March 11, 2015

It is wise to know your marginal tax rate and your effective tax rate as you set out to reduce the taxes you pay. Why?

3 thoughts on “March 11, 2015”

  1. Garrett Haag says:

    You should know your marginal tax rate so when your working and your thinking of working a few more hours, you should know how much of that you will keep. If your marginal is 15% you will be keeping .85$ of the next dollars you earn. So if you make an extra $100 in the end you actually keep $85 of that. The effective tax rate is the average of your taxes. This is always lower than the marginal tax rate due to the progressive tax system. The effective tax rate is useful in doing a quick estimate of your tax liability. You might want to use that to get a estimate of how much you want to withhold from your pay.

  2. Elizabeth Barske says:

    It is wise to know what your marginal and effective tax rates are and the difference between them so that you know how much your income is being reduced by taxes. Your marginal tax rate is the rate at which income over certain amounts is taxed and it will allow you to find how much of your additional income you will keep. Your effective tax rate is the average rate of taxation that applies to your income and shows you what you actually paid in income taxes as opposed to predicting the rate your income will be taxed at.

  3. Mike Finley says:

    Well said by both of you. Let’s recap.

    (1) The marginal tax rate is the rate of income tax on your last dollar earned (think December 31st after you get your last paycheck of the year).

    (2) Use that tax bracket to identify your tax savings when you identify tax credits and tax deductions.

    (3) The effective tax rate tells you what you are actually paying at the end of the day in relation to your income.

    (4) This number is important because it gives you something to gauge your previous tax year on and how you can try to reduce it this year in relation to your income.

    (5) Here is a real easy want to reduce your effective tax rate. Put money into your traditional retirement plan at work. This pre-tax money will provide for your future needs AND reduce your yearly federal and state income taxes. Winner, winner, chicken dinner!

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