Which really matters? Marginal or effective tax rate? Just show me how much I get to keep says Quinn. 

The recent tax legislation triggered a thought. Do taxpayers understand the difference between their marginal tax rate and effective tax rate?

I see the focus on the tax on the next dollar earned – marginal tax rate as opposed to what I view as actually mattering – the effective tax rate. 

There is a big difference between their two. Are seniors overestimating the net impact on the new $6,000 deduction? 

My associate Gemini explains it like this:

• Marginal rate is the speed limit on each segment of a road. You might have different speed limits (tax rates) on different parts of your journey (income levels).
• Effective rate is your average speed for the entire trip. Even if you hit a high speed on one segment (high marginal rate on your top income), your overall average speed (effective rate) will be lower because you also drove slower on other segments (lower marginal rates on your initial income).

I see the effective tax rate as the most relevant. The average speed reflects how long it takes to reach your destination and may also reflect better driving efficiency. 

Would I turn down a bonus or raise because it pushes me into a higher tax bracket? I never did. Last year my effective tax rate was 18% – less than my highest bracket do to deductions, our ages and tax free income.  While a large income increase may affect that number, the effective rate and not the marginal rate seems most important in terms what percentage of my income I get to keep. 

I have read the marginal tax rate tells you the tax impact of your next financial move. But is that really accurate? Isn’t the only measure of the net tax impact your effective rate? Shouldn’t my next move consider the real bottom line? 

Since I claim no expertise on taxes or tax planning, let’s discuss.