What Is A Marginal Tax Rate, And How Can You Use It To Save?

Saving money on marginal tax rate use does not need to be complicated. Here is a clear, no nonsense rundown of what works and how to make the most of it.

Key Takeaways

• SharePinTweetShare0 SharesOne financial term frequently used, but not consistently understood, is “Marginal Tax Rate” or Marginal Rate for short.
• It’s used so frequently that financial writers take its meaning for granted.
• Right now, let’s look at this term, understand what it means, what it’s not, and how we can apply this information to our advantage.
• Let’s take a look at a tax rate schedule and consider a couple examples.

Where the Real Savings Hide

Worth noting: as a single person, you gross $40,000 and pay $4180 in federal tax. You are in the 10% bracket, right?

When you divide these numbers, you get 10.45%, but this is your average rate. Begin with the $40,000 gross, and you first deduct $3,650 as your exemption, everyone gets one.

A Closer Look at Marginal Tax Rate Use

More importantly, it’s $3,650 you pay no tax on. Next, to keep it straightforward, I’ll assume you do not itemize.

As a single person you get a standard deduction of $5,700. I call the sum of these two numbers your “zero bracket.” It’s $9,350 a single person will pay no tax on.

What to Know About Marginal Tax Rate Use

Remember that this is subtracted from the gross $40,000, and produces a taxable income of $30,650. Now, let’s go to the table above.

The first $8,350 is taxed at 10% or $835, and the remaining $22,300 is taxed at 15% or $3,345. So, on $40,000 gross income, your marginal tax rate is 15%, even though your overall average tax is just over 10%.

How Marginal Tax Rate Use Really Works

As a rule, it wouldn’t take much more income to be taxed at a marginal 25%, but back to the table, only the taxable amount above $33,950 is taxed at 25%. How To Apply Marginal Rates To Save Highly interesting, you’re thinking, but how can you apply this to save on your taxes?

First, being aware of your current bracket and potential future tax bracket can assist you decide how to pick which retirement account method to apply, the traditional 401(k) or IRA, vs the Roth 401(k) or Roth IRA. Say you project you will have a taxable income this year of $35,000.

Getting the Most From Marginal Tax Rate Use

In short, the last $1050 is taxed at 25%, so I’d suggest picking to put only that amount in a traditional pre-tax account, the rest of the retirement money should be with post tax money, taxed at only 15%. Your property tax , interest on mortgage, and state income tax (these are the three large itemized deductions) just exceed $5700, but not by much, so you fill out the schedule A to itemize, but only get $100 or so beyond the standard deduction.

Here’s a method to squeeze some savings out of this situation: In odd years, make the next year’s January mortgage payment in December, so you’ll have 13 months interest in that year. Also pay an added six months of property tax from next year.

Tips That Make a Difference

Worth noting: last, make any charitable deductions in January and December of this year. This should increase your itemized deductions quite a bit, and in the even years, when you only pay 11 months of mortgage payments, and just 6 months property tax, you hop on the standard deduction again.

This strategy takes a little bit of effort but can result in quite a few hundred dollars in tax savings. Any questions on marginal rates?  Post a question, and we’ll answer it in the comments here.

Common Mistakes to Avoid

More importantly, this article was written by Joe from JoeTaxpayer.com. 2011 Federal Income Tax Brackets: IRS Marginal Tax RatesThe 2011 tax year promises to be one where there will be some significant changes to the marginal tax brackets.

What those changes exactly will… 2014 Federal Income Tax Brackets: IRS Marginal Tax RatesThe 2014 marginal tax rate tables have been released and there are mainly small changes in the tax rate ranges due to inflation. What does… 2012 Federal Income Tax Brackets: IRS Marginal Tax RatesThe 2012 tax rate tables are projected to remain essentially unchanged.A few rate income ranges and standard deductions will change slightly.

Frequently Asked Questions

How can I save money on marginal tax rate use?

Compare prices across a few retailers, look for active coupon codes, and time bigger buys around sales events. You are in the 10% bracket, right?.

Is it worth shopping around for marginal tax rate use?

Usually yes. When you divide these numbers, you get 10.45%, but this is your average rate.

Smart Ways to Save More on Marginal Tax Rate Use

• Leave items in your cart for a day; some stores send a follow up discount.
• Pair cashback with a coupon so you save twice on the same order.
• Stack a coupon code with an existing sale whenever the store allows it.
• Sign up for the retailer newsletter to catch first time and seasonal discounts.
• Compare the final price including shipping, not just the headline number.

Final Thoughts

Put these ideas to work and marginal tax rate use gets a lot less expensive. Bookmark this page, check back for fresh deals, and let the savings do the talking.

Originally published at biblemoneymatters.com.