We can illustrate the use of the marginal tax rate with an example. Suppose a single taxpayer currently rents and is considering buying a home. Her adjusted gross income is $30,000, and she has no itemized deductions. If she buys the home, tax-deductible interest and property taxes would amount to $6,750 the first year. By itemizing, she gives up her standard deduction of $4,400 (based on 2001 tax law), so the amount of additional tax deductions would be $2,350. Her marginal tax rate is 15%. Buying the home would save her $352 (.15 times $2,350) in taxes the first year.

To see that this is correct, we can calculate her taxes with and without the additional deductions. As a renter, her taxable income would be $22,700. This is her adjusted gross income of $30,000 less a $2,750 personal exemption and $4,400 standard deduction; taxes would be $3,405. With the additional deductions, her taxable income is $20,350 and taxes are $3,503. The difference is $352.

In 2002, there are currently six marginal federal tax rates: 10%, 15%, 27%, 30%, 35%, and 38.6%. You can find the rate for any income range by referring to the Tax Rate Schedules included in the Form 1040 book mailed to most taxpayers in January