Your Marginal Tax Bracket

This bracket is very important for tax planning purposes. In effect, it is the tax rate you pay on the last dollar of net taxable income, hence the term "marginal". Under our current tax laws, there are several tax brackets; the more money you make, the higher tax for that portion-or bracket-of money, For instance, a single individual with a taxable income of $67,000 would pay federal tax as follows: 15% on the first $27,050, 28% on the next $38,500, and 31% on the remaining $1,450, based on the projected 2001 tax rate schedule.

Thus, in this example, the marginal bracket would be 31%, and the tax payer would pay 31 cents on every extra dollar earned above the $65,550 level already being paid. It also means this taxpayer would save 31 cents on every extra dollar of tax deductions at this level. Examples of these allowable federal deductions are such items as interest expense, donations, taxes, medical, and misc. business expenses, to name a few. Taxpayers who also have deductions in such areas as rental property, capital losses, retirement plan deductions, and businesses of their own follow the same pattern.

Finally, the marginal bracket is important in evaluating the true return on different types of investments. By analyzing the gross income from the investment vs. the actual, after-tax yield, a "common denominator" can be found among various investments. So, if the taxpayer in the example we used made an extra investment that yielded 10%, the actual, after-yield on this from a marginal tax bracket standpoint would be 10% less the 31% tax, or 6.9%

Please contact Topolinski & Associates regarding more information on this topic.