How to Calculate MTR
Original post by Ryan Menezes of Demand Media
The marginal tax rate (MTR) is the amount of tax owed on a specific project or asset. This revenue source and the associated tax rate exist on top of a base income. If the increased income leaves the taxpayer in the same tax bracket as before, the marginal tax rate equals the highest rate on the original return. If the increased income brings the taxpayer into a new tax bracket, the marginal tax rate is a combination of the original highest rate and the rate on the new bracket, which is higher still.
Multiply the portion of the new income that falls within your original tax bracket by your original highest tax rate. For example, the Internal Revenue Service has set $34,000 as the maximum income for which a 2010 single filer pays taxes at 15 percent. If you have $30,000 of taxable income before a new venture raises that income by $10,000, then the IRS will tax $4,000 of the new income at 15 percent: $4,000 --- 0.15 = $600.
Multiply the remaining portion of the new income by its new tax rate. Between incomes of $34,000 and $82,400, the IRS taxes 2010 single filers at 25 percent. Continuing the example, you will owe 25 percent on the remaining $6,000 of the income from the venture: $6,000 --- 0.25 = $1,500.
Add together the previous two sums: $600 + $1,500 = $2,100. This is the amount of tax that you owe on the venture.
Divide this tax liability by the income from the venture: $2,100 ÷ $10,000 = 0.21.
Multiply this answer by 100 to get 21 percent, which is the marginal tax rate on the new venture.
- Harvard University: Optimal Taxation in Theory and Practice; N. Gregory Manki et. al.
- Visualizing Economics: Top Marginal Tax Rates 1916 - 2010; Catherine Mulbrandon; April 2011
- Georgia State University: Basic Tax Rate Concepts; Ernest R. Larkins
- Internal Revenue Service: 2010 Tax Rate Schedules
About the Author
Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.
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