2011 Marginal Tax Rates: Reduce Your Taxable Income

December 6, 2011 | By: TaxCure Staff

Reduce Taxable IncomeOne of the biggest sources of confusion when it comes to taxes is the rate at which we are taxed. At first glance, it seems fairly straightforward: Your tax bracket determines how much you are taxed. If you make $100,000 a year, you fall into the 28% tax bracket, so you owe $28,000, right?

Not so fast. Before you get to the point of deciding how much you owe in taxes, there are a few steps to go through.

Reducing Your Taxable Income

First of all, it is important to understand that your tax bracket is determined by your taxable income. If you make $100,000 a year, that entire amount isn’t going to be taxed. In fact, after you account for your deductions and exemptions, instead of being taxed on your $100,000 gross income, you are likely to be taxed on between $65,000 and $75,000 (depending on how your income is reduced). This amount is known as your taxable income. If you have enough deductions to put you at around $67,000 in income, and you are married filing jointly, you are in the 15% tax bracket – not the 28%.

But, even in this case, your taxes aren’t figured by taking 15% of that $67,000. Marginal tax rates don’t work like that.

Marginal Tax Rates

In actuality, all of your income is taxed at a different rate, progressing from the lowest bracket, up through your marginal tax bracket. So, if you are in the 15% tax bracket, some of your income is taxed at 10%, and some at 15%.

Marginal Tax Rates


Above, you can see a table with 2011 marginal tax brackets. If you have $67,000 in taxable income, and your status is married filing jointly, here’s how it would work:

  • Your income up to $17,000 is taxed at 10%, totaling $1,700
  • Your remaining income ($50,000) is taxed at 15%, totaling $7,500
  • Add the two, and your tax is $9,200

In reality, you are only paying 9.2% of your gross income in taxes. The same principle works for someone in a higher tax bracket as well. What if that $100,000 was your taxable income, rather than your gross? In that case, you would progress through the tax brackets as follows:

  • Income up to $17,000 taxed at 10%: $1,700
  • The next $52,000 of income (bringing it up to $69,000) at 15%: $10,350
  • Final $31,000 of income at 25%: $7,750
  • Total Tax = $19,800

So, even though someone making $100,000 in taxable income is in the 25% tax bracket, he or she is paying a smaller portion of that in taxes – 19.8% of taxable income. If his or her gross income were larger, at $120,000 a year, the true percentage of income paid in taxes would be lower: 16.5%.

If you don’t understand how marginal tax rates work, it can be misleading to see your tax bracket. And, because of the way income is taxed in our system, moving up a tax bracket does have as big of an impact as many would think. In our example of $67,000 in taxable income, if the earner made $71,000 instead, moving up to the 25% tax bracket, the addition to his or her taxes would be $3,350, bringing the total to $12,550, or 12.55% of the gross $100,000 income. It’s a lot gentler than jumping from paying 15% on $67,000 to paying 25% on $71,000, which would be a difference of $7,700.

Bottom Line

Understand how marginal tax rates work, and you will have a better understanding of how you are taxed.