What is a Marginal Tax Rate?

Imagine you’re climbing a ladder of tax brackets, and each rung represents a different tax rate. The highest tax rate you encounter is called your marginal tax bracket. This bracket applies only to the portion of your income that falls within it, leaving the rest taxed at lower rates. It’s like a sliding scale where only a fraction of your hard-earned money is subject to the highest rate.

This means that different increments of your income are taxed at varying rates, and these rates progressively rise as you climb the ladder of the seven “marginal” levels in the current tax system. Fascinating, isn’t it?

This dynamic nature of marginal tax rates means that you may have multiple tax rates influencing the amount you owe the IRS.

It doesn’t matter if your taxable income is $40,000, $400,000, or even a whopping $40 million – the first $10,000 you earn will be taxed at the same rate of 10%. Similarly, the next $30,000 will be taxed at 12%. This pattern continues as you ascend through the various levels until you reach the pinnacle of tax brackets, where the rate caps at 37% for single filers once you exceed $539,900 in taxable income.

Under this system, everyone who earns income contributes a little something – everyone has “skin in the game.” However, higher earners pay higher rates on their top-end taxable income. It’s a fair and balanced approach that ensures everyone contributes based on their ability, creating a more equitable tax system.

Are you tired of feeling clueless about tax brackets and rates? Let’s face it, most of us don’t keep up with the nitty-gritty details. However, what if we told you that your hard-earned money and spending power could be influenced by the very same thing that impacts the ever-changing tax landscape? That’s right; we’re talking about inflation!

We all know about the seven U.S. federal tax rates—10%, 12%, 22%, 24%, 32%, 35%, and 37%. The tax rates are here to stay until 2025, thanks to the Tax Cuts and Jobs Act of 2017.

However, the income thresholds used to determine which tax bracket you fall into have experienced significant adjustments to account for inflation, which has caused the most substantial price increases in decades.

The Internal Revenue Service (IRS) makes these adjustments to avoid the dreaded “bracket creep.” Imagine being pushed into a higher income tax bracket or losing out on credits and deductions due to inflation. The IRS helps prevent such situations by ensuring that your tax bracket doesn’t skyrocket as your cost of living rises.

So, paying attention to tax brackets might just save you some money! In fact, the tax brackets for the 2023 tax year have already been released, and they show a significant increase of over 7% compared to last year’s modest 3% uptick.

Now that we’ve piqued your interest, let’s delve deeper. The tax brackets for the 2022-2023 season —the return you either filed by April 2023 or must now file by October 2023—as well as for the 2023 tax year—the return you’ll file in 2024— can be found on this blog post along with all the essential details to help you make informed financial decisions and maximize your tax efficiency!