Nicholas Frey

Marginal tax brackets are the foundation of the United States tax system. They determine the percentage of income that an individual or business owes to the government based on their income. In this article, we will discuss the basics of marginal tax brackets, how they work, and how they are put into practice.

What are marginal tax brackets?

Marginal tax brackets are a system of taxation in which different rates are applied to different levels of income. In the United States, the tax system is progressive, meaning that higher levels of income are taxed at higher rates. The tax rate increases as the income of an individual or business increases.

How do marginal tax brackets work?

Marginal tax brackets work by dividing taxable income into different levels, each of which is subject to a different tax rate. For example, for the tax year 2021, the IRS has set seven marginal tax brackets for individual taxpayers, ranging from 10% to 37%. The marginal tax rate is the rate at which the last dollar earned is taxed.

For instance, suppose an individual's taxable income is $50,000. In that case, they would pay 10% on the first $9,950 of their income, 12% on income between $9,951 and $40,525, and 22% on income between $40,526 and $50,000. Therefore, the individual's tax liability would be calculated as follows:

$9,950 * 10% = $995

($40,525 - $9,951) * 12% = $3,669.24

($50,000 - $40,526) * 22% = $2,076.72

Total tax liability: $6,741.96

It is important to note that marginal tax brackets only apply to taxable income. Taxable income is calculated by subtracting any deductions, credits, and exemptions from an individual's total income.

How are marginal tax brackets put into practice?

The IRS updates marginal tax brackets each year to account for inflation and changes in tax laws. Taxpayers can use the IRS tax tables or tax software to determine their tax liability based on their income and filing status.

For example, for the tax year 2021, the following marginal tax brackets and rates apply to single taxpayers:

10% on taxable income up to $9,950
12% on taxable income over $9,950 up to $40,525
22% on taxable income over $40,525 up to $86,375
24% on taxable income over $86,375 up to $164,925
32% on taxable income over $164,925 up to $209,425
35% on taxable income over $209,425 up to $523,600
37% on taxable income over $523,600

For married filing jointly taxpayers, the following marginal tax brackets and rates apply for the tax year 2021:

10% on taxable income up to $19,900
12% on taxable income over $19,900 up to $81,050
22% on taxable income over $81,050 up to $172,750
24% on taxable income over $172,750 up to $329,850
32% on taxable income over $329,850 up to $418,850
35% on taxable income over $418,850 up to $628,300
37% on taxable income over $628,300

John and Sarah are a married couple with one child. In the tax year 2021, they earned a total of $70,000 in taxable income. They decide to take the standard deduction, which is $25,100 for married filing jointly taxpayers with one child.
In addition, they are eligible for the child tax credit, which is $2,000 per child under age 17. Since they have one child, they can claim a credit of $2,000.
To calculate their tax liability, we need to first subtract the standard deduction from their taxable income:

$70,000 - $25,100 = $44,900

Next, we need to determine their tax liability based on the marginal tax rates for the tax year 2021. Here are the marginal tax rates for married filing jointly taxpayers with one child:

10% on taxable income up to $19,900
12% on taxable income over $19,900 up to $81,050
22% on taxable income over $81,050 up to $172,750
24% on taxable income over $172,750 up to $329,850
32% on taxable income over $329,850 up to $418,850
35% on taxable income over $418,850 up to $628,300
37% on taxable income over $628,300

Based on their taxable income of $44,900, John and Sarah fall into the 12% marginal tax bracket. Therefore, their tax liability is calculated as follows:
$19,900 * 10% = $1,990

($44,900 - $19,900) * 12% = $3,408

Total tax liability before child tax credit: $5,398

Since they have one child and are eligible for the child tax credit, they can reduce their tax liability by $2,000. This is a dollar-for-dollar credit, meaning that it reduces their tax liability by $2,000.

Total tax liability after child tax credit: $3,398

In this example, John and Sarah's tax liability is reduced from $5,398 to $3,398 thanks to the child tax credit. It's important to note that the child tax credit is subject to income limitations and phaseouts and that individual tax situations can vary greatly depending on factors such as income, deductions, credits, and other variables.

In conclusion, the United States' marginal tax brackets are used to calculate the amount of federal income tax owed by taxpayers based on their taxable income. The tax rates increase as taxable income increases, which means that taxpayers in higher income brackets pay a higher percentage of their income in taxes.

In practice, taxpayers can use the IRS tax tables or tax software to calculate their tax liability based on their income and filing status. Taxpayers may also be eligible for various deductions and credits that can reduce their tax liability.

In the example provided, we demonstrated how a married couple with one child and a taxable income of $70,000 can calculate their tax liability using the marginal tax rates and the standard deduction. We also showed how they could reduce their tax liability by claiming the child tax credit.

It's important for taxpayers to stay informed about changes to the tax code and seek professional advice if needed to ensure they are taking advantage of all available deductions and credits and accurately reporting their taxable income.