How to calculate my Marginal and Effective tax rates

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Topic Author
johnpau
Posts: 304
Joined: Sat Dec 30, 2017 5:24 pm

How to calculate my Marginal and Effective tax rates

Post by johnpau »

Hi,

Married filing jointly (W2s)
side hustle schedule C ( solo-proprietor, no employees,1-man show)
No legal entity registered.
DBA( doing business as)

Using FreeTaxUSa.com filed 2020 taxes in 04/2021.
1040
Schedule C
Schedule SE

By looking at the above forms , how to calculate my Marginal & Effective Tax rate ?

Thanks for your time.
milktoast
Posts: 438
Joined: Wed Jul 10, 2019 8:17 pm

Re: How to calculate my Marginal and Effective tax rate based on 1040

Post by milktoast »

Pull up form view.

1040 line 11 is AGI. Line 15 is Taxable income. Line 24 is total tax. Depending on how you want to define effective, divide line 24 by either line 11 or line 15. Effective is kinda pointless other than as a trivia.

For marginal, take your taxable income from line 15 and subtract off any long term capital gains. Then look up the bracket https://www.nerdwallet.com/article/taxe ... x-brackets
dailybagel
Posts: 512
Joined: Tue Feb 15, 2011 8:35 pm

Re: How to calculate my Marginal and Effective tax rates

Post by dailybagel »

I suppose "effective tax rate" is your total tax paid (in dollars) divided by total income (or maybe adjusted gross income); see Form 1040 lines 9 and 24.

For the marginal rate, you could re-compute your taxes after increasing your income by a small amount (say, $100), then determining the increase in total tax. This would correctly account for tax credit phaseouts etc.

A cruder, but simpler way is to refer to the Tax Computation Worksheet for Line 16 (instructions page 78), and look at the multiplication amount in column (b). Note that this can be incorrect if your income is within some tax credit phaseout window.
casualflower
Posts: 354
Joined: Thu Jul 16, 2015 9:36 am

Re: How to calculate my Marginal and Effective tax rate based on 1040

Post by casualflower »

For what purpose do you want to know those numbers? It may make a difference.

In short, look at Line 15 of your 1040. That's your taxable income. Check out the IRS tax tables, see here: https://www.irs.com/articles/2021-feder ... n-amounts/.
For MFJ (married filing jointly), your income puts you at the 22% marginal tax rate.***

What's your effective tax rate? Well, that's where the 'purpose' comes in. Do we count the tax credits issued this year? There was Recovery rebate credit, Additional child tax credit, American opportunity credit. ACA. I might be missing one or two. Do we count SE tax? I'd say yes to the latter. Maybe to the credits.

Take your Line 16, add the SE tax (Line 23). That's tax owed. Divide that by Line 15. That's your effective tax rate.

Or take your tax paid and subtract all your credits (Line 32). Divide that by Line 15. That's also your effective tax rate.


***Edit: Oops, forgot about cap gains! milktoast has a better response for marginal.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: How to calculate my Marginal and Effective tax rates

Post by livesoft »

Many discussions of marginal and effective income tax rates exclude FICA and medicare taxes.
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Topic Author
johnpau
Posts: 304
Joined: Sat Dec 30, 2017 5:24 pm

Re: How to calculate my Marginal and Effective tax rates

Post by johnpau »

livesoft wrote: Mon Sep 13, 2021 4:19 pm Many discussions of marginal and effective income tax rates exclude FICA and medicare taxes.
In my case since all the side hustle income goes into my personal tax forms (schedule C),
wouldn't Form 1040 line 23 already include self-employment and medicare taxes (FICA) you are talking about ?

Correct me if I'm wrong.
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FiveK
Posts: 12012
Joined: Sun Mar 16, 2014 2:43 pm

Re: How to calculate my Marginal and Effective tax rates

Post by FiveK »

If you are at all familiar with Excel, perhaps the easiest way to look at your marginal tax rates (they may differ depending on whether you are looking at a change in W-2, Schedule C, capital gains, etc.) is to put your base situation in the personal finance toolbox, and choose the income item of interest for the marginal rate chart.

As already mentioned, your effective rate based on some overall income is probably not a useful number. E.g., see Marginal Vs Effective Tax Rates And When To Use Each.
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