The Income Tax Rate is used to calculate tax liability of individuals and business. Internal Revenue Service (IRS) and state tax agencies have different tax rates determined based on factors like income levels, filing status, etc. IRS and many state revenue agencies follow progressive tax rate system in which different rates are applied to different tax brackets. The tax brackets are formed based on income ranges. This results two different types of tax rates: average tax rate and marginal tax rate.
Average Tax Rate
The tax amount you owe is a percent of your total income and this percent is the average tax rate for your income. Therefore, the average tax rate would be the total tax paid as a percent of your total earned income. There is a real formula for the average tax rate: ATR = Tax liability / Pretax income.
During 2010, the tax rates progressively increased as earned income goes up. The higher tax rates apply to the income in each range – a range called a tax bracket. These tax rates are applicable to TAXABLE income, which is the amount remaining after application of adjustments, deductions and exemptions. Your total income is always much higher than the taxable income.
Marginal Tax Rate
A person with $0 income would have a marginal tax rate of 0%. However, someone with $25000 income owes tax of $600, which raises the marginal tax rate to 10%. If you have an income of $100,000, then you also owe $12,500 and this equals a marginal tax rate of 25%.
The marginal tax rate is the amount of tax paid on each additional dollar of income. As the income dollar amount goes up, so will the marginal tax rate. When higher taxes apply to higher incomes, it does not raise the tax rate if you make an extra dollar in income. Marginal tax rates increase by income brackets with the tax applying to the income falling within the bracket.
State Tax Rates
Nine states have no state income tax and ten others have income tax rates that are over the top. However, the other 31 states fall somewhere in the middle. Each state has its own taxation system, which usually is a combination of property taxes, sales taxes and income taxes.
Of special note is the treatment of income tax in New Hampshire. There is no personal income tax collected in the Granite State. Instead, the state income tax applies only to dividends and interest. A 5% tax rate applies to those two categories. Income tax returns must be in the hands of the Department of Revenue on April 15 or the next following business day.
Tennessee has a similar policy in place. Salary and wage income is tax-free. Taxable income includes earnings from stocks, bonds and other unearned income. The rate is 6% and the first $1250 is exempt for an individual and $2500 for joint filers. Income tax returns are due on April 15 or the next following business day.
Tax Hike Prevention Act
Federal income tax rates were set to increase to the levels effective before 2001, but the Tax Hike Prevention Act of 2010 kept the rates as they are through TY2010. The only change was the income range adjustments that account for inflation. This only slightly affects the tax brackets.