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Marginal vs. Average

IMAGINE YOU’RE SINGLE, you claim the standard deduction and you have income of $60,000 in 2023. You’d be in the 22% federal income tax bracket, but that isn’t how much of your income you’d lose to taxes.

On the first $13,850 of income, you wouldn’t owe any federal income taxes, thanks to your standard deduction. The next $11,000 would be taxed at 10% and the subsequent $33,725 would be taxed at 12%. That gets you up to $58,575 in total income. It’s only at that point that your income starts getting taxed at 22%. In other words, while you’re in the 22% marginal federal income tax bracket, just $1,425 of your $60,000 income would be taxed at that rate. Your total federal income tax bill would be $5,460.50, putting your average tax rate at 9.1% for your $60,000 in gross income and 11.8% for your $46,150 in taxable income.

Your marginal tax rate is crucial for figuring out whether you should buy taxable or tax-free bonds, how much all that mortgage interest is costing you, and whether it makes sense to convert your traditional IRA to a Roth IRA. But your marginal rate isn’t a good indicator of what your total bill will be for the year. For that, you’d want to know your average rate.

Next: Standard vs. Itemized

Previous: Payroll Taxes

Article: Life on the Margins

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