calculating marginal tax rate

For most situations, you can apply the tax table in the Form 1040 instruction booklet or the form 1040ES instructions, to the taxable income line of Form 1040, reduced by the long term gains included on form 1040 line 13 and the qualified dividends shown on Form

1040 line 9b. If you are subject to AMT the answer is more complex.

Alan:

It is a little more complicated than Art suggests if you consider the effiective marginal tax rate because AGI, Modified AGI, and AMTI can impact over twenty-five credits, exemptions, deductions, exclusions, and eligibilities. Fortunately all 25+ phase-outs can't impact the same taxpayer, at least for now. For example the effective marginal tax rate for a Social Security recipient in the nominal 25 percent bracket can be more than 50 percent because of the impact of income on taxable Social Security benefits, medical, and miscellaneous expense deductions. These pahse-outs can also increase state income taxes.

And it can get worse. Because IRS ignores the limitations imposed by section 111(a) of the Internal Revenue Code, refunds / recoveries related to state income taxes and other itemized deductions that produced a tax benefit are included the those same phase-out calculation in the refund year even though the itemized deduction had no impact on the phase-out calculations but the income used for deductions did,,. to the disadvantage of the taxpayer. A rough analogy would be a merchant keeping the sales tax when you return a purchase except it is worse. In the case of the Social Security recipient, the effective marginal federal income tax rate on the income related to a state income tax overpayment/refund can be more than 76 percent. And then there is the state income tax. Check out Minnesota.

Cheers,

WDK

========================================= MODERATOR'S COMMENT: Please trim unnecessary parts of messages you respond to

And some would argue that the very term "marginal tax rate" is meaningless because it depends on what type of income you're referring to. Your marginal rate on interest income is probably different than your marginal rate on (qualified) dividends or capital gains or 1250 recovery. You might think your marginal rate on tax exempt income is zero, but if you are receiving social security ...

You can even construct examples where your marginal rate is over 100%, since some credits have sharp cutoffs instead of phasing out.

provides a good start.As others replied, there are numerous phase-outs and quirks that lead to the next $1 of income being impacted by more than this published rate. Whether correct or not, I refer to this phenomenon as a "phantom tax rate" and it's impact is most striking in the effect on social security benefits vs other income during retirement.I provide a graph of this at I showed that IRA distributions can create a phantom marginal rate of 46.25% for a woman who otherwise should be in the 15% bracket. Joe

No.

Correct. What does matter to many people is the rate you get when you put the result of Form 1040 Lines 66a plus 67 through 71, minus Line 63, in the numerator, and whatever you want to call your "total income" in the denominator.

In fact, the tax tables themselves have a sharp cutoff for every $50 increment, one dollar more or less can change your tax by five or ten times that amount.

You can also construct examples where your marginal rate is zero, or less than zero (Earned Income Credit).

-Mark Bole

My answer is less correct than the others, but it may be of some use in planning. Take the amount of taxable income that is not qualified dividends or capital gains. Subtract deductions. See the table on

the federal marginal rate. All of those reasons why this method is not really accurate still apply.

This does not apply to the marginal rate on qualified LT capital gains, which is usually 15% for those who would be asking the question. :-)

Being picky here, but "taxable income" has had deductions subtracted already.

Using TurboTax, I just add a fictional $1,000 of income and see how much the tax increases. I do it once for ordinary income and once for LTCG. Presumably, the software takes into account the complexities of limitations and phase-outs and the like.