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You are here: Home / blog / Understanding Marginal and Effective Tax Rates

Understanding Marginal and Effective Tax Rates

September 30, 2015 By staff - tc

Tax RatesUnderstanding the difference between marginal and effective tax rates is important information for attorneys in the midst of a divorce or family law case.

The marginal tax rate is the tax rate imposed on the very last dollar of taxable income. The effective tax for an individual is the average rate at which their income is taxed. The effective rate is often a more accurate representation of a taxpayer’s liability than its marginal rate. Observe the chart below.

Taxable Income    Marginal Rate      Effective Rate

$ 18,450.00                       10.0%                             10.0%
$ 74,900.00                       25.0%                             14.0%
$ 151,200.00                     28.0%                             19.0%
$ 230,450.00                    33.0%                              22.0%
$ 411,500.00                    35.0%                              27.0%
$ 464,850.00                    39.6%                              28.0%

So when is it proper to use marginal rates, and when should effective rates be used?

The marginal tax rate is used to measure at the margin the impact of a certain change or implementing a certain strategy. Effective rates are useful to understand the portion of an individual’s overall income that is consumed by taxes. For example, if the problem in divorce is to adjust a retirement account for future taxes, the effective rate is the proper rate to use.

For more information on taxes and divorce, see my blog post here.

Filed Under: blog Tagged With: Steve Walker, Tax Information

Steve Walker, CPA

8864 Broken Bend
Frisco, Texas, 75036
214-797-2572

Steve Walker

 

Steve Walker, CPA

8864 Broken Bend
Frisco, Texas, 75036
214-797-2572

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