Q&A of the Week July 20, 2022

Question

What is the difference between effective tax rates and marginal tax rates?

Answer

Effective tax rate is the percentage of taxes a taxpayer pays on their taxable income. To calculate, you divide the amount of taxes paid by taxable income. It is the more effective tax measurement for most Americans.

Marginal tax rate is the amount of additional tax paid for additional income and is used to determine the value of a specific deduction for a taxpayer.

Both effective tax rate and marginal tax rate are used for tax planning purposes. In general, when the effective and marginal tax rates are close to each other, it suggests that there hasn't been a lot of tax planning.

A CPA helps taxpayers with tax planning and to get the lowest possible tax rate.