Taxes, Uuuuugh!! (Marginal vs. Effective Tax Rate)

Should you care? Yes.

There are marginal tax rates and effective tax rates. Why do I care? Because it gives me hope that I’m not paying as much in taxes as I thought. Sadly, I’ll still be paying out far more than I want to.


I had only been at my first full-time job for four months (two months in the actual tax year) when I decided to find a professional tax preparer. That is how much tax information baffled me. In truth, I just didn’t want to sit down and figure it out. Now years later, my taxes are far more complicated than back then, but I want to understand a few things instead of just handing my documents over to a tax preparer and blindly signing on the dotted line when she’s finished.

I knew tax brackets existed but I didn’t know how they worked. Here’s what I learned today:

Marginal tax rates are simply [no, not really simple] based on a person’s tax bracket which is determined by his or her income level and his or her status (single, married filing jointly, married filing separately or head of household). Income is divided into different levels or brackets. A single person making up to $9,325 a year will be taxed at 10 percent, based on the 2017 income tax brackets. A single person who makes between $190,651 – $416,700 [I wish I had an income that high!] is taxed at 33 percent.

However, the single person making $300,000 isn’t taxed at 33 percent for her entire income. The first $9,325 is taxed at 10 percent. The next $28,625 of her income is taxed at 15 percent.The next $53,950 is taxed at 25 percent and so on. Only the last $108,350 is taxed at 33 percent. This is called the effective tax rate.

When you add in deductions and credits and so on, the actual taxes paid will be even lower [I always like lower!].

 

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