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Many folks don’t realize it, but the federal government (like most state governments) charges you different income tax rates for different parts of your annual income. You effectively pay less tax on the first dollars of your earnings and more tax on the last dollars of your earnings. As a wage earner receiving a paycheck, you won’t actually notice or see your actual tax rate rising during the year. The reason: Taxes are withheld at a constant rate from your paycheck based upon estimating your expected income for the year and your total expected tax bill for the year.

Your federal marginal income tax rate is the rate of tax that you pay on your last, or so-called highest, dollars of income (see Table 4-1). Your taxable income is the income that is left after taking allowed deductions on your return.

TABLE 4-1 2021 Federal Income Tax Rates for Single and Married Households Filing Jointly

Federal Income Tax Rate	Singles Taxable Income	Married Filing Jointly Taxable Income
10%	Up to $9,950	Up to $19,900
12%	$9,951 to $40,525	$19,901 to $81,050
22%	$40,526 to $86,375	$81,051 to $172,750
24%	$86,376 to $164,925	$172,751 to $329,850
32%	$164,926 to $209,425	$329,851 to $418,850
35%	$209,426 to $523,600	$418,851 to $628,300
37%	Over $523,600	Over $628,300

Your actual marginal tax rate includes state income taxes if your state levies an income tax. Though this chapter focuses upon the federal income tax system and strategies to reduce those taxes, most of what is discussed also helps you reduce your state income taxes, which the vast majority of states levy. Each state income tax system is unique, so covering them all here is impossible. All but eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — impose a state income tax. (New Hampshire has only a state income tax on dividend and interest investment income.)

There’s value in knowing your marginal tax rate. This knowledge allows you to determine the following (among other things):

 How much you could reduce your taxes if you contribute more money to retirement accounts

 How much you would pay in additional taxes on extra income you could earn from working more

 How much you could reduce your taxable income if you use investments that produce tax-free income (which may make sense only if you’re in a higher tax bracket — more on this later in the chapter)