Average Marginal Income Tax Rates by Adjusted Gross Income and Filing Status

Average Marginal Income Tax Rates by Adjusted Gross Income and Filing Status

Order Code RS22229
August 25, 2005
CRS Report for Congress
Received through the CRS Web
Average Marginal Income Tax Rates by
Adjusted Gross Income and Filing Status
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Summary
This report presents average marginal income tax rates by filing status and detailed
adjusted gross income (AGI) class for the 2001 tax year, the most recent year for which
data are available. The source of data is the 2001 Internal Revenue Service (IRS) public
use micro-sample. A general finding is that the average marginal tax rates by filing
status begin to converge with AGI above $75,000. Below that amount, married
taxpayers filing joint returns had significantly lower average marginal tax rates. This
report will be updated when new data are released.
Overview
This report provides a rough approximation of the marginal tax rate faced by
taxpayers of different income levels by filing status, e.g., single, married filing joint,
married filing separate, and head of household in 2001. Statutory rates (the rates in the
income tax code) are often termed marginal tax rates because they represent the amount
of tax due on the last dollar earned. For example, a single taxpayer with net taxable
income of $60,000 would be in the 25% statutory tax bracket and would pay 25 cents in
taxes for the next dollar earned above $60,000. Policymakers and researchers are
interested in marginal tax rates because they are the rates that influence taxpayers
decisions to work or invest. A higher marginal tax rate reduces the incentive to earn more
through work or investments.
The 2001 tax cuts contained in the Economic Growth and Tax Relief Reconciliation
Act (P.L. 107-16, EGTRRA) reduced the higher marginal tax rates and expanded the
taxable income brackets for married taxpayers filing joint returns. Congress believed that
these tax cuts were necessary because of (1) the projected federal budget surpluses; (2)
high marginal rates that reduced the “...incentives for taxpayers to work, save, and to
Congressional Research Service ˜ The Library of Congress

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invest....”; and (3) the slowing economy could use the stimulative boost of tax reductions.1
The data in this report provide the average marginal tax rates by income class and filing
status when the first incremental steps of the EGTRRA tax cuts began to take hold. The
data can serve as a benchmark for comparison to the burden distribution after EGTRRA
has been fully implemented. In addition, EGTRRA is scheduled to sunset in 2011 and if
Congress chooses not to act, marginal tax rates will revert to ones approximating 2001
rates.
Marginal Tax Rates in 2001
The federal personal income tax is a progressive tax because it collects a larger
percentage of income as income rises. This outcome is achieved through graduated
statutory rates that increase with taxable income. In addition, the federal income tax
requires taxpayers to claim a filing status, i.e., single, married filing joint, married filing
separate, and head of household. The statutory rates across filing status are the same but
are applied to different levels of income. In 2005, the individual income tax rates are
10%, 15%, 25%, 28%, 33%, and 35%. However, there are additional rates that apply to
different types of income, e.g., the capital gains tax rate for taxpayers in the 10% or 15%
bracket is 5%. Table 1 reports the frequency of the marginal tax rates and type of income
for the which the rate applied for the 2001 tax year.
The Internal Revenue Service (IRS) provides researchers with public use data on
individual returns that are based on a sample of taxpayers from all states and from all
income ranges. Income is reported in ranges and taxpayer’s filing status and marginal tax
rates are included in the sample data. Weights are assigned to each sample return that
“inflate” the returns to represent the full taxpayer population. The data are from 2001, the
most recent year that is publicly available. The data are scrubbed by the IRS to mask any
information that could reveal the identity of a taxpayer. The summarized results of the
scrubbed public use data do not match the IRS published tables exactly because the IRS
publications are based on the actual data in the full population of returns.
1 U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted
in the 107th Congress, JCS-1-03, U.S. Government Printing Office, January 24, 2003, pp. 6-8.

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Table 1. Marginal Tax Rates for the 2001 Tax Year
Marginal Number of Percentage
Description
Tax Rate
Returns
of Returns
0.0%
26,171,186
20.09%
No taxable income.
8.0%
183,923
0.14%
Long term capital gains tax rate on assets held for
longer than 5 years for taxpayers in the 15% income
tax brackets.
10.0%
4,727,907
3.63%
Long term capital gains tax rate on assets held for
longer than 1 year (and less than 5) for taxpayers in
the 15% income tax bracket. Bracket for qualified
dependent children.
15.0%
64,994,479
49.90%
First bracket rate.
20.0%
675,123
0.52%
Capital gains tax rate for assets held longer than 1
year.
25.0%
49,164
0.04%
Recaptured capital gains tax rate on real estate.
27.5%
27,300,434
20.96%
Second bracket rate.
28.0%
49,663
0.04%
Capital gains tax rate on collectibles.
30.5%
3,796,728
2.91%
Third bracket rate.
35.5%
1,460,089
1.12%
Forth bracket rate.
39.1%
846,468
0.65%
Top bracket rate.
Source: CRS calculations based on Internal Revenue Service 2001 Public Use Tax File.
Table 2 presents marginal tax rate information by adjusted gross income (AGI) and
filing status. AGI is gross income less selected “above-the-line” deductions such as
qualified IRA contributions, moving expenses, or student loan interest. The marginal tax
rate or tax bracket is determined by net taxable income which is adjusted gross income
less personal exemptions and either itemized deductions or a standard deduction. Thus,
net taxable income is less than AGI and can vary significantly based on an individual
taxpayer’s situation.
In each AGI range in Table 2, taxpayers could have a variety of marginal tax rates
based on the amount of deductions (standard or itemized) and the number of exemptions
which together generally determine taxable income. The average marginal tax rates in the
table represent the weighted average of the tax rates of all the taxpayers in the income
group. The average marginal tax rate can be used as a rough approximation of the
marginal tax burden for groups defined by income class and filing status.

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Table 2. Average Marginal Tax Rate in 2001, by Income Class and
Filing Status
Weighted Average Marginal Tax Rate in 2001
Total
AGI
Returns
Married
Head of
Single
Married
Separate
Household
Total Returns
130,255,165 58,235,849 51,042,444
2,358,665 18,618,205
less than equal $0
1,454,425
0.0000
0.0000
0.0000
0.0000
$1 to $1,000
1,805,280
0.0084
0.0000
0.0000
0.0000
$1,001 to $2,000
2,555,855
0.0170
0.0000
0.0048
0.0000
$2,001 to $3,000
2,718,465
0.0115
0.0000
0.0000
0.0000
$3,001 to $4,000
2,671,531
0.0097
0.0000
0.0216
0.0000
$4,001 to $5,000
2,784,014
0.0281
0.0000
0.0017
0.0000
$5,001 to $6,000
2,418,277
0.0448
0.0000
0.0115
0.0000
$6,001 to $7,000
2,477,901
0.0378
0.0000
0.0508
0.0000
$7,001 to $8,000
2,638,850
0.0728
0.0000
0.1307
0.0000
$8,001 to $9,000
2,512,017
0.1142
0.0000
0.0954
0.0000
$9,001 to $10,000
2,362,305
0.1267
0.0000
0.1386
0.0031
$10,001 to $11,000
2,476,378
0.1312
0.0000
0.1348
0.0012
$11,001 to $12,000
2,251,608
0.1409
0.0000
0.1119
0.0056
$12,001 to $13,000
2,424,155
0.1398
0.0000
0.1326
0.0459
$13,001 to $14,000
2,401,739
0.1440
0.0193
0.1500
0.0752
$14,001 to $15,000
2,537,919
0.1455
0.0317
0.1486
0.0704
$15,001 to $16,000
2,391,556
0.1452
0.0625
0.1460
0.1128
$16,001 to $17,000
2,286,003
0.1463
0.0923
0.1470
0.1209
$17,001 to $18,000
2,406,348
0.1458
0.1006
0.1500
0.1330
$18,001 to $19,000
2,165,447
0.1452
0.0965
0.1446
0.1371
$19,001 to $20,000
2,167,193
0.1467
0.1148
0.1382
0.1401
$20,001 to $25,000
9,873,137
0.1483
0.1286
0.1494
0.1461
$25,001 to $30,000
8,507,326
0.1480
0.1422
0.1621
0.1490
$30,001 to $40,000
13,825,559
0.1911
0.1464
0.2322
0.1487
$40,001 to $50,000
10,602,167
0.2597
0.1487
0.2546
0.1534
$50,001 to $75,000
17,531,694
0.2698
0.1882
0.2713
0.2365
$75,001 to $100,000
9,010,079
0.2877
0.2642
0.3006
0.2693
$100,001 to $200,000
8,435,039
0.3017
0.2809
0.3371
0.2868
$200,001 to $500,000
2,013,541
0.3388
0.3462
0.3690
0.3504
$500,001 to $1,000,000
356,235
0.3625
0.3776
0.3808
0.3598
$1,000,001 to $1,500,000
85,448
0.3659
0.3776
0.3730
0.3662
$1,500,001 to $2,000,000
36,480
0.3654
0.3763
0.3734
0.3706
$2,000,001 to $5,000,000
52,121
0.3630
0.3759
0.3700
0.3644
$5,000,001 to $10,000,000
12,259
0.3625
0.3719
0.3773
0.3588
greater than $10,000,000
6,815
0.3583
0.3609
0.3698
0.3575
Source: CRS calculations based on Internal Revenue Service 2001 Public Use Tax File.

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The average marginal tax rate by filing status begins converging at an AGI of
$75,000 and above. The average marginal rates converge because the amount of income
subject to lower statutory rates becomes a smaller share of adjusted gross income and the
higher rates are closer together. In addition, many special deductions and credits are
phased out as income increases. And finally, the top bracket amount, applying to income
above $297,350 ($148,675 for married filing separate), is the same regardless of filing
status.
In contrast, below the $75,000 threshold, married taxpayers filing jointly had average
marginal tax rates significantly lower than the other three filing status groups. Taxpayers
in these lower income groups can take fuller advantage of most special deductions and
credits in the individual income tax code. Married taxpayers in lower income classes
were more likely to receive a marriage “bonus,” thus reducing taxable income and the
associated marginal tax rate.2
Looking forward, the rates in 2001 reported and analyzed here represent the first step
in the gradual rate reductions and bracket adjustments implemented by the EGTRRA. In
2005, the higher rates, those above 15%, are reduced and the 15% and 25% married filing
joint brackets are expanded to twice that of the single bracket amounts. This means that
many married taxpayers who were in the next higher rate in 2001, dropped into the lower
rate bracket with the expansion of the lower bracket amounts. Table 3 below compares
the 2001 and 2005 tax year rates and brackets by major filing status.
Table 3. Personal Income Tax Rates and Bottom Brackets in 2001
and 2005
Rates
Single
Married
Head of Household
2001
2005
2001
2005
2001
2005
2001
2005
-
10.0%
-
$0
-
$0
-
$0
15.0%
15.0%
$0
$7,300
$0
$14,600
$0
$10,450
27.5%
25.0%
$27,050
$29,700
$45,200
$59,400
$36,250
$39,800
30.5%
28.0%
$65,550
$71,950
$109,250
$119,950
$93,650
$102,800
35.5%
33.0%
$136,750
$150,150
$166,500
$182,800
$151,650
$166,450
39.1%
35.0%
$297,350
$326,450
$297,350
$326,450
$297,350
$326,450
The 2001 27.5% (25% bracket in 2005) entry bracket for single was $27,050 in 2001
and $29,700 in 2005, an average annual growth rate of just over 2.3%, just keeping pace
with inflation. For married taxpayers filing joint returns, the entry bracket increased from
$45,200 to $59,000, an average annual growth rate 6.8%. The faster growth represents
the congressional intent (through EGTRRA) to eliminate the “marriage penalty” for
taxpayers in these groups by expanding the brackets to be twice the size of the single
2 U.S. Congressional Budget Office, For Better or for Worse: Marriage and the Federal Income
Tax, Washington, D.C., June 1997.

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bracket amounts. Thus, married taxpayers enter into the next higher bracket amount at
a proportionally higher taxable income level. Note that the entry points for the brackets
above 27.5% (25% in 2005) increased at roughly the same 2.3% average annual rate. (In
2011, the top four rates will revert to slightly higher rates, half of one percentage point,
than in 2001: 28%, 31%, 36%, and 39.6%.)
The effect of the EGTRRA changes on the 2001 average marginal tax rates reported
here would likely be significant. In particular, married taxpayers filing joint returns with
AGI under $75,000 would likely experience a significant reduction in average marginal
tax rates. All taxpayers would benefit from the new 10% bracket and the higher income
taxpayers from the reduced statutory rates.
While the alternative minimum tax (AMT) was not directly addressed in this report,
the AMT is a parallel tax to the income tax that is designed to serve as a “floor” or
minimum tax liability for relatively wealthy taxpayers. The base of the AMT is much
broader than the regular income tax and the rates are 26% and 28%. Although, because
these rates are applied to a different base than the regular income tax, they are not directly
comparable to the marginal rates presented here. In 2001, relatively few taxpayers (less
than 0.9%) were subject to the AMT and most of these taxpayers were in higher income
classes. The 2001 data indicates that 0.02% of returns with AGI below $20,000 have
AMT liability and just 0.05% of returns between $20,000 and $50,000. Table 4 below
exhibits the percentage of AMT filers by income class. The EGTRRA tax cuts lowered
rates for many high income taxpayers who may be captured by the AMT whose rates have
remained unchanged. Congress has increased the exemption amount periodically to
prevent more taxpayers from becoming subject to the AMT. The most recent adjustment
expires after the 2005 tax year.
Table 4. Percentage of AMT Filers by AGI Class, 2001
Non-AMT Filers in
AGI
AMT Filers
Percent AMT Filers
Class
Less than $20,001
8,615
49,898,649
0.02%
$20,001 to $50,000
21,350
42,786,838
0.05%
$50,001 to $75,000
92,491
17,439,203
0.53%
$75,001 to $100,000
154,011
8,856,068
1.71%
$100,001 to $200,000
415,548
8,019,491
4.93%
$200,001 to $500,000
352,244
1,661,296
17.49%
$500,001 to $1,000,000
50,682
305,553
14.23%
$1,000,001 to $1,500,000
11,170
74,278
13.07%
$1,500,001 to $2,000,000
4,521
31,959
12.39%
$2,000,001 to $5,000,000
6,621
45,500
12.70%
$5,000,001 to $10,000,000
1,767
10,492
14.41%
greater than $10,000,000
1,249
5,565
18.33%
Total
1,120,269
129,134,892
0.86%
Source: CRS calculations based on Internal Revenue Service 2001 Public Use Tax File.