Having a rough idea of your tax bracket can help you estimate the tax impact of major financial decisions.
Have you ever been asked for your approximate tax bracket by an advisor, attorney, financial provider, or even a Fidelity representative? Knowing your tax bracket can be useful in many scenarios, including when you open new accounts.
While your tax bracket won't tell you exactly how much you'll pay in taxes, it can help you assess the tax impact of financial decisions. For instance, if you're in the 35% tax bracket, you could save 35 cents in federal tax for every dollar spent on a tax-deductible expense, such as mortgage interest or charity.
Marginal tax rate: Your tax bracket explained
A common misconception is that your marginal tax rate is the rate at which your entire income is taxed. So someone in the 35% tax bracket pays 35% in taxes.
In actuality, income is taxed in tiers. When your income reaches a different tier, that portion of your income is taxed at a new rate. Your marginal tax rate or tax bracket refers only to your highest tax rate—the last tax rate your income is subject to. For example, in 2023, a single filer with taxable income of $100,000 will pay $17,400 in tax, or an average tax rate of 17%. But your marginal tax rate or tax bracket is actually 24%.
