Definition
The marginal tax rate is the tax rate at which each earned dollar of income is taxed. The percentage of tax in each bracket increases as earned income increases. This tax bracket only defines what your federal tax burden (requirement) is and does not include any state or local taxes!
2018 Reform
The most recent and largest tax reform in the past 30 years has been nicknamed the Tax Cuts and Jobs Act and includes a revision of the marginal tax bracket metrics. With 7 brackets this reform at its core is designed to keep more money in the tax payer’s pocket for a majority of the population. The chart below shows what percentage of each dollar is taxed depending on gross income.
| 2018 | Individuals | Married Filing Jointly |
| 10% | Up to $9,525 | Up to $19,050 |
| 12% | $9,526 – $38,700 | $19,051 – $77,400 |
| 22% | $38,701 – $82,500 | $77,401 – $165,000 |
| 24% | $82,501 – $157,500 | $165,001 – $315,000 |
| 32% | $157,501 – $200,000 | $315,001 – $400,000 |
| 35% | $200,001 – $500,000 | $400,001 – $600,000 |
| 37% | over $500,000 | over $600,000 |
At the time of this article the 2018 tax season just finished and there were a lot of discussions among my co-workers how this is the first year in a long time that they had to pay. This peaked my curiosity so I figured I would share my results with an example below.
Examples
Single man John earns $94,000 in 2018. Below is a chart explaining how he is taxed according to the newer standards.
| 2018 | Earned Money | Tax |
| 10% | $9,525 | $952.5 |
| 12% | $29,175 | $3,501 |
| 22% | $43,800 | $9,636 |
| 24% | $11,500 | $2,760 |
| Total | $94,000 | $16,849.5 |
The first $9,525 dollars that John earned in 2018 was taxed at 10% which results in a tax requirement of $952.50 so far. The next $29,175 that John earned was taxed at 12%. At this point John has earned $38,700 dollars ($9,525 + $29,175). The next $43,800 that john earned was taxed at 22% which adds another $9,636 of tax burden. At this point John has earned a total of $82,500. The last $11,500 he earns is taxed at 24% and results in an additional $2,760.
To calculate Johns total tax burden for 2018 we have to add all of the numbers from each of the brackets. This results in John owing the federal government $16,849.50 (minus deductions and credits).
Through a simple google search you can see that the tax brackets were different prior to 2018. If we go through the same process for John with the 2017 bracket John would have had to owed $20,040. That’s $3,190.50 more than what John owed for the same amount of money earned!
The same process can be done for a married couple filing jointly. I went the same procedure as defined above but used the married filing jointly brackets. I found a couple who earned $150,000 in 2017 would have had to owe $28,977 and in 2018 would have to owe $24,879. That’s approximately $4,000 less the couple owed with the newer tax bracket.
Effective Tax Rate
From our example above we showed that John owed a total of $16,849 for the 2018 year. The typical train of thought is that because John made $94,000 he is in the 24% tax bracket and that all of his monies are taxed at 24%. If this were true then John would have been required to pay $22,560. Through our example above we showed that John only owed $16,849! In order to calculate John’s effective (actual) tax rate we simply divide the tax owed by his total income: $16,849/94,000 = 17.9%.
Summary
So, we started off this article with the attempt to explain why my co-workers had to pay, when they did their tax return, this year instead of receiving money like they had in previous years. What we just reviewed in this article was the amount of federal tax which is owed to the government based on the amount of income per year. If taxes were this straight forward then it would be obvious that the newer tax system is better. HOWEVER! Things get a lot more complicated once we add deductions and exemptions. To further this discussion and come up with the answer check out Tax Deductions and Exemptions.
