Figuring your tax bracket

You may not know it, but the government charges you different tax rates for
different parts of your annual income. You pay less tax on the first dollars of
your earnings and more tax on the last dollars of your earnings. For example,
if you’re single and your taxable income totaled $50,000 during 2011, you
paid federal tax at the rate of 10 percent on the first $8,500, 15 percent on the
taxable income above $8,500 up to $34,500, and 25 percent on income above
$34,500 up to $50,000.
Your marginal tax rate is the rate of tax that you pay on your last, or so-called
highest, dollars of income. In the example of a single person with taxable
income of $50,000, that person’s federal marginal tax rate is 25 percent. In
other words, he effectively pays a 25 percent federal tax on his last dollars of
income — those dollars earned between $34,500 and $50,000. (Don’t forget to
factor in the state income taxes that most states assess.)
Knowing your marginal tax rate allows you to quickly calculate the following:
✓ Any additional taxes that you would pay on additional income
✓ The amount of taxes that you save if you contribute more money into
retirement accounts or reduce your taxable income (for example, if you
choose investments that produce tax-free income)