marginal tax rate investment & finance definition
The
tax rate that is paid on an additional dollar of taxable income. In progressive
tax systems, the tax rate paid increases as income rises. The U.S. and many
European companies have a progressive tax system. For example, suppose the tax
rate is 25% for the first $25,000 of a person’s income and 35% for the next
$10,000. A person earning $30,000 a year would have a marginal tax rate of 35%,
as any additional income earned by the person would be taxed at 35%. The actual
percentage rate of tax that ends up being paid will vary according to the
amount of deductions that are taken.
See marginal tax rate in Wall Street Words
The percentage of extra income received that must be paid in taxes. It is crucial for an investor to know his or her marginal tax rate in order to make intelligent investment decisions. For example, a decision whether or not to purchase municipal bonds is primarily a function of the investor's marginal tax rate. Also called
tax bracket. See also
progressive tax.
How to calculate your marginal tax rate and how to use that rate for making sound investment decisions.
Taxes are determined by calculations based on taxable income. Tax rates (or brackets) start at 10%, rising as high as 39.1% currently. Taxable income is broken down into certain levels, each to which a tax bracket applies. The highest bracket relative to taxable income is called your marginal tax rate. Each additional dollar of income or deduction increases or reduces tax by the percentage determined to be your marginal tax bracket. Use the calculations in investment decisions by comparing aftertax returns to tax-free securities or to growth securities that might be held until retirement, when tax brackets may be lower.
Jeffrey S. Levine, CPA, MST, Alkon & Levine, PC, Newton, MA
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