Marginal tax brackets are a frequently misunderstood topic. It’s not uncommon for someone to say they don’t want a raise because it will put them in a higher tax bracket and force them to pay more taxes on the money they earn. They believe they would be better off not receiving the raise in the first place. This is a common misconception, but thankfully, that is not how marginal tax rates work.
For example, let’s say you receive a salary increase that takes your final salary from the 12% tax bracket to the 22% tax bracket. Your raise doesn’t place all your income to the 22% tax bracket. You only pay the higher taxes on the amount that falls within the 22% tax bracket.
We’ll show you the income levels for each tax bracket and some examples of income tax brackets and how marginal taxes actually work. You can use these to calculate your effective tax bracket or the amount of taxes you actually pay on all your income.
Table of Contents
Understanding Marginal Tax Rates
Tax planning is a fundamental aspect of financial planning. To fully understand how tax planning works, it’s important to understand what your marginal tax rate is.
A marginal tax rate systems is a “gradual” tax schedule. In effect, the amount of taxes you pay increases as your income increases. The IRS places the marginal tax rates into brackets, making the marginal tax formula easier to understand and compute by hand.
Let’s look at the 2023 federal tax brackets to see this in action.
What Are Tax Brackets?
Understanding your income tax bracket is the basis of sound tax planning. For federal tax purposes (and for most states that do not have a flat income tax), income tax brackets state the amount of tax that you’ll pay for income earned within that bracket.
For example, in 2023, a married couple (filing jointly) making less than $22,000 is taxed at 10% of their income. Thus, they’re in the 10% tax bracket.
Once they make more than $22,000, they are taxed at 12% for their income above $22,000. (They will still be taxed at 10% for the first $22,000 they earn.) Now, they’re in the 12% tax bracket and will be until they earn more $89,450. Then, they’ll move up to the 22% tax bracket, where they’ll pay 22% on any income above $89,450, and so on.
Once you determine what income tax bracket you’re in, then your marginal tax rate is simply the applicable tax on your next dollar of earned income. For example, if you are a single filer in the 22% tax bracket, then your marginal tax rate is 22%. For every additional dollar you earn over $44,725, you’ll pay an additional 22 cents in tax. Conversely, for each dollar of decreased taxable income, you’ll save 22 cents in tax.
What Does the Marginal Tax Rate Mean?
Now that we know what the marginal tax rate is, we can apply it to tax planning. You can use your tax rate to evaluate every decision for tax savings and after-tax financial impact.
Financial decisions that might be very wise in one tax bracket (such as accelerating or postponing taxable income) might not be prudent in another.
Let’s use tax-loss harvesting as an example.
Suppose you bought a stock six months ago. Since then, a series of developments and bad earnings reports has convinced you to sell.
You’re trying to decide whether to sell the stock at the end of the year or at the beginning of next year.
If you’re in the 32% tax bracket but expect to be in a lower bracket next year, you might want to sell now. But, if you’re in the 12% tax bracket but expect to be in a higher tax bracket next year, you might want to wait to sell until next year, so you can lower your tax burden when it’s highest.
This is a basic example of how marginal tax brackets affect tax planning.
How Do I Find My Marginal Tax Rate?
To find your previous year’s marginal tax rate, you only need your tax return (Form 1040 or Form 1040-SR). Look at Line 15, which correlates to taxable income. Once you determine your taxable income, you can refer to the tax brackets below to determine your marginal tax bracket. Keep in mind your filing status (single, married filing jointly, married filing separately or head of household), particularly if your status recently changed.
2023 Federal Tax Rates, Standard Deductions and Capital Gains
Here are the current tax rates.
You can use this information for short and long-term tax planning. Knowing how your tax rate will change can help you time important decisions like Roth IRA conversions, selling stocks for short-term or long-term capital gains, making charitable donations and other moves that will impact your tax return.
2023 Federal Income Tax Brackets
| 2023 Marginal Tax Rate | Single Individuals Taxable Income Above | Married Filing Jointly or Qualified Widow(er) Taxable Income Above | Head of Household Taxable Income Above | Married Filing Separately |
|---|---|---|---|---|
| 10% | $0 | $0 | $0 | $0 |
| 12% | $11,000 | $22,500 | $15,700 | $11,000 |
| 22% | $44,725 | $89,450 | $59,850 | $44,725 |
| 24% | $95,375 | $190,750 | $95,350 | $95,375 |
| 32% | $182,100 | $364,200 | $182,100 | $182,100 |
| 35% | $231,250 | $462,500 | $231,250 | $231,250 |
| 37% | $578,125 | $693,750 | $578,100 | $346,875 |
2023 Standard Deductions
The standard deduction is how much taxpayers can deduct from their income before paying income tax. You can choose to apply the standard deduction or itemize deductions, whichever results in the best tax return for your situation.
The Tax Cuts and Jobs Act of 2017 substantially increased the standard deduction, removed personal exemptions and decreased the amount taxpayers could deduct for SALT taxes (state and local taxes, including state and property taxes). Many of these changes will expire in 2025, and it may become easier for many people to claim deductions. Here are the current standard deductions:
| Filing Status | Standard Deduction Tax Year - 2022 | Standard Deduction Tax Year - 2023 |
|---|---|---|
| Single | $12,950 | $13,850 |
| Married Filing Separately | $12,950 | $13,850 |
| Married Filing Jointly | $25,900 | $27,700 |
| Head of Household | $19,400 | $20,800 |
It only makes sense to itemize tax deductions if they will be larger than the Standard Deduction.
2023 Long-Term Capital Gains Tax Rates
When you sell certain property or investments for a profit, you owe capital gains tax.
If you held your investment for less than a year, you’ll pay short-term capital gains tax. The IRS assesses these taxes as regular income and taxes them at your marginal income tax bracket.
You’ll pay long-term capital gains tax on investments that you held for longer than a year. They are taxed at the following schedule:
| 2023 Long-Term Capital Gains Tax Rate | 0% | 15% | 20% |
|---|---|---|---|
| Single Filers | $0 - $44,625 | $44,625 - $492,300 | Over $492,300 |
| Married Filing Jointly | $0 - $89,250 | $89,2501 - $553,850 | Over $553,850 |
| Head of Household | $0 - $59,750 | $59,750 - $523,050 | Over $523,050 |
| Married Filing Separately | $0 - $44,625 | $40,401-$523,050 | Over $523,050 |
Some investments, such as gold or collectibles, do not follow the capital gains guidelines. How you’ll pay taxes on them depends on whether you’ve held them long- or short-term.
Applying Federal Tax Rates to Your Situation
As you can see from the above federal tax bracket table, this is a gradual tax system. You won’t pay the corresponding income tax rate on all your income – just on the income you earn above each tax threshold.
For example, if you are married filing jointly and receive a raise from $89,450 to $90,000, the 22% tax bracket will not apply to all of your income — it will only apply to income earned above the 12% threshold (in this case, $550). These gradual tax rates add up to your effective tax rate.
How to Calculate Your Effective Tax Rate
Here’s an example to show how effective tax rate calculations work.
Let’s say you’re a married couple filing jointly with $100,000 of taxable income (after deductions and exemptions). You’re in the 22% tax bracket but you don’t actually pay $22,000 in federal taxes.
Instead, you pay:
- 10% on the first $22,000 of income: $2,200
- 12% on income over $22,000 but less than $89,450: $8,094
- 22% on income from over $89,450 but less than $178,150: $2,321
In total, you’d only pay $12,615, before factoring in deductions.
So, in this example, the weighted, or effective tax bracket, is 12.615%.
Note: This is a simplified example and does not include any deductions, state taxes or local taxes. Use a state tax calculator when you file your taxes, or file with tax software. Most tax software programs, including MilTax, TurboTax and H&R Block, can calculate state taxes, deductions, tax credits and more.
MORE: The Military Wallet Readers save $25 on H&R Block Tax Services!
Using Marginal Tax Rates for Tax Planning
You can use your knowledge of the marginal tax rate system to reduce your taxes if you are near one of the tax bracket limits. All you need to do is bring your final number below the threshold.
For example, if you are married filing jointly and earn $91,450, you can contribute $2,000 to your 401(k) and avoid paying the higher tax rate on $2,000.
The marginal tax bracket on the amount over $89,450 would be 22%. By dropping back down to the 12% tax bracket, you can avoid paying 10% extra in taxes paid for that $2,000. So your 401(k) contributions in this situation would save you $200 in federal taxes.
While this is a simplified example, you can see that the tax savings can easily add up, depending on how much you can shave from your marginal tax rate.
Marginal Tax Rate Case Study
Let’s consider a young couple, Joe and Jane Doe, who want to convert their traditional IRA to a Roth IRA, to avoid paying taxes on their earnings. It makes sense to do this if they expect to be in a higher tax bracket in their retirement years when they are drawing from their IRA.
However, they’ll have to pay taxes on any traditional IRA funds that they convert, so it’s better to make the conversion when they’re in a lower tax bracket.
So, let’s calculate their tax bracket. Joe is a homemaker and Jane is an O-3 in the Air Force. She’s been in for six years, so her monthly income is $6,780.30. Assuming they have no other taxable income, this puts their 2023 annual taxable income at $81,364 (rounded up to the nearest dollar). So, they’d be in the 12% tax bracket, assuming they have no tax exemptions or deductions that would reduce their taxable income, (which is what we’ll assume here for simplicity’s sake).
The Does’ traditional IRA account has $50,000 in it.
Joe and Jane want to convert as much as they can but stay within their current marginal tax rate.
A quick look at the tax tables shows that they’ll remain in the 12% bracket until their income reaches $89,450. So, they could convert $8,086 this year at 12%. If they converted any more of their IRA this year, they would pay 22% of every dollar over $8,068.
Let’s look at their options:
- They could convert the entire amount this year. They would pay a total of $10,191.40. This includes $970.32 for converting $8,086 at the 12% rate plus $9,221.08 for converting the remaining $41,914 at the 22% rate.
- They could convert up to the 12% limit without going over. In doing so, they would pay $970.32 in taxes this year. They could revisit this in future years to take advantage of their 12% tax bracket. If they could convert the full amount at the 12% bracket, they would pay a total of $6,000 in taxes, saving them about $3,220 compared to a one-time conversion.
- They could choose not to convert at this time. They could make this for any number of reasons. Perhaps they found a better investment opportunity, or maybe the tax rules changed. Or, perhaps there’s an upcoming deployment that allows them to convert some of their money at the 10% bracket.
Again, this is a simplified example. When you’re considering your situation, be sure to factor in tax exemptions, tax deductions and any tax-deferred contributions to a traditional IRA, Thrift Savings Plan, or 401(k).
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Monica Kueny says
Thank you very much for your informative review of tax brackets, as well as tax planning based on brackets, whether current or expected in the future. I’m 60, and just starting my financial education beyond the basics. I suppose some would say tax planning is basic financial knowledge, but not for me unfortunately! I appreciate your clear explanation and examples. Thank you again, and Happy Holidays to you and your family!
Chris says
I’m in the top 1% this year. Last year I lost $600,000. The year before that, I lost $200k. The year before that I was in the top 1%. I make a living by being an entrepreneur and taking risk. Without risk I could have a more steady income stream, but I would never make a lot of money. Its a necessary evil. Most in the Top 1% are entrepreneurs like me. If you jack the marginal tax rates to the moon, I am that much less incentivized to take that risk and make that money. At some point, I will take what savings I have left, and go to the golf course. Why would I risk a penny, if I get little of the upside? Between state taxes in 4 states, county taxes, city taxes, franchise taxes, “nominal fees”, accounting fees to prepare for it (over $40,000 to accountants, and some other huge number to attorney’s), opportunity cost in lost time making deals which was spent prepping for taxes, not counting any property taxes, vehicle, gas taxes etc etc…I paid over 55% of my income to some government. After next year, that same number would be close to 65%. Then you throw in all the other taxes that aren’t “income taxes”, and its a huge percent of my income paying for government junk. Those 90% tax brackets of the 50’s are not the same, because they had a million deductions and exceptions. The top earners still paid in less total income to the government than we do now.
Why put myself through all that headache? If I can earn a living off my savings I won’t have to take any real risk, I can sleep well at night, I can hang out with friends and family. At some point, I will go home instead of providing for everyone else and the government largess.
By making only high earners pay the tax, you effectively shut the door to the path to the upper class. I was not born in the upper class, but I want to get there. To do that I must take risks. If there is no pay off, I will never attempt it. America becomes France.
Don Devaney says
What do I do with my TSP money when I retire next year? (about $8OOK)
fredct says
Well you need an overall retirement plan, but the easiest answer is probably leave it where it is, and just make sure it’s in a reasonable mix. You are to be congratulated for saving that much. A simple rule of thumb is you can withdraw 4% of your assets with a good chance that they will last in perpetuity. So that gives you $32K of income per year from that account. Not sure what other accounts or other sources of income (pension, SS) you have available.
Jarhead says
Greg, I like your idea a lot. I would say the line to make the cutoff at would be the poverty line. If I am not mistaken they set a poverty line for any family size from single to however many kids you have.
I also think that you shouldn’t get more than you pay in. Last year my return was nearly half of my taxable income and more than 10,000 dollars more than I had withheld from my check. Basically whoever didn’t get all that they paid in back gave me more than 10,000 dollars mostly because I bought a house. I am not going to not take it but I still don’t think it makes fiscal sense for the G’met to give me that kind of money.
Jarhead says
The whole tax code needs to be rewritten. I think they need to end all deductions and go to a flat tax. I will pay more obviously (got more than I had withheld last year), but the country will be the better for it. Plus we can get rid of the IRS and save money in government. There might be a few people losing jobs, but do we really need that many tax lawyers? It is time for DC to quit pandering to the voters, not worry about getting re-elected and do what is right for the country not themselves.
Greg McFarlane says
It’s a crying shame Jarhead’s idea isn’t on the top of the national dialogue.
Tell me what would be wrong with this: a standard $20,000 deduction for everyone, 17% on the remainder. That way a guy making $20,000 pays nothing, a guy making $20,001 pays 17¢, and Kobe Bryant pays $4,213,662.50 (on the $24,806,250 he receives from the Lakers, excluding other sources.)
In theory, this idea of One Deduction/Constant Rate On The Remainder should have bipartisan support between the tax-and-spend Democrats and the ostensibly fiscally conservative Republicans. The only thing they’d need to reach a consensus on is the numbers; how big a deduction to grant, and how big a rate to charge on the rest. Perhaps Henry Waxman would argue that the numbers should be $100,000 and 40%, while Ron Paul would prefer $0 and 1%; Congress could debate the final numbers for as long as it takes.
But anything’s better than we’ve got now, at least until we see next year’s even more complex tax code.
Kate Horrell says
Wow, Ryan. I knew that changes were possible, but I didn’t realize how big the possible changes are. In theory, my family could be paying WAY more taxes next year. (And we’re already dealing with a huge increase this year.)
Every year, I estimate what our tax liability will be in hopes of coming out with close to the right amount of withholding. Every year, our situation or the law changes and my estimates are useless. I’m about to give up 🙂
Ryan says
Kate, I gave up trying to match withholdings as soon as I became a business owner. 😉
These potential changes are huge and I can’t think many of them will change in some form before they are allowed to expire. Reverting to the pre 2001 taxes would be the most unpopular move President Obama would have made to that point in his administration. I think we will see some extensions and modifications, but who knows how many, when, and in which form.
fredct says
Unless your income has gone well up (then good for you 🙂 ), I don’t know why that would be. There were few significant tax changes from last year to this, and those I know of generally were lower taxes.
fredct says
To be clear, my last post was in response to Kate’s comment: “And we’re already dealing with a huge increase this year.”
Kate Horrell says
You are right, Fred. Due to my husband’s military service, our taxable income is erratic. He was in a tax-exempt combat zone for all of 2009, so we are facing a huge jump in taxable income for 2010.
We appreciate the tax-exempt status – it makes the whole “imminent danger” thing slightly more palatable – but it also makes tax planning nearly useless.
Rahul says
Get some perspective folks !
When you look around in the world and see how easy we have it in USA — and I don’t just mean lower tax rates — a great majority of us would stop whining !
fredct says
“That would be fine if that money were being used efficiently. The reality is that the balance of your 400K is just being squandard.”
John, defined squandered? In what way? Where is it going? Just being used for something you don’t like? Being used for something poorly? What projects? What would you cut?
Or is it just ideology? Do you just have a generally ‘feeling’ that you know to be true without any facts or definitions?
fredct says
> I wonder why forbes excludes Singapore or Hong Kong with their 20%, and
> 15% flat tax structures.
I don’t know. Good question. Although I’d be interested what their *total tax burden* is. For instance, Singapore has a 7% Value-Added-Tax as well.
Here’s another more-inclusive chart, although I don’t know their methods:
http://www.photius.com/rankings/tax_burden_country_ranks_2009.html
According to that, Singapore does have a lower tax burden than the US by about 8%, but that’s not a gigantic difference. And of course they don’t have nearly the military technology or military presence that the US does.
Hong Kong’s tax rate is indeed very low (about half the US’s). I’d be interested to find out more about that, but my google searches have been inconclusive. Hong Kong of course hasn’t been an independent country in over a decade, so I have to wonder if its really an apples-to-apples comparison or not.
> I really hope you do make $400k+ one day.
So do I! And if I do, I’ll be more than accepting of the taxes paid to live in this country. I’ll live well below my means and it won’t be an issue.
Heck, sometimes I feel that to own a nice home in the greater NYC area, you need to make that much! 😛
Joe Plemon says
Ryan,
While the banter about paying taxes on $400,000 is intriguing, I simply want to thank you for putting the brackets and explantions on this post. This is stuff I know, but sometimes things I “know” start to get fuzzy. It is always good for me to refresh my brain by reading it fresh.
fredct says
A “40% tax rate will *definitely* make people work less”. When I’m at a work my level of motivation is due to a lot of things… how I’m treated by my supervisors, your level of commitment to the particular project, your intellectual interested in your tasks, your scheduled commitment… I can’t say I’d ever thought ‘hmmm, whats my marginal tax bracket again?’
The idea that a historical very-moderate top tax bracket (it’s been as high as 94% in the 40’s and 90% in the 50’s) will prevent people from working hard is ideology-based nonsense. (Here’s a graph of top tax rates over time – http://en.wikipedia.org/wiki/File:MarginalIncomeTax.svg
By the way, when you consider the employee & employer portions of payroll taxes, the 25% bracket actually pay a higher marginal rate than the 35% tax bracket payers.
Financial Samurai says
Fredct – Just let me know how you feel when you start making $400,000+.
fredct says
I doubt I ever will, but if I do, I will be very grateful to this country for allowing me to be in a position when I am so well off, and also recognize that I’m lucky to be in a country where making $400K lets me keep over $280K of it, a situation that would be hard to find in nearly every other developed country in the world.
fredct says
In case you doubt that the US is one of the least taxed countries… http://www.forbes.com/global/2006/0522/032a.html
Unless you want to move to Mexico, you’re not going to really find a significant improvement. Its not always income taxes, there’s VAT, payroll taxes, etc, but overall the US is about tied with Japan & Korea, and less than basically everyone else.
Financial Samurai says
I wonder why forbes excludes Singapore or Hong Kong with their 20%, and 15% flat tax structures. Those guys have budget surpluses and are thriving. Another vote for the flat tax.
I really hope you do make $400k+ one day.
John says
That would be fine if that money were being used efficiently. The reality is that the balance of your 400K is just being squandard. It is not even needed by the Fed, just the big spenders on the hill. And the government will not control or cut their spending. They will just come after more of your money. For you to keep that 400K and invest it accordingly makes you independent. No need for the Big Gubament. But the question is FRED, can you survive without Big Guberment taking care of you. Be careful – you will have no one to blame but yourself if you fail.
Ronnie says
Honestly, if I’m making $400,000 and have to pay $120,000 in taxes, I’m still really okay with that. I can make do JUST FINE on that $280,000 in income. I think the problem comes when people forget that they will have to pay taxes on the $400,000. My and my boyfriend’s combined incomes will approach that in the not too distant future, once he finishes his residency, and we’ll figure out a way to make do :D!
John says
Ronnie, I use to say the some things when I was making very little money. I remember being in the Army in the early 80s, making about 18,000 a year and saying if I could just make 40,000 I could make due. The fact is that with more earnings comes an increased lifestyle for you and your family. In addition, to make that kind of money requires a lot of hard work, valuable time and physical stresses of daily life. When you see what it takes to make that kind of money and how easily people will vote their own interests to take it from you and villify you in doing so, that $120000 will become more important to you. Making due will not be so fine then. Your hard work and accomplishments will become of so much valuable to you.
fredct says
If you continue to increase your living standard dollar-for-dollar with your income, then you have no one but yourself to blame. Its called living below your means and not doing so is foolhardy.
If your values change such that money and keeping-up-with-the-jones’ is more important to you than financial security, then there’s no reason the federal government should indulge you in that.
Financial Samurai says
Your tax account won’t be able to hide much, other than deduct some business expenses and mortgage interest. That’s what you will find my man. All the deductions “regular folks” get, all are PHASED OUT for the highest tax brackets! And then there’s AMT.
It may be good for the ego to earn 400K+, but you will start to wonder why bother trying with such high taxes.
Flat tax for all!
fredct says
But Financial Samurai has missed the main point of this post! *At* $400K (or whatever the specific threshold is), how much extra money do you pay? $0! Its only the money *over* that amount that is taxed any higher
If you make $600K, then the difference between the current 35% bracket and increase to 40% after the current law expires, costs you how much? 5% times the $200K that you’re over the $400K cutoff. Or… $10K.
A nice chunk of change, no doubt… but are you telling me that people making $600K are going to stop working so hard and drop back to < $400K over a $10,000 change? Hogwash.
Financial Samurai says
Eh? I used a 30% effective tax rate on 400K (400K X 30% = 120K).
Yes, if someone has to pay a whopping 40% tax on any income above $370,000 they will definitely try and work less and spread their money in various vehicles to avoid. Your argument is off. An extra $12,000 in taxes b/c of the 5% bump IS a lot. You can then say, at 45% it’s still ok b/c it’s only another $12,000 in taxes at $600,000 vs. $370,000. It never ends.
You don’t know, b/c you don’t make 600K.
Tyler WebCPA says
Thanks for dispelling a very popular myth; I have people refuse to believe me when I tell them that because the belief is so deeply entrenched. Being sensitive to your tax bracket can be very important to your financial planning. For example, I think that most younger people would be better off with a Roth retirement plan than a traditional IRA or 401(k),
Financial Samurai says
And don’t forget the 40% tax bracket starting in 2011! We are going to tax people to oblivion, and we’re goig to like it! Go big government!
I encourage all of you big earns to move your 2011 income to 2010 if possible.
fredct says
If my income is anywhere approaching $400K in 2011, I’ll be thrilled, not dreading it.
Ryan says
I’ll be happy to make $400k in any year, not just 2011. 😉
Ryan says
FS, If I’m bringing in that much money, I will have a kick *** accountant help me find ways to shelter a goodly portion of it. If I’m earning $400,000 after every possible deduction and credit, then wow… that would be an amazing year. Sure, paying a lot of taxes isn’t fun… but my expenses are pretty minimal, so that would be amazing cash flow as far as I’m concerned. 🙂
Financial Samurai says
But let me ask you Ryan, would you still be happy when you have to pay $120,000 in taxes and only take home $280,000? That is the issue at hand. Work more, pay MORE tax!
Financial Samurai says
Better start cracking! You got 1 year.
fredct says
Don’t forget the o% tax bracket! That is, all income below the amount of your total personal exemption plus your standard or itemized deductions plus any ‘above the line’ deductions you can claim!
To put it in English, at least the first $8000+ for individuals or $16,000+ for married couples (and maybe much more, especially if you own a home) is taxed at 0% before you even get to the 10% bracket.
Also subtract off anything you put into a 401k or IRA as part of that 0% bracket.