The Federal Income Tax: How Do Marginal Income Tax Rates Work in 2020?

The Federal Income Tax: How Do Marginal Income Tax Rates Work in 2020?

INSIGHTi
The Federal Income Tax: How Do Marginal
Income Tax Rates Work in 2020?
Updated November 9, 2020
Calculating Income Tax Liability
For many taxpayers, calculating their federal income tax liability can be broken down into three main
steps.
1. Taxpayers calculate the amount of their income subject to taxation (i.e., their taxable
income).
2. Taxpayers apply marginal income tax rates to their taxable inc ome to determine their
“pre-tax credit” income tax liability.
3. Taxpayers subtract any tax credits from their pre-tax credit income tax liability to
determine their final income tax liability.
This Insight looks only at statutory marginal tax rates and not effective marginal tax rates, which may
differ. Effective marginal tax rates are the amount paid in tax on the next dollar of income, taking into
account interactions with other features of the tax system. Thus, effective marginal tax rates are a function
of (1) a taxpayer’s statutory tax marginal tax rate and (2) interactions with other credits, deductions,
exemptions, and special provisions in the tax code.
Some taxpayers with more complex tax situations, including those who are subject to the alternative
minimum tax (AMT) and those who have income from capital gains and dividends, wil have to perform
additional steps to calculate their income tax liability. (Those cases are not discussed in this Insight.)
For a visualization of this calculation, see CRS Infographic IG10020, The U.S. Individual Income Tax
System, 2020, by Molly F. Sherlock, The U.S. Individual Income Tax System, 2020, by Molly F.
Sherlock.
Applying Marginal Income Tax Rates
This Insight focuses on the second step in this process outlined above—applying marginal tax rates to
taxable income. For the purposes of this Insight, it wil be assumed that the taxpayer has a relatively
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simple tax situation: they are a married couple with only wage income that claims only one deduction—
the standard deduction—and claims no tax credits when calculating their income tax liability. In effect,
this couple wil need to do only steps one and two outlined above to calculate their income tax liability.
For 2020, the standard deduction for a married couple is $24,800.
(In reality, the calculation of taxable income for a taxpayer may not be so simple and wil depend on a
variety of factors, including the taxpayer’s sources of income, family structure, and eligibility for a
variety of deductions—i.e., subtractions from their income.)
Once a taxpayer has calculated their taxable income, they then apply the marginal tax rates to their
taxable income. There are currently seven marginal tax rates, and the income ranges over which they
apply (“tax brackets”) differ based on the taxpayer’s filing status; see Table 1 below. The federal income
tax is considered a progressive tax by economists because as taxable income increases, income above a
given bracket threshold is taxed at a higher marginal rate.
Table 1. Marginal Income Tax Rates for Married Couples, 2020
Filing as Married Joint Filers
The
The maximum
The maximum
marginal
amount of taxable
amount of tax
If taxable
tax rate
income subject to
generated in that And the taxpayer’s total
income is:
is:
this marginal rate:
bracket is: income tax (pre-credit) is:
$0 to $19,750
10%
$19,750
$1,905.00 10% of taxable income
Over $19,750
12%
$60,500
$7,260.00 $1,975 + 12% of the amount over
to $80,250
$19,750
Over $80,250
22%
$90,800
$19,976.00 $9,235 + 22% of the amount over
to $171,050
$80,250
Over $171,050
24%
$155,550
$37,332.00 $29,211 + 24% of the amount
to $326,600
over $171,050
Over $326,600
32%
$88,100
$28,192.00 $66,543 + 32% of the amount
to $414,700
over $326,600
Over $414,700
35%
$207,350
$72,572.50 $94,735 + 35% of the amount
to $622,050
over $414,700
Over $622,050
37% The difference
37% of the difference
$167,307.50 + 37% of the amount
between total taxable
between total taxable
over $622,050
income and $622,050
income and $622,050
Source: Adapted from IRS Revenue Procedure 2019-44.
Note: Final income tax liability is rounded to the next highest whole number.
Below, the 2020 tax brackets are presented graphical y up to taxable income of $1 mil ion for a married
couple filing a joint return.

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Note: The maximum taxable income displayed in this graphic and al subsequent graphics is $1 mil ion.
Importantly, these tax rates apply only to the income in a specific income range or bracket, not the entire
taxable income. For example, if a married taxpayer has $750,000 of taxable income, only the amount
above $622,050—or $127,950—is subject to a marginal rate of 37%, not the entire $750,000.
Below are examples of three married taxpayers with different levels of income that il ustrate how
marginal income tax rates work.

First, the taxpayer wil subtract $24,800 from their $50,000 of wage income to calculate their taxable
income of $25,200. As shown in the visual above, this taxpayer has a total income tax liability of $2,629.

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The taxpayer’s statutory marginal tax rate is 12%, and the taxpayer’s last dollar of income was taxed at
that rate. However, most of the taxpayer’s income was taxed at a rate of 10%, since most of the taxpayer’s
income fel within the lowest (the 10%) income tax bracket.

First, the taxpayer wil subtract $24,800 from their $200,000 of wage income to calculate their taxable
income of $175,200. As shown in the visual above, this taxpayer has a total income tax liability of
$30,207. The taxpayer’s statutory marginal tax rate is 24%, and the taxpayer’s last dollar of income was
taxed at that rate. However, most of the taxpayer’s income was taxed at a rate lower than 24% (taxed at
10%, 12%, or 22%), because most of the taxpayer’s income fel in one of these lower tax brackets.

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First, the taxpayer wil subtract $24,800 from their $1,000,000 of wage income to calculate their taxable
income of $975,200. As shown in the visual above, this taxpayer has a total tax income tax liability of
$297,973. The taxpayer’s statutory marginal tax rate is 37%, and the taxpayer’s last dollar of income was
taxed at that rate. However, more than three-fifths of this taxpayer’s taxable income was taxed at a rate
lower than 37%, as less than two-fifths of this taxpayer’s taxable income was in the top (or 37%) tax
bracket.

Author Information

Margot L. Crandall-Hollick

Acting Section Research Manager

Disclaimer
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