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It is important to know your tax bracket and how this tax bracket can affect your income tax and the tax liability that you may have. Knowing and understanding your tax bracket can help you to plan for your retirement and how you should invest your hard-earned money. The marginal tax calculator will help you estimate your average tax rate, your current tax bracket, and your marginal tax rate. This calculator sorts through the tax brackets and filing options to calculate your true tax liability.
Marginal tax rates are used because they are considered to be the most fair; low income earners are taxed at a lower rate than high income earners. This is achieved by setting several tax brackets which earners’ incomes fall into. In the US, these brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The amount of salary the earner has in each bracket determines their taxable income:
10% - $0 to $9,275
15% - $9,275 to $37,650
25% - $37,650 to $91,150
28% - $91,150 to $190,150
33% - $190,150 to $413,350
35% - $413,350 to $415,050
39.6% - $415,050
However, the tax bracket does not determine the percentage of tax taken from the entire income. Instead, the income is taxed progressively. For example, a single person earning $100,000 per annum would be taxed as follows:
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: ($100,000 - $91,150) x 28% = $2,478
33%, 35% and 39.6% brackets are not applicable as the salary does not reach them.
Total tax: $927.50 $4,256.25 $13,375 $2,478 = $21,036.75 (21% average)
The dollar ranges are different depending on whether the person is filing as single, married, or head of household, while the tax brackets remain the same regardless.
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Many people think so, as it encourages a system where people are not taxed more than they can afford. However there are schools of thought which insist that this method of taxation can decrease levels of entrepreneurship and motivation by not incentivizing high earnings.
A common concern, but fortunately not based in truth. The marginal tax system protects against this, as you are only taxed the higher percentage on the amount of money you earn above that percentage’s threshold. The example above should explain this clearly in more detail.