– Cash bonuses
– Short-term capital gains. Profits on investments held less than one year.
– Interest or coupon payments
These forms of income are taxed in the United States under a progressive tax system. This means the more you earn, the higher your tax rate.
Under a progressive tax system, your first dollar and your 50,000th dollar are taxed at different rates. The highest tax bracket you fall into is your marginal tax rate. “Marginal” refers to how much tax you pay on the next dollar you earn.
Therefore, when you consider various tax-advantaged strategies, deductions, or retirement plans, such as Traditional vs Roth plans, your potential tax savings and decisions should be based on your marginal tax rate.