37,650 - $9,275) x 15% = $4,256.25

25% Bracket: ($91,150 - $37,650) x 25% = $13,375

28% Bracket: ($150,000 - $91,150) x 28% = $16,478

33% Bracket: Not applicable

35% Bracket: Not applicable

39.6% Bracket: Not applicable

Totaling these up, the entire tax liability for this individual would be
$35,036.75. Though the actual marginal tax rate brackets remain
constant regardless of a person's filing status, the dollar ranges at
which income is taxed at each rate can change depending on whether
the filer is a single person, married joint filer or head of household filer.

In October 2016, the IRS released the 2017 Federal tax rates for
taxes due in April 2018. To see those new rates, see the IRS's
website and to learn more about how the marginal tax rate system
works, read Can moving to a higher [tax bracket cause me to have a
lower net income?