Minimizing Your Taxes and Managing Your Complex Affairs

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What are Marginal Tax Rates?

One tax myth is that your tax bracket is imposed on all your income. The IRS and most states have marginal tax brackets meaning income within that range is taxed at one rate and income within the next bracket is taxed at a higher rate. This is known as your marginal tax rate.

For individuals your effective tax may be more than your marginal rate as itemized deductions, credits or tax deductions (such as the 20% pass-through deduction) may be potentially phased out as your gross income increases. For retirees, additional income may make up to 85% of your social security benefits taxable which then increases your taxable income.

Therefore your tax may be higher than your marginal bracket. Those in the highest 37% bracket sometimes pay higher effective taxes on marginal income.

Also don't forget about special taxes such as self-employment tax or the additional 0.9% Medicare taxes on high earners that is imposed on wages & self-employment income or the additional 3.8% investment income tax.

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Richard Pon CPA, CFP