The Tax Puzzle: Understanding Your Fully-Loaded Marginal Income Tax Rate

When discussing income tax in the United States, it is essential to consider the combined impact of both federal, state, and FICA marginal tax brackets. This combined rate is what you will actually pay on their income. Understanding this combined marginal tax rate is critical for accurate financial planning and decision-making.

However there are no resources online that highlight what your combined marginal rate would be. This is where PFF is at your service! We’ve got state-by-state pages for you to browse so you can understand what your fully loaded marginal and average tax rate would be.

If this is your first time browsing this data, there are some nuances to consider (specifically related to how we display FICA taxes), so please do read the information further below in this article before jumping to your state.

Jump To Your State

Here are the states for which we’ve built the combined income tax tables so far. If you don’t see your state’s name on the list, please do leave us a comment below and we’d be happy to publish one for you!

1. California
2. Texas
3. Florida
4. New York
5. Pennsylvania
6. Illinois
7. Ohio
8. Georgia
9. North Carolina
10. Michigan
11. New Jersey
12. Virginia
13. Washington
14. Arizona
15. Massachusetts
16. Indiana
17. Colorado

The Concept of Marginal Tax Rates

Marginal tax rates refer to the rate at which your last dollar of income is taxed. The U.S. uses a progressive tax system, meaning higher income levels are taxed at higher rates. However, each bracket of income is taxed at its respective rate, not your entire income at the highest rate.

Take a look at this video from the Tax Foundation to get a better understanding of how a progressive and marginal tax system works.

Combined Marginal Tax Rates in the US

The combined marginal tax rate is the total of both federal and state tax rates. For instance, if you’re in a 24% federal tax bracket and a 7% state tax bracket, you are already at 31%.

Add FICA on top of this, and you’re looking at a roughly 39% total marginal tax rate. This rate is critical as it reflects the true rate of taxation on your income. That’s quite high!

Did you know that there are a number of states where the combined top marginal tax rate crosses the 50% threshold? Stunning, isn’t it? If you didn’t examine the combined rates, unfortunately, there’s no way you’d know.

Federal Income Tax Rates

The federal government sets various tax brackets and we’re all familiar with the IRS, which is the department responsible for collecting taxes. As you can guess, federal income taxes apply to all persons who are employed in the US.

For single filers in 2023, these range from 10% for incomes starting at $11,000, to 37% for incomes over $578,125. There are different rates for married filers or those who are considered as head of household.

State Income Tax Brackets

Most U.S. states also impose income taxes, each with its own set of brackets. These can be progressive, flat, or non-existent. State tax brackets and rates vary significantly from the federal rates and brackets, which makes it difficult to calculate the combined brackets.

FICA Taxes

Don’t forget to include the additional FICA taxes, which are currently set to 7.65% of income.

FICA (Federal Insurance Contributions Act) taxes are a critical component of the United States tax system, primarily funding Social Security and Medicare programs. These payroll taxes are shared between employees and employers, each paying half of the total.

As of 2023, the Social Security tax rate is 6.2% for both employees and employers on earnings up to a certain limit ($160,200 for 2023 and $168,600 for 2024), while the Medicare tax rate is 1.45%. This adds up to 7.65% total.

There is an additional 0.9% surcharge for individuals earning over $200,000 or couples earning over $250,000. Self-employed individuals bear the full burden of these taxes, paying both the employee and employer portions.

Therefore what’s interesting is that FICA rate drops from 7.65% to 1.45% for marginal income that is higher than the limit for the year. However once you cross $200,000 of individual income, it goes up marginally to 2.35%. There is no cap on earnings.

Here are a few additional important points to note:

• FICA taxes are calculated individually, not jointly. Each spouse pays FICA taxes based on their own earnings, regardless of their marital status or how they file their income taxes. This means that if both spouses are employed, each one pays FICA taxes on their respective earnings.
• You cannot use deductions to reduce your taxable income for FICA purposes. If you are browsing our marginal tax brackets to determine how much to contribute to reduce your marginal rate, please use the Simplified Tables on the respective state page.
• Our Detailed tables show the fully-loaded tax rates, including FICA. Due to the complexity in how FICA taxes interact with the Federal and state income taxes, we have assumed that both spouses earn equal amounts. Of course this is not correct, but there is no easy way to convey this information otherwise.

Standard Deductions & Exemptions

On each of the pages, we have outlined the relevant Federal and state deductions and/or exemptions that are allowed. These have not been reflected in the tables.

If this is something you’d like to see, please do send us a note or leave a comment below and we will work to incorporate said functionality in to our table.

Importance of the Combined Marginal Tax Rate

Understanding your combined marginal tax rate is important for several reasons:

1. Accurate Tax Liability: It provides a clearer picture of your actual tax liability.
2. Effective Financial Planning: Knowing your combined rate aids in making informed investment and savings decisions.
3. Tax Strategies: It allows you to devise strategies for income and deduction planning to potentially lower your overall tax burden.
4. Budgeting Accuracy: Helps in more precise budgeting and financial forecasting.

Personally, the most important aspect is for legally reducing my tax liability. Nobody likes to pay taxes and the easiest route for most people to reduce their taxable income – and hence the total tax burden – is to contribute to retirement accounts.

Contributing to these accounts helps to immediately reduce your income tax bill. However it’s important to not over-contribute as well because you don’t want to go too far down the marginal tax ladder.

As outlined earlier, please note that you cannot use 401k or other contributions to reduce your taxable income when calculating FICA taxes. For planning contributions, please use our Simplified Tables to accurately determine what marginal rate you fall in.

Leveraging 401(k) Contributions

One of the most effective strategies for reducing your overall tax burden is making contributions to a 401(k) plan. Contributions to a traditional 401(k) are made with pre-tax dollars, which means the money is taken out of your paycheck before income taxes are applied. This reduces your taxable income.

For instance, if your annual income is $60,000 and you contribute $10,000 to your 401(k), your taxable income drops to $50,000. The benefits are twofold: you save for retirement while simultaneously lowering your current tax liability.

In 2023, the contribution limit for a 401(k) is $22,500, with an additional catch-up contribution of $7,500 allowed for those aged 50 and over.

Individual Retirement Accounts (IRAs)

Contributing to a traditional Individual Retirement Account (IRA) can also help reduce your taxable income. Like a 401(k), contributions to a traditional IRA are typically made with pre-tax dollars, thus reducing your taxable income in the year the contribution is made.

The contribution limit for IRAs in 2023 is $6,500, with an additional $1,000 catch-up contribution for those 50 and older.

Health Savings Accounts (HSAs)

For those with high-deductible health plans, contributing to a Health Savings Account (HSA) can also provide tax benefits. Contributions to HSAs are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are not taxed. This makes HSAs a triple tax-advantaged account.

Flexible Spending Accounts (FSAs)

Contributions to a Flexible Spending Account (FSA) for healthcare and dependent care expenses are made with pre-tax dollars, reducing your taxable income. These funds can be used for qualified medical expenses and dependent care, but typically must be used within the plan year.

Tax-Loss Harvesting

In the realm of investments, tax-loss harvesting is a strategy where investors sell securities at a loss to offset a capital gains tax liability. This can be particularly effective in managing taxes in taxable investment accounts.

Before You Go…

We have done our best to ensure that this information is accurate. If however you do spot errors, please do email us directly or leave a comment below and we’ll be sure to address it right away.

Please do check out our other content such as calculators, investment articles, and more!