How to calculate your incremental tax rate

Your incremental rate is the rate at which the next dollar of income will be taxed. In 2016, the 35% bracket stops at $233,475 ( for Married Filing Joint). This means that one dollar more of ordinary taxable income will be taxed at 39.6%. That is your incremental federal tax rate. I used the word “ordinary” purposefully because some kinds of income are not taxed at your incremental tax rate – dividends and long-term capital gains, for example.

Some people also include state taxes and FICA taxes in the calculation. If so, you would then need to differentiate between “earned” and “unearned” income. After you pass the Social Security threshold ($118,500 in 2016), you pay 1.45% Medicare taxes on earned income. Ordinary income is not taxed for Medicare but it may cause you to pay the Net Investment Income Tax (NIIT).

And, of course, don’t forget the Alternate Minimum Tax (AMT) . Quite frankly, I would leave AMT out of the incremental tax calculation – it’s just too complicated.

If you are trying to keep tabs on your history of your incremental tax rates, the most important thing to do is to be consistent. Don’t try to compare yours to someone else’s (I’ll show you mine if you’ll show me yours!) because you are probably calculating differently.

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