What is a marginal tax rate and why is it important?

This is a question that I definitely don’t ever remember learning in school! What’s more unfortunate is that most of us have never known what a marginal tax rate is, yet we pay it every day. I wanted to create this article because I wanted you to better understand what this concept means and how it impacts your life, especially with your paychecks and taxes. 

I will explain this concept and give you a little back story on how it came to be in the United States. Also, I will do my best to provide you with recommendations and suggestions to help lower your taxes and keep more of your hard-earned money. With that being said, let’s get started!

What is a marginal tax rate?

In a nutshell, the more money you make, your federal taxes are taxed in a higher income bracket. There are 7 different brackets you may be taxed in depending on your income; you may be taxed by all 7. 

According to the census conducted by the US government, the median household income is around $68,000 per year. Using this example, we can see the chart below on how much tax you owe per bracket. Let’s use the median household income of $68,000 per year. 

The first thing you see is anything in between $0 to $20,550 would be taxed at 10%. Since the $68,000 yearly income household still claims more income, they would be taxed by the second bracket. This means that they would pay $2,055 + 12% on all of the money between $20,550 to $83,550. The grand total for your household owed that year is $7,749 in taxes according to the marginal tax rate, which can also be coined the progressive tax rate. 

In the example of a family earning $68,000 per year, the federal income tax bracket would be 12% because most of their money was taxed in that bracket. However, let’s say that the family instead reported earning $87,000 to the IRS for tax season. The remaining $3,450 would fall into the third bracket and be taxed at 22%. Your expected tax bracket is 12%, so your marginal tax rate is 22%.

Marginal tax rates became more popular and widespread during WWII. Learn about why we have taxes and why we pay for them. To pay for the war, Americans began to see posters, videos, and radio broadcasts advertising the importance of giving your hard-earned money to help defeat the enemies. It was sold as a patriotic right to help further entice Americans to help fight the war through their wallets. Around the end of the war, the highest marginal tax rate a wealthy person could be taxed at was around 94% (compared to today’s 37%). 

Meaning that most of your money would have gone to support the war through taxes you were obligated to pay during war time. It finally went back down to around 28% after Reagan left office and has remained under 40% ever since that time. 

If the marginal tax rates continue to increase in the future, the lower to middle-class population will see less and less income. The more you try to earn during overtime, it will just be taxed at a higher rate.

Strategies!

After knowing all of this, I am sure you are in the same boat as me thinking, screw that, tell me how I can lower my marginal tax rates asap!! There are many strategies when filing taxes every year (usually on April 15th is the deadline). These strategies can help give you a tax break and put money back into your pocket from the government. These are some popular solutions that I have also used to get tax refunds, usually over $1200+ back from the IRS.

• DONATION: donating, donating, donating can really benefit you. Contributing to organizations and companies that fall under non-profits can give you a tax write-off for your contributions. This strategy does not just have to be cash you donate but also items and material objects you give to the organization. Keep track of the price of things you have contributed over the year. 

• RETIREMENT FUNDING: the IRS wants to reward you for planning for the future and stacking away money for yourself or your loved ones. The government loves the idea of you being able to take care of yourself and your family without relying on the government. Hence you are receiving some credit back towards your refund for having a retirement plan. 

• CHILDREN: Anyone with children can always claim them on their taxes and receive tax write-offs for all of the care & money you provide for their well-being. As a parent, you deserve to get a return for the hard work and investments you have made for your children! 

• BUSINESS EXPENSES: this is for anyone that has a business, side business, side hustle, or works from home out of an “office” you created. ALL of these things can be filed on your taxes, and you can mark them as a business expense. You deserve to be refunded the money you invest in the business category. 

• EDUCATION: any money you have spent towards the education category can be marked down as an education expense. You can fill that away on your taxes. The IRS wants to reward you for furthering your education and elective courses. 

• HOMEOWNER EXPENSES: many house-related purchases and expenses can be marked on your taxes to be filed for a potential refund.

• HEALTHCARE: this is a very important area that many people forget to put down in their taxes. Anything health-related that you make payments to may help lower how much you owe in taxes. You can insert the amount you have spent on hospital or healthcare bills. As well as if you have health savings accounts that you are actively saving money into.

This concludes today’s article, and I hope that it was helpful to you and got you thinking more about your taxes. I always want to hear your thoughts and questions.

Please email me your questions and leave comments below because I want to know what you think. Learn about if you should hire a tax professional or do it yourself! It is always essential to research before moving forward with the ideas presented above, as everyone’s situation is different. You want to make sure you are making the best decision for yourself and not potentially missing out on more money you can receive from a tax refund.

Check out the website to keep reading more!

And remember, like Earl Nightingale said, “Everything begins with an idea.” See you again next time!