Marginal Tax Rates

Consumerism Commentary has a helpful summary of the 2009 tax brackets. As Flexo points out, the way tax brackets work is often misunderstood, and people often just think their income is all taxed at a higher amount than it really is. I decided to put together a tax chart that shows how the actual tax amounts break down, in this case for a single individual like me.

Here’s how the rates are explained:

Unmarried individuals (other than surviving spouses and heads of households):

If Taxable Income Is:	The Tax Is:
Not over $8,350	10% of the taxable income
Over $8,350 but not over $33,950	$835 plus 15% of the excess over $8,350
Over $33,950 but not over $82,250	$4,675 plus 25% of the excess over $33,950
Over $82,250 but not over $171,550	$16,750 plus 28% of the excess over $82,250
Over $171,550 but not over $372,950	$41,754 plus 33% of the excess over $171,550
Over $372,950	$108,216 plus 35% of the excess over $372,950

Here’s my spreadsheet of how it works out for income at each of those breaks, plus some higher levels (click for larger image):

As is often pointed out, the highest marginal rates used to be much higher a few decades ago, and now people at the highest income rates pay quite a bit less than they used to. What if we added some higher brackets? Here’s one scenario of how that might work, with the blue showing what would change and who would be affected:

My estimates for the percentage of the population affected were based on Wikipedia’s stats on household income in the USA. A lot of households in the higher income ranges actually have two income earners, so this is far from precise. I’m not sure what percentage of taxpayers are single earners as opposed to married filing jointly or head of household, etc.

There are a lot of other variables to consider– this is based on taxable income, and people at higher income levels are more likely to itemize and have more deductions to reduce their taxable earnings. It also doesn’t take into account other forms of income such as capital gains, which is taxed at lower rates– at the higher levels of wealth, much more income is likely to come from investment gains than a salary. And of course any state and local taxes would be in addition to these rates.

Regardless of all the subtleties, though, it’s important to understand the basic concept! As Flexo points out, sometimes people “mistakenly believe that earning $1 over the barrier into the next tax level would result in a significantly higher tax bill because all income would be taxed at a higher rate, but that's not true.” And someone with a salary of $100,000 might think they’re “in the 25% tax bracket,” but even that level of taxable income only results in about 22% going to federal tax, and of course if your gross salary is $100,000, your actual taxable income will be far less if you factor in deductions and 401k contributions.

Keep all that in mind, though I doubt it will make you that much happier the next time April 15 rolls around!

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