When it comes to designing and creating, architects are effective and anything but marginal. But what about when it comes to paying taxes? In this article, we will discuss the differences between effective versus marginal tax rates.
The tax rates listed in the current Internal Revenue Services (IRS) charts-10%, 12%, 22%, 24%, 32%, 35%, and 37%- are what are known as “marginal tax rates.” With all of the tax reform that is occurring, these rates are subject to change. For reference on income levels for the tax rates, see our other article <hyperlink>.
But does a person just take his or her income and multiply that number by the percentage listed in the IRS charts? The answer lies in understanding that the federal tax system is far more complex. The “effective tax rate” is part of what creates this convolutedness; the effective tax rate represents the true percentage of your income that you owe to Uncle Sam.
The effective tax rate represents an average amount that a person will pay on his or her income after taking any deductions for which that person is entitled. Especially with the increased limits for the standard deduction that occurred in recent years, far more Americans claim the standard deduction rather than itemizing their taxes.
For the tax year 2020, the standard deduction for earned income is $12,400 if filing single or married filing separately (MFS), $18,650 for head of household (HOH), and $24,800 for married filing jointly (MFJ).
For more information on how to calculate one’s effective tax rate, stay tuned and follow our other articles on The Wealthy Architect.
