Marginal and effective tax rates are discussed in detail around tax season. So, which one is the most important?
As part of TheStreet’s ongoing tax series, we’ve gathered some of the top CPAs in the country to answer your tax questions.
This week, Retirement Daily’s Robert Powell caught up with Jeffrey Levine, CPA and tax pro from Buckingham Strategic Wealth Partners to tackle a frequently asked question, What is the most important tax rate?
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Quotes| What’s the Most Important Tax Rate? Jeffrey Levine, Chief Planning Officer, Buckingham Strategic Wealth Jeffrey Levine, Chief Planning Officer, Buckingham Strategic WealthRecommended: Is It Possible to Lower My Effective Tax Rate? What Are My Options?
Video Transcript| Jeffrey Levine, CPA and Tax Expert, Buckingham Strategic WealthRobert Powell: What’s the most important tax rate? Well, here to talk taxes with us is Jeffrey Levine from Buckingham Wealth Partners. Jeffrey, when you think about all the different tax rates, what’s the most important one to you?
Jeffrey Levine: Well, for me, it’s the marginal tax rate, and there are lots of different ones. For instance, a lot of people talk about your effective tax rate, which is the average tax rate you pay on your income. The marginal rate is effectively what is the tax that you pay on that last dollar or the next dollar of income. And the reason to me as a planner that matters most is it’s the number that I have the greatest control over changing. If I increase my income a little bit, well, I’m paying tax at that marginal rate. What does it cost me? If I can reduce income a little bit or I can create some additional deductions, whether they be retirement deductions, charitable contribution deductions, etc., those deductions will offset my tax at that marginal rate.
So ultimately, while the effective rate can be a great indicator of what your big picture tax percentage looks like, the marginal rate is the rate that we should focus on most from a planning perspective because by adding or subtracting amounts of income, it’s the rate that actually applies to that income.
Editor’s Note: The opinions expressed in this article are those of the authors. The content was reviewed for tax accuracy by a TurboTax CPA expert.
Zachary Faulds contributed to the writing of this article and produced the video and/or the graphics associated with it.