Not every dollar of your income is taxed at the same rate. That's because portions of your earned income fall into different brackets, which are assigned tax rates that increase on a graduated scale. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Those in the upper-income brackets pay more because a larger percentage of their income is taxed at the highest tax rates.

(Keep in mind, your taxable income is not the salary your boss told you you'd make when you got your job, but the amount of your income left over after you've subtracted the tax breaks to which you're entitled. We'll talk about those breaks later, in the section "1040 Mysteries Revealed."

Here's an example: Say you were single and reported $80,000 in taxable income in 2000. In accordance with the income ranges defining federal tax brackets that year, the first $26,250 of your income was taxed at 15 percent; dollars $26,251 through $63,550 were taxed at 28 percent; and dollars $63,551 through $80,000 were taxed at 31 percent.

When people ask you what your tax bracket is, they're really asking for your marginal tax rate. That is, the percent at which the highest portion of your income is taxed. In other words, if you report $80,000 of taxable income, the rate at which the last dollar of that $80,000 is taxed is your marginal tax rate. In 2000, that would have been 31 percent. But your effective rate is the percent of your taxable income that was actually paid in taxes, which will be less than your marginal rate.

Keep in mind, the income ranges that define tax brackets are adjusted for inflation and change yearly. And tax rates can change as well. In fact, under the Tax Relief Act of 2001, they have. They're now set to decrease gradually between 2001 and 2010 (see table). What's more, a new 10 percent tax bracket was added, reducing the amount of income that used to be taxed in the 15 percent bracket.

You should also be aware of what's known as your combined tax bracket. That's the sum of your federal tax bracket and your state tax bracket. (If your federal bracket is 31 percent and your state charges 6 percent income tax, your combined bracket is 37 percent.) That number will determine how much tax you'll owe on income from your investments. (If your combined bracket is 37 percent, then 37 percent of your investment income will go to Uncle Sam. Put another way, you'll be able to keep 63 percent of the income.)

TAX RATES DECLINE
Old rate	2001*	2002-2003	2004-2005	2006-2010
39.6%	39.1%	38.6%	37.6%	35%
36%	35.5%	35%	34%	33%
31%	30.5%	30%	29%	28%
28%	27.5%	27%	26%	25%
15%	Same	Same	Same	Same
10%	New	Same	Same	Same
*Effective July 1.