"What Tax Bracket Am I In?" -- "It's Complicated."


You don't need a Hogwarts sorting hat to figure out what tax bracket you're in. Photo: Flickr user Cleavers.

This article was updated on Oct. 3, 2014.

It's common for us taxpayers to think about, and occasionally look up, our tax bracket, to see how big a tax hit we're taking. But many people misunderstand the tax bracket concept.

You might, for example, glance at the table below, which features the tax brackets for the current tax year, and note that your taxable income of $50,000 parks you in the 25% bracket. You might then assume that your tax rate for those 50,000 dollars (as a single person) is 25%. Wrong!

Tax Rate

Single filers

Married filing jointly

or qualifying

widow/widower

Married filing

separately

Head of household

10%

Up to $9,075

Up to $18,150

Up to $9,075

Up to $12,950

15%

$9,076-$36,900

$18,151-$73,800

$9,076-$36,900

$12,951-$49,400

25%

$36,901-$89,350

$73,801-$148,850

$36,901-$74,425

$49,401-$127,550

28%

$89,351-$186,350

$148,851-$226,850

$74,426-$113,425

$127,551-$206,600

33%

$186,351-$405,100

$226,851-$405,100

$113,426-$202,550

$206,601-$405,100

35%

$405,101-$406,750

$405,101-$457,600

$202,551-$228,800

$405,101-$432,200

39.6%

$406,751 or more

$457,601 or more

$228,801 or more

$432,201 or more

Source: Bankrate.com. 

Here's what really happens: Your first $9,075 of taxable earnings are taxed at 10%. Then, your next $27,824 is taxed at 15%. Finally, the remainder of your taxable income, $13,101, is taxed at 25%. So actually, most of your dollars got hit with a 15% tax rate. Still, the answer to the question, "What tax bracket am I in?" isn't 15%.

When someone refers to your "tax bracket," it usually means the highest rate at which you're being taxed -- and the rate at which your next dollar of taxable income will be taxed. That's also referred to as your "marginal" tax rate. Most of us have more than a single rate that affects us, though. For example, someone with taxable income of, say, $500,000, will actually pay taxes at every bracket's rate. In our example, your tax bracket, and your marginal tax rate, would be 25%.

The marginal tax rate matters for planning purposes. If you're wondering whether to generate more income in the year, for example, you'll know that it will be taxed at your marginal rate. Just remember to keep things in perspective: If additional income kicks you into a higher bracket, it doesn't mean that all your income will suddenly get taxed at that rate -- not at all.

The tax rate that should usually interest you most is your "effective" tax rate. That's the tax rate you actually pay on your taxable income. In the example above, you'd pay $907.50 (that's 10% of $9,075), plus $4,173.60 (that's 15% of your next $27,824), and $3,275.25 (that's 25% of your final $13,101). Add them up, and your total tax paid would be $8,356.35. Divide that by the $50,000 you started with, and you'll see that your effective tax rate is 17%. That's much more attractive than 25%, right?

So, next time you ask yourself, "What tax bracket am I in?" be sure to look at the big picture, not just your marginal tax rate.

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  • Report this Comment On October 03, 2014, at 5:59 PM, ChrisC wrote:

    What has become immensely clear to me is that, when most people talk about what tax bracket they are in, they have absolutely no clue what they are talking about.

    Of course, determining you marginal tax bracket can be even more complicated than your article points out. For example, if you are in the phase out range for the child tax credit, you have an automatic bump in your marginal tax rate of 5%. A similar bump happens when you get phased out of itemized deductions and personal exemptions. If you are getting pre-tax deductions through a Section 125 plan, you, in effect, have to take FICA taxes into consideration when looking at your marginal tax rate. And, let's not even begin to discuss how complex the marginal tax rate is when social security becomes taxable.

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