Download full article here: marginal vs effective.pdf
Consider the following tax table for 2018 supplied by www.irs.gov:
Tax Rate | Taxable income, Single | Taxable income, Married Filing Jointly |
10% | $0 – $9,525 | $0 – $19,050 |
12% | $9,526 – $38,700 | $19,051 – $77,400 |
22% | $38,701 – $82,500 | $77,401 – $165,000 |
24% | $82,501 – $157,500 | $165,001 – $315,000 |
32% | $157,501 – $200,000 | $315,001 – $400,000 |
35% | $200,001 – $500,000 | $400,001 – $600,000 |
37% | $500,001 or more | $600,001 or more |
First a simple example:
Let’s say you’re filing as Single with $10,000 of taxable income. Reviewing the first two columns above, $9,525 of the income will be taxed at 10%, and the remaining $475 will be taxed at 12%. The math is:
This is intuitive, as the large majority of the income is taxed at 10%, with only those dollars over $9,525 taxed at 12%.
Now a more complicated example:
Let’s say you’re Married Filing Jointly with $80,000 of taxable income. While people may call this “the 22% tax bracket,” the effective tax rate is much lower. The math here is:
This is also intuitive, as most of the income falls within the 12% marginal rate, with some in the 10% rate, and a small amount in the 22% rate.
So what does this all mean?