Whether you received a bonus from work or are retired and considering taking an IRA distribution, understanding how that extra income impacts your taxes is important. I just had a client review meeting explaining tax brackets and realized it’s quite possible many people do not understand how their personal income taxes are calculated.
The confusing part for most people is understanding the difference between your marginal tax bracket and your effective tax rate.
Your marginal tax bracket is the rate that your next dollar of income would be taxed. For example:
Using the information below for a married couple filing jointly making a taxable income of 50,000, their marginal tax rate is 15%. Their first $18,450 of income is taxed at 10% for a total tax of $1,845 and the income over $18,450 is taxed at 15% up to $74,900. In this case if they made one more dollar in income it would be taxed at the 15% rate, so 15% is the marginal tax bracket.
If your joint taxable income was $200,000 you can see that your income tax is tiered at several levels. The table below makes it easy to calculate at any income, in this example your tax would be:
$29,387 on the first $151, 201 of your income + 28% times the amount over $151,201 or $13,664 = $42,051 total tax owed
The tiered tax brackets led to $42,051 in tax owed or 21% of the $200,000 taxable income.
Also, keep in mind that only the net/taxable income is taxed, and that is after deductions are taken. So if your actual gross income was $250,000 (before deductions) and your tax was $42,052, your effective tax was 16.8% ($42,052/250,000).
By using the tables below you can easily see what your marginal tax rate is and compute your effective rate by plugging your numbers into my examples above.
If you have any questions about this please feel free to call me to discuss. IRS Tax Table
Married Filing Jointly – Taxable Income Tax Rate
$0 to $18,450 10%
$18,451 to $74,900: $1,845.00 + 15% of the amount over $18,450
$74,901 to $151,200: $10,312.50 + 25% of the amount over $74,900
$151,201 to $230,450: $29,387.50 + 28% of the amount over $151,200
$230,451 to $411,500: $51,577.50 + 33% of the amount over $230,450
$411,501 to $464,850: $111,324.00 + 35% of the amount over $411,500
$464,851 or more: $129,996.50 + 39.6% of the amount over $464,850
Individual Taxable Income Tax Rate
$0 to $9,225 10%
$9,226 to $37,450: $922.50 + 15% of the amount over $9,225
$37,451 to $90,750: $5,156.25 + 25% of the amount over $37,450
$90,751 to $189,300: $18,481.25 + 28% of the amount over $90,750
$189,301 to $411,500: $46,075.25 + 33% of the amount over $189,300
$411,501 to $413,200: $119,401.25 + 35% of the amount over $411,500
$413,201 or more: $119,996.25 + 39.6% of the amount over $413,200