The marginal tax rate is the percentage of tax you will pay, which is based on the amount of income you earn. The more money you make, the more tax you are expected to pay. This approach is otherwise known as the marginal tax rate. More specifically, the marginal tax rate, is the amount of tax incurred on each additional dollar of income.
How is the Marginal Tax Rate Applied?
Under a marginal tax rate, taxpayers are divided into tax brackets, which determine the particular rate of tax applied to the taxable income. The marginal tax bracket where a taxpayer’s income applies to does not determine how the entire income is taxed. Instead, income is taxed on a progressive system. This means the following for 2019:
|Taxable Income||Federal Income Tax Rate|
|$47,630 and below||15%|
|$47,630 up to $95,259||20.5%|
|$95,259 up to $147,667||26%|
|$147,667 to $210,371||29%|
Note: In order to determine the total tax rate paid in your province, you must combine the marginal tax rates for your province and the federal tax rate.
You are a resident in Ontario, and your gross taxable income is $50,000. To calculate your federal tax rate, you would:
- Pay 15% on the amount up to $47,630. This would equal $7,144.50; and
- Pay 20.5% on the amount between $47,630 and $95,259. This would equal $485.85.
This would make your total federal tax $7,630.35. Next, you would have to add this figure to the provincial tax rate. The Ontario rates for 2019 are as follows:
|Taxable Income||Ontario Income Tax Rate|
|$43,906 and below||5.05%|
|$43,906 up to $87,813||9.15%|
|$87,813 up to $150,000||11.16%|
|$150,000 up to $220,000||12.16%|
Following the same principles from above, your total provincial tax payable would equal $277.50. Taken together, on your $50,000 gross taxable income, you will pay $7,907.84 in tax.
Tax Planning and the Marginal Tax Rate
If you know the tax bracket that you are in, this will allow you to make well-informed decisions on when, how, and which deductions you are able to claim. It can help determine whether you or your spouse should claim certain amounts or credits, whether it is an appropriate time to withdraw from your retirement savings accounts, and even whether it might be worth making that extra dollar from a promotion.
If you wish to take full advantage of the tax bracket you are in, and ensure that you do not miss out on, or sacrifice any benefits you are eligible for, contact us and we would be happy to help you strategize and determine the best course of action moving forward!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.