How to Calculate Taxes Using Marginal Tax Rate

Original post by Ryan Menezes of Demand Media

Large investment gains may increase your tax liability.

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The marginal tax rate is the ratio between a change in tax liability and a change in income. Economists define the marginal tax rate as the rate on a tax base's last dollar earned, but when you use the rate to calculate your taxes, it generally refers to the rate on a specific venture or asset separate from your base income. This added income or expense could push you into a new tax bracket. The venture's marginal tax rate in such cases combines the statutory rates for several brackets.

Step 1

Divide the marginal tax rate by 100. For example, if a new venture's marginal tax rate is 21.4 percent, divide 21.4 by 100, producing 0.214.

Step 2

Multiply the decimal value that you derived from the marginal tax rate by the income from the venture. For example, if the venture earns you $8,000, multiply 0.214 by $8,000, producing a liability on the venture of $1,712.

Step 3

Add the tax liability on the venture to your independent tax liability. For example, if you otherwise owe $5,200, add $1,712 to $5,200, for a total of $6,912. This is your overall tax liability.

Resources

• Visualizing Economics; Top Marginal Tax Rates 1916 - 2010; Catherine Mulbrandon; April 2011
• Internal Revenue Service: Tax Rate Tables

References

• Georgia State University: Basic Tax Rate Concepts; Ernest R. Larkins
• Harvard University: Optimal Taxation in Theory and Practice; N. Gregory Manki et. al

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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