Considerations
Tax Rates: 2007
The highest federal tax rate is 35% - add another 11% if you live in California and you have just given almost 50% of your ordinary income over to the TaxMan. Right?
Wrong!
The IRS doesn't collect 35% of all your income. You are only taxed at 35% on the income over $349,700. This means that if your taxable adjusted gross income (what's left after you apply all qualifying deductions and adjustments to your gross income) is $349,750 in 2007, the tax TaxMan gets 35% of only $50. Income between $160,851-$349,700 is taxed at 33%. This continues down to the lowest rate of 10%. What's more, when you pay state income tax, that's an itemized deduction that reduces the amount that is taxed at the federal level by the IRS.
Given the multiple tax levels, tax payers often want to know the real percentage of adjusted gross income going to the TaxMan. This is your effective tax rate.
Your Effective Tax Rate is the proportion of gross income you pay to the TaxMan. This is a weighted average of each tax rate and therefore much lower than your marginal tax rate.
Remember the example above? It has $50 taxed at 35%. The 35% is your Marginal Tax Rate. This is the tax rate you pay on your last dollar of income. For example, if your taxable income is $60,000 and you are single, your marginal tax rate is 25%. If your taxable income is $78,350, your marginal tax rate is 28%.
