Maryanov Madsen Gordon Campbell, Certified Public Accountants

Marginal tax rate schedules

Howard Gordon
Special to The Desert Sun
April 18, 2007

By reviewing a copy of your just-filed tax return, you can begin to understand your "marginal" and "average" tax rates and how they can help you with important financial decisions, like buying a house.

The Desert Sun, other periodicals and various news outlets all refer to these tax rates when trying to explain just how much tax you pay or reporting on new tax proposals.

Knowing your marginal tax rate is particularly helpful since it tells you how much money you paid in tax on the last dollar of income you had. Let me give you an example.

If you were married, filing a joint return and had taxable income of just over $61,300, your marginal tax rate would be 25 percent. If you had a chance to earn another $1,000, you would therefore pay an additional $250 in tax on that last $1,000 of income, not counting any Social Security taxes, state income taxes or the effect it would have on certain deductions you may have taken. In some cases, it might also increase the amount of Social Security income that is subject to taxation.

You can see that knowing your marginal tax rate can help you determine whether additional income is worth the effort, cost or possible risk.

Marginal tax brackets start at 10 percent and go up to 35 percent as your income increases.

To compute your bracket, first determine your taxable income by looking at line 43 on form 1040 or line 6 on form 1040 EZ.

Then, using your taxable income figure, check the adjacent schedules provided at the end of today's column or go to the IRS tax rate schedules at www.IRS.gov to see exactly where your income falls. You can see that the $61,300 used in my example above is the beginning of the 25 percent bracket for married, filing jointly, and stays the same until income exceeds $123,700.

If you itemize deductions instead of taking the standard deduction, this marginal tax rate is helpful in determining the value of your deductions.

For instance, a married couple with taxable income of $65,000 and with charitable deductions of $2,000 is in the 25 percent bracket and therefore saved $500 in taxes on that $2,000 in contributions. You can compute the savings on your deductible IRA in the same manner.

It's also helpful to compute your average tax rate since so much tax legislation refers to it.

We often hear discussions of a flat tax, so knowing your average rate can help you evaluate the effect of this proposed change on your personal tax bill.

To compute your average tax rate, divide your tax liability by your gross income. If you're filing form 1040, divide line 57 by line 22.

If you filed form 1040 EZ, first compute your tax liability by adding lines 11 and 7 together and then divide by line 4.

If we use that same married couple with taxable income of $61,300 as an example, and if they are not eligible for any tax credits, they would be paying a tax of $8,440. If their gross income were $80,000, their average tax rate would be about 10.5 percent ($8,440 divided by $80,000). But a flat tax of 15 percent, the figure most often discussed, would leave this couple with a lot more taxes to pay.

Knowing your marginal tax rate also can help you decide whether to buy a house or rent, since your mortgage interest and real estate taxes become deductible and usually allow you to itemize your deductions instead of just taking the standard deduction.

Additionally, knowing your marginal rate will help you determine what real savings will result from your home purchase.

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