By: Austin Colby, CFP®, MBA
People talk about taxes all the time. (Especially during times of tax reform in Congress.) Income tax, property tax, sales tax, payroll tax, excise tax, investment income surtax, Medicare tax…..the list goes on and on.
The most widely discussed and most prevalent is the federal income tax. Important pieces of that tax code are the marginal income tax brackets and tax rates.
So what is a Marginal Income Tax Rate?
Your marginal income tax rate simply tells you what percentage of income tax you will pay if you have one additional taxable dollar.
If you are in the 25% tax bracket, then your marginal income tax rate is 25%, which means if you have one more dollar of taxable income, you will pay 25 cents to the federal government in taxes.
This does not mean you have a 25% tax rate. That is a separate discussion. It means that if you want to earn one more dollar, you will be paying that portion in income taxes. This is important to know as you make tax planning decisions for the future. Will your marginal rate be higher or lower in one year, three years or ten years? If you know that, oftentimes you can craft some clever tax strategies to maximize both your earned and invested dollars.
Let’s Focus: What is your marginal income tax rate?