The rate of taxation is the biggest source of confusion in taxes. It may seem straightforward because of the tax bracket an individual may fall in, like those who make $100,000 fall into the 28% tax bracket; you should owe Uncle Sam $28,000. This may not be as straightforward because as deciding how much you owe in taxes requires that you follow a few steps.

Cutting Your Taxable Income

Your taxable income is what sets your tax bracket. If you earn $100,000 a year, the amount to be taxed may range from $65,000 to $75,000, as per your taxable income. If you have sufficient deductions that can amount to $67,000 in income, and maybe file returns jointly with a spouse, then the tax bracket you fall in is the 15% and not 28%. This does not automatically determine your tax at 15% of $67,000 as marginal tax rate operate differently.

Marginal Tax Rate

All income is taxed at varied rates, from the lowest to the trivial tax brackets. If you are in the 15% bracket, some of your income can be taxed at 10% while others at 15%. If your taxable income is $67,000 in 2011, the first batch of income up to $17,000 is taxed at 10% which amounts to $1,700. The remaining $50,000 is taxed at 15% which amounts to $7,500. The total of the annual tax comes to $9,200. What this implies is that you are paying only 9.2% of your gross income in taxes.

Someone in a higher tax bracket, like with a taxable income of $100,000. The income of such individual totaling to $17,000 is taxed at 10% amounting to $17,000. The second batch of $52,000 income is taxed at 15% which is $10,350. Finally, the remaining $31,000 of income is taxed at 25% which results in $7,750. When all the taxes are summed up, it amounts to $19,800. This is a smaller portion 19.8% of taxable income compared to the taxable income bracket of such an individual that is 25% bracket. If such a person’s gross income were more than $120,000 a year, the real percentage of income paid in taxes would be lower, at 16.5%.

Conclusion

Understanding how the marginal tax works is the best way to determine your tax bracket. The way the IRS calculate our income tax may in essence mean, that moving up a tax bracket does not impact much on the mount to be taxed. To understand better how you are taxed, it is crucial to understand how the marginal tax rates work.