You might be on your last dollar, but it’s not always a reason to sing the blues. In fact, in the strange world of taxation, your last dollar could actually put you in a higher tax bracket. Put on your shades, grab your guitar, and read on.
A tax bracket is a range of incomes taxed at a specific rate. For example, the lowest tax bracket might be $0-$8,025; the second might be $8,026-$32,550; the third $32,551-$78,850. When your income moves above or below the range limits (from $8,025 to $8,026 for example), you switch to a different tax bracket.
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Tax brackets are components of a progressive income tax system, in which taxes increase progressively as income increases. The idea is that high-income taxpayers can shoulder the burden of a high tax rate. Low-income taxpayers pay less because they can’t afford to pay high taxes.
Tax bracket is a simpler way to say marginal tax rate. A marginal tax rate is the “tax paid on an additional dollar of income” [source: Investopedia]. That additional dollar is also known as your “last dollar.” In a progressive tax system, the portion of your income that does not exceed the upper limit of a tax bracket is your “last dollar.”