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Marginal Tax Rate
The marginal tax rate refers to the amount of tax (as a percentage of income) that a person or entity is liable to pay the IRS when income falls under a range of incomes.
Generally, the tax rate that a person has to pay increases as he or she goes each tier of income ranges.
These ranges are more commonly known as marginal tax brackets.
For example, if a person has an income that fall in the first tier, he or she might be liable for a 12% income tax rate. However, should income be high enough to fall within the next tier (tax bracket), then income tax might rise to 18%, and so on.
However, it must be noted that the higher tax percentage will only be applicable to the amount that exceeds the lower tier.
For example, if a person has a personal income of $$40,000, the first $30,000 might be taxed at 12%. While the next remaining $10,000 will be taxed at 18%.
The marginal tax bracket can play a key role in the tax planning of business owners and investors.
Retaining earnings instead of booking them as profits can enable one to delay the payment of taxes and use the funds to generate more revenue for the business.
However, taxes will still eventually be due one way or another unless tax breaks occur in a particular year.
In this case, one can legitimately pay less tax if he has a capable accountant.