Marginal Tax Rate vs. Effective Tax Rate
When it comes to income taxes, the government can end up with a significant portion of your wages, as well as your investment income. While many people are aware that tax will be due to their income, determining the amount of your income tax liability can be somewhat tricky.
This is because there is a difference between your marginal tax rate and the effective tax rate. In this case, your marginal tax rate refers to the highest tax rate that is achieved.
For instance, if you file your income tax return (in 2021) as an individual and earn $72,000 in that year, your marginal tax rate would be 22%. This is because it is the highest rate by which some of your income will be taxed.
Federal Income Tax Brackets (2021)
|
Tax Rate |
Single Tax Filer |
Married Filing Jointly Tax Filers |
Head of Household Tax Filers |
|
10% |
Up to $9,950 |
Up to $19,900 |
Up to $14,200 |
|
12% |
$9,951 to $40,525 |
$19,901 to $81,050 |
$14,201 to $54,200 |
|
22% |
$40,526 to $86,375 |
$81,051 to $172,750 |
$54,201 to $86,350 |
|
24% |
$86,376 to $164,925 |
$172,751 to $329,850 |
$86,351 to $164,900 |
|
32% |
$164,926 to $209,425 |
$329,851 to $418,850 |
$164,901 to $209,400 |
|
35% |
$209,426 to $523,600 |
$418,851 to $628,300 |
$209,401 to $523,600 |
|
37% |
$523,601 or more |
$628,301 or more |
$523,601 or more |
Source: Internal Revenue Service
In this case, the amount of income tax you owe for the year would be determined as follows:
Single Tax Filer
$72,000 annual income
$9,950 @ 10% = $995
$40,525 – $9,950 = $30,575 @ 12% = $3,669
$72,000 – $40,525 = $31,475 @ 22% = $6,925
Total Tax Due: $11,589
However, your effective tax rate would be 16.1%. This represents the amount of your tax payment that is due divided by your adjusted gross income. The result is determined by taking the $11,589 of tax that you owe and dividing it by the $72,000 in your annual adjusted gross income for the year.
Because taxes can have such a big impact on your lifestyle, it can be beneficial to discuss your retirement income needs with a retirement specialist who is also adept at creating strategies to help you reduce or eliminate them.
Feel free to reach out to us with any questions by calling 813-926-9909 or emailing at fjcarreno@theretirementadvantage.net. We look forward to talking with you and finding the right financial tools for reducing your income tax liability.
