How tax brackets work.
A tax bracket refers to a range of taxable income to which a certain tax rate applies. In the U.S., there are seven federal tax brackets that apply to different portions of your taxable income. For example, the first $0 to $18,550 of taxable income earned by a married couple filing jointly falls into the lowest tax bracket and is taxed at a rate of 10%. Taxable income from $18,551 to $75,300 falls into the next tax bracket, which is taxed at 15%.
This system, with different tax rates applying to various ranges of income, is called a progressive tax system.
What is a marginal tax rate?
Your marginal tax rate is the rate at which your next dollar of income is taxed. It’s important to remember that under the progressive tax system, your entire taxable income is not taxed at your marginal tax rate. Your marginal tax rate only applies to the top tier of your taxable income.
Why is it important to know my estimated tax bracket?
Knowing your marginal income tax bracket helps when you’re making decisions on things like deductions or whether municipal bonds make sense. For example, if your marginal tax bracket this year is 33%, and you claim a deduction of $2,000, it will reduce your taxes by $660. If your marginal tax bracket is 15% and you claim the same deduction, you’ll save $300.
If your 2016 filing status is:
Head of household
Married filing jointly or qualifying widow(er)
Married filing separately
|Over||But not over||The tax is|
|$9,276||$37,650||$927.50 plus 15% of the amount over $9,275|
|$37,651||$75,950||$5,183.75 plus 25% of the amount over $37,650|
|$75,951||$115,725||$14,758.75 plus 28% of the amount over $75,950|
|$115,726||$206,675||$25,895.75 plus 33% of the amount over $115,725|
|$206,676||$233,475||$55,909.25 plus 35% of the amount over $206,675|
|$233,476||--------||$65,289.25 plus 39.6% of the amount over $233,475|
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Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Schwab does not provide legal or tax advice.
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