Comments on: Slight Misunderstanding of Marginal Tax Brackets

By: Art

Art — Tue, 09 Jun 2009 15:15:24 +0000

Jim Wang’s article is not a complete and accurate treatment of the marginal rate situation in federal income tax calculations.

It is apparent from the comments that most taxpayers fail to grasp even the basics of marginal calculations. How is the average taxpayer ever to understand the complications introduced through the nuances of phase-ins/phase-outs of deductions, exemptions, and credits, and the interplay with marginal brackets?

By: eldergal

eldergal — Wed, 03 Dec 2008 13:15:08 +0000

I have to say, this is extremely helpful! I was worried, as my husband started a new job with a very generous salary (we’re both recently finished college), and I saw that it would bump us into the next tax bracket. Given this is his first year working, I was afraid we would owe some massive sum to the IRS come April. Now that I better understand it, I can look through things again. Knowing this now, I think we’ll be OK!

By: Emily

Emily — Wed, 03 Dec 2008 08:37:02 +0000

But what does this mean when it comes to the AMT (Alternative Minimum Tax)? If you go over the AMT limit, it can mean making less, doesn’t it? I’m always confused about this issue. Luckily, my husband and I are still just below it, but I’m always very concerned about what’s going on with that, because my husband always seems to be just one raise under it and congress is only barely keeping up.

By: Walt Bauer

Walt Bauer — Wed, 03 Dec 2008 03:40:57 +0000

To add confusion, there is the “actual” marginal rate. To understand it just add $100 to an income source say interest and recalculate the new tax. For some senior citizens on SS the tax bracket may be 15 % but the actual additional tax dollars required to cover the $100 extra income is $27.75 or 85% more. It’s the way the IRS penalizes old folk for saving.

By: saladdin

saladdin — Sun, 07 Sep 2008 02:47:23 +0000

What drives me crazy is people that turn down higher paying positions because they will end up in a “higher” tax bracket. My best friend’s wife did this. I tried to explain taxes to her but it did not help. She turned down a higher paying job to keep from paying more taxes.

saladdin

By: MoneyBeagle

MoneyBeagle — Fri, 05 Sep 2008 16:04:34 +0000

This is a great article. The accountant that does our taxes gives us a summary sheet every year, and two of the lines pertain to the tax rate. One is the ‘marginal’ bracket and the other is the ‘actual’ percent of tax paid. This makes it easy to see. I wish more people understood this, thanks for pointing it out in an easy to understand way.

By: PartialExponent

PartialExponent — Fri, 05 Sep 2008 15:10:32 +0000

Great post, this is something that seems to be very widely misunderstood. I even remember my favorite high school math teacher complaining with this very misconception!

By: JB

JB — Fri, 05 Sep 2008 04:15:23 +0000

An easy way to figure out a close approximation of your effective tax bracket is to look at your paycheck, divide your Net Pay (the amount that gets deposited in the bank) by your Gross Pay (the amount at the top, before taxes are taken out). (this works as long as you were correct on your W-4 and aren’t itemizing).

For example, I just did mine: I make $65k a year, and am in the 25% bracket:

-16.9% Federal
-7.5% Payroll Taxes (FICA)
-7.2% Maryland State Tax

Total Tax Burden: 31.6%

…ouch!

By: Todd A.

Todd A. — Fri, 05 Sep 2008 02:28:10 +0000

Great post. It wasn’t all that long ago that I misunderstood the concept of marginal tax brackets. Probably a hundred other tax terms/concepts I still don’t know !

By: Jim

Jim — Thu, 04 Sep 2008 22:34:11 +0000

Good post Jim. This is a topic that a lot of people are confused about. I used to be confused about it too. I had a post about this myself not long ago and I made a graph showing the EFFECTIVE tax rates as your income goes up. See:
http://freeby50.blogspot.com/2008/08/how-do-tax-brackets-work.html

Another thing you can do is look through the tax tables in the 1040 instruction book. You can see that the numbers go up gradually. Theres no large jumps in taxes due to entering a new marginal tax bracket.

Lord, The median is around 10% and the average is around 12%

Median household income is about $50k. Federal income taxes are around 10% effective that much.

Average effective federal income tax rate for all tax payers is around 12% (its skewed higher due to the very high income earners). But the bottom 50% of tax payers pay only about 3% average taxes to the IRS while the top 50% of us pay over 13% tax.
See: http://www.taxfoundation.org/publications/show/250.html

Jim

By: Lord

Lord — Thu, 04 Sep 2008 21:05:46 +0000

No, it was always like this, it is just that the brackets weren’t indexed originally so inflation would result in more taxes. I believe median average tax rates are just under 20%.

By: jim

jim — Thu, 04 Sep 2008 20:22:45 +0000

Start-Up: Yeah I did… Cut and Paste failed me.

Ben: No, it’s been that way for a long time.

By: Ben

Ben — Thu, 04 Sep 2008 20:20:49 +0000

Hear, hear. Though the confusion is based off of the old tax code from the first Bush presidency and before (I think). But now it’s changed to what you described it.

Your AGI (adjusted gross income) is what the tax is ultimately based off of. Although if you end up like me with too many deductions (close to 25% of income) you get stuck with AMT which is actually why I lowered my 401k contributions this year.

By: Start-Up

Start-Up — Thu, 04 Sep 2008 20:09:40 +0000

I’ve never taken the time to figure out if my entire income is taxed at the new rate or just the income above the plateau. Now I don’t have to.

Did you mean you are only taxed 25% on the 32550th dollar you earn up to the 78849th dollar you earn instead of:

“you are only taxed 25% on the 32550th dollar you earn p to the 32549th dollar you earn”

I’m assuming so, but just clarifying