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What's Your Real Marginal Tax Rate?

What's your real marginal tax rate? If you answer that question by looking at the tax rate tables that show rates of 10, 15, 25, 28, 33, 35 and 39.6 percent, you could be understating your real marginal tax rate. Your marginal tax rate could be higher due to numerous provisions that phase out or limit certain deductions, credits, and other tax benefits. Some of the more significant provisions include:

While these unfavorable phase-out rules aren't called income taxes, the result is the same -- an increase in your total income tax bill.

  • Limitation on itemized deductions. In 2016, once adjusted gross income (AGI) exceeds $155,650 for married persons filing separately, $311,300 for those filing married joint or a surviving spouse, $285,350 for a head of household filer, and $259,400 for singles, itemized deductions phase out (for 2015 these figures were $154,950, $309,900, $284,050, and $258,250 respectively). Under these rules, up to 80 percent of your write-offs for mortgage interest, state and local income and property taxes and charitable contributions can be lost.

  • Phase-out of personal exemptions. The personal exemption amount of $4,050 in 2016 (up from $4,000 in 2015) begins phasing out when AGI crosses threshold amounts. Those amounts are $311,300 for married taxpayers filing jointly, $285,350 for heads of household, $259,400 for single taxpayers, and $155,650 for married taxpayers filing separately (up from $309,900, $284,050, $258,250 and $154,950 respectively in 2015).

  • Exclusion of Social Security benefits from income tax. Up to 50 percent of benefits are taxed when AGI plus tax-free interest plus one-half of Social Security benefits is over $25,000 but less than $34,000 for single taxpayers and is over $32,000 but less than $44,000 for married couples filing jointly. Up to 85 percent of benefits are taxed once income exceeds $34,000 for single taxpayers and $44,000 for married couples filing jointly.

  • Other phase-outs. Numerous credits, deductions, and other benefits are phased out once income exceeds prescribed limits, including the earned income credit, the child credit, the dependent care credit, traditional deductible and Roth individual retirement account contributions, Coverdell Education Savings Account contributions, Hope Scholarship and Lifetime Learning credits, the above-the-line higher education expense deduction, student loan interest deductions, rental real estate losses under passive loss rules, the adoption credit, and the elderly and disabled credit.