Marginal Effective Tax Rates ? Deconstructed! | Finance Columnist

Posted on 07 August 2012.

The IRS Tax Code is the collection of current tax laws as enacted by Congress and their implementation as decreed by the IRS. Currently, the U.S. tax code is progressive and marginal. Progressive means that your effective tax rate increases as your income goes up.?Marginal refers to the manner in which taxes are calculated.

There are currently six rates for personal income tax, but the application of those rates?is where the marginal factor comes in. For someone filing single, income is taxed this way:

• 10% on taxable income from $0 to $8700
• 15% on taxable income over $8700 to $35,350
• 25% on taxable income over $35,350 to $85,650
• 28% on taxable income over $85,650 to $178,650
• 33% on taxable income over $178,650 to $388,350
• 35% on taxable income over $388,350

If you make over $8700, you would be taxed at 2 different rates. The first $8700 is taxed at 15% and the amount over $8700 is taxed at 15%, etc. Once your tax has been calculated, you can calculate your marginal effective tax rate by using the formula below. If you make over $8700 or more, the marginal rate will be in between two of the rates above.

Effective tax rate = (((Income ? deductions) x tax table rate) ? credits / Gross Income) x 100

At the root of the US tax system is the filing of tax returns. In most countries, tax forms must be filed by the individual taxpayer or severe penalties, including possible legal proceedings will result. For individuals in the US, this is not quite the case. In theory, you are not required to file a tax return with the IRS (in the states have income tax, filing is usually required). If you don?t file a return, the IRS will eventually file your return for you and send you a notice which quite likely includes a bill for an amount of money you owe including penalties and interest for not filing your returns. You don?t have to file a return but if you don?t and you owe money, you are penalized.

The complexity of the tax code and the importance of accuracy necessitated the early adoption of computer technologies. Tax software has come a long way. Now anyone with a basic computer and an internet connection (even a smartphone or tablet) can file their own taxes with reasonable assurance of correctness.

Malia Anderson is a freelance writer from Greensboro, NC. She enjoys writing about finance, DIY, and ?being green?. Thanks for reading!

Source: http://www.financecolumnist.com/marginal-effective-tax-rates-deconstructed/

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