Question

if you have $20000 in your savings account this year and it increases to $25000 next year, to what amount does the marginal tax rate apply

Answer 1

Marginal tax rate defines the rate that is applied on the additional dollar income received. The marginal tax rate increases with the increase in income. It is also referred to as progressive taxation.

Tax bracket Marginal Tax Rate Amount taxable $20,000 Tax payable 0% $0 $0-$20,000 $20,000 - $40,000 10% $20,000 $2,000

Thus, referring the above table, if the income is $20000 then there will be no marginal tax rate hence nothing will be taxable.

but, next year the income increased to $25000 that exceeds the current year bracket hence, this amount will be taxable @ 10%.

Thus, tax liability for next year will be:

tax liability = amount taxable * tax rate