WHAT IS YOUR TAX BRACKET

Not every dollar of your income is taxed at the same rate.

That's because portions of your 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 the last dollar you make.

Your taxable income is not the salary your boss told you you'd make when you got your job, but the amount of income left over after you've made your pre-tax contributions to your 401(k) and after you've subtracted the tax breaks to which you're entitled.

The income ranges that define tax brackets are adjusted for inflation, change yearly and differ depending on your filing status (e.g., single or married filing jointly).

Tax rates can change as well.

Here's an example of how income is taxed: Say you are single and report $80,000 in taxable income for the 2006 tax year (filing in 2007). In accordance with the income ranges defining federal tax brackets for single filers in 2006, the first $7,550 of your income is taxed at 10 percent; dollars $7,551 through $30,650 are taxed at 15 percent; dollars $30,651 through $74,200 are taxed at 25 percent; and dollars $74,201 through $80,000 are taxed at 28 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 the example above, if you report $80,000 of taxable income for 2006, your marginal tax rate is 28 percent - the rate at which the last dollar of that $80,000 is taxed.

Your marginal rate is the rate you use to calculate the value of a deduction. For example, if your marginal rate is 28 percent, a $100 deduction reduces your taxable income by $28 (100 x 0.28).

Your effective rate, meanwhile, is the overall percentage of your taxable income that was actually paid in income taxes at the end of the day. And that rate will be lower than your marginal rate because much of your income will taxed at rates lower than your top rate.

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, minus the amount of state taxes you can deduct from your federal return.

For example, if your top federal rate is 28 percent and your state tax rate is 5 percent, your combined rate is 33 percent if you take the standard deduction on your federal return.

But if you itemize deductions on your return, your combined rate is likely to be less since you may deduct the state income tax you pay on your federal return, unless you're subject to the alternative minimum tax.

Your combined tax rate determines how much tax you'll owe on income from your investments. If your combined bracket is 33 percent, then 33 percent of your investment income will go to the federal and state governments. Put another way, you'll be able to keep 67 percent of your investment income.