What Is My tax Rate? (Marginal Tax vs Effective Tax Explained) (Federal Income Tax Rates Explained)

What Is My tax Rate? (Marginal Tax vs Effective Tax Explained) (Federal Income Tax Rates Explained)

how’s it going subscribers and fellow
youtubers! my name is Mike the CPA this is my sidekick Chipper in
this video we’re gonna help you expand your tax knowledge so that you can truly
have a better understanding of how much tax you’re actually paying on the income
you make so please stick with me through this video as we discuss the differences
between marginal tax rate and effective tax rate let’s get it now I can tell you
that most people have absolutely no idea what marginal tax rate means versus
effective tax rate means and in fact I used to not have any idea myself so why
should we even care to learn about it well the first reason is that by knowing
this stuff it’s going to help you better budget your finances and manage your
cash flow secondly as you learn this stuff you’re gonna be thinking
throughout the year have how to minimize your taxes and the third reason you want
to learn this is so you can confuse the heck out of people with your new fancy
tax knowledge let’s start off by talking about marginal tax I mean what the heck
is marginal tax anyway marginal tax is the amount of tax we pay on each
additional dollar we earn let me repeat that
it’s the marginal tax rate is the amount of tax we pay on each additional dollar
we earn remember the tax rates follow tax brackets so as your income goes up
so will your tax rate in this example we’re looking at we have chippers income
his filing status is single you just say guys know these tax rates the marginal
tax rates are actually coming from the 2018 income tax bracket rates so that’s
where those are coming from so chipper let’s say it’s January 1st ok and he has
hasn’t made any income yet because as you as you will see for for most people
that at the start of the year their marginal tax rate is actually zero
because they haven’t made any income yet right so chipper is the same way so on
January 1st chipper has made nothing so his tax rate is nothing but now the way
this works though is so chipper starts on January 2nd he starts working and
starts making some money now up to the point where he makes nine thousand five
hundred twenty five dollars and all this stuff is coming from
the income tax brackets for a Singler single filer up until he makes this much
money his marginal tax rate will be ten percent so it’s ten percent is
marginal tax rate until he exceeds this amount so that’s why I have this little
note over here for you guys it says income from zero to nine thousand five
twenty five will be taxed at 10% and so as you guys can see as the March 31st
chipper has made from working nine thousand five hundred twenty five
dollars which means his Knicks dollar earned will be taxed at a higher rate
according to those income tax brackets so now the second he exceeds this his
marginal tax rate the amount he’s gonna make or pay on each additional dollar
earned is now going to be twelve percent so from from nine thousand five twenty
five to income a thirty eight thousand seven hundred tripper will pay twelve
percent on that income so from April 1st through September chippers working away
working away paying now on this any income above this now he’s paying twelve
percent starting in September he breaks through this thirty eight thousand seven
hundred dollar amounts so now since he’s above this now any money he makes beyond
that will be taxed start to be taxed at twenty two percent so now his marginal
tax rate is 22 percent so that’s marginal tax rates in a
nutshell so everybody’s marginal tax rate at the beginning of the year is
zero until they start to make money the first nine thousand five hundred
twenty-five dollars are taxed your marginal tax rate will be ten percent as
you exceed that amount the next set of income will be taxed at twelve percent
as you exceed that then you’ll 22 percent etc etc so when you guys are
thinking about marginal tax rate think about the highest rate of tax you will
pay on the next dollar of income you earn your marginal tax rate will
increase throughout the year and your income increases throughout the year
where I see people get messed up all the time all the time is that they tend to
think that all of their income is taxed at one rate but from this example you
can clearly see it’s not your income and our income as you make more money is tax
at different rates and once you exceed certain dollar amounts of income then
your rate increases but all this income is being taxed at different rates
as your income climbs you’re never getting taxed on all at just one income
tax rate so now you guys will know that when you hear people saying oh I’m in
the ten percent tax bracket I’m in the twenty five percent
max brackett but I’m in the 22% tax bracket now you guys will know when if
you hear people saying things like that they’re actually talking about their
marginal tax rate the majority of the time okay guys now let’s talk about the
effective tax rate how it works and what it is it’s super simple to explain and
it’s my favorite way to measure income taxes I think of the effective tax rate
as my real rate of income tax let me explain what I mean the thing that’s
important to understand about the effective tax rate is that the effective
tax rate is the average rate of tax we pay on each dollar we earn let me repeat
that the effective tax rate is the average rate of income tax we pay on
each dollar we earn the quickest way to find your effective tax rate is to
actually look back at your last previously filed return and what you’re
gonna do is you’re gonna look at your 1040 okay and go to page two on page two
you’re gonna find line 43 see where it says taxable income go ahead and figure
out what your taxable income is there and let’s just say it’s 40 thousand this
is just I’m not gonna like figure out the exact numbers and calculations this
is strictly for an example this is just strictly for educational purposes guys
but so let’s say chippers taxable income was 40,000 okay so we’re he’s gonna look
at that on line 43 and then his total tax on that income let’s just pretend it
was five thousand four hundred twenty bucks who knows who knows something like
that okay that was his total tax so you’re gonna look at on the second page
of your 1040 you’re gonna look at these two lines this one line 63 and line 43
and then what you’re gonna do is you’re gonna be a lot divided line sixty three
of five thousand four hundred and twenty dollars divide that by line forty three
which is your taxable income of $40,000 so I’m gonna type in forty thousand
dollars here and there is our effective tax rate so for chipper if his income
was forty thousand dollars and he paid federal income tax of $5,400 and $5,400
then his effective tax rate is thirteen and a half percent roughly which
basically means that on average for every dollar he earns throughout the
course of the year he’s paying an income tax rate of thirteen and a half percent
and that’s what the effective tax rate it’s the average amount of tax we pay on
each dollar we earn now you guys can clearly see that is much different than
the marginal tax rate which we just discussed so in summary your marginal
tax rate will usually be the same or higher than your effective tax rate
marginal tax rate and effective tax rate both only cover income taxes that you
not cover other taxes like property taxes Social Security taxes Medicare
taxes and things like that your marginal tax rate is the highest rate of tax on
each dollar you earn your effective tax rate is the average rate of tax you pay
on each dollar you earn if you live in a state that has income taxes you’ll have
a separate marginal tax rate for state and a separate effective tax rate for a
state as well but they it works just like federal taxes but for state income
taxes now the best part of all now that you’ve come across this newfound tax
knowledge now it’s time to go out there and talk about this with your friends
and family to confuse the heck out of them nothing will put a smile on your
face more than talking about marginal tax rate effective tax rate and then
waiting for their deer in the headlights look remember don’t be afraid to share your
newfound knowledge because most people will have no idea what you’re talking
about but you my friend will sure sound intelligent if you guys want to learn
more about income tax brackets or taxes in general make sure to follow some of
my links down in the description section down below I have a ton of tax videos
and I make all new tax videos towards the start of every single year well guys
I hope you found this information helpful if you did make sure you drop a
like to let me know you liked it share this information with a friend
especially somebody who’s trying to get a better grasp on taxes and how they
work and be sure to subscribe if you have not already by hitting that red
subscribe button down below now if you’re new to money in life TV welcome
to our Channel every single week our goal is to help you become fiscally fit
and we do that by helping you learn finances investing and taxes and more on
a regular basis if you guys have questions or comments on anything we
discussed in today’s video just let me know by leaving a comment down below
I’ll make sure to get back to you or just if you want to say hi just say hi
okay guys we’ll go have a great week out there it was great seeing all your
smiling faces once again here on YouTube and I will see you guys in the next
video use the information you learned in this video to live your life
uncaged see y’all next week bye guys peace


  1. Money and Life TV says:

    Thanks for watching everyone. I see a lot of confusion in the area of the understanding of tax rates so I hope this video will clear that up. Marginal tax rates and effective tax rates are both similar, but different ways to measure your taxes. I tried to keep this short and concise. I hope you all enjoyed the video.

  2. Money and Life TV says:

    What is your marginal tax rate? Mine is sitting at 22% under the new tax law. My effective tax rate is somewhere between 15% – 20%.

  3. Money and Life TV says:

    By understanding tax rates you can better forecast and budget your finances for the year. You will be less likely to fall behind on your taxes if you know the average amount of tax you pay on every dollar you earn. Just remember these numbers will fluctuate throughout the year. For tax planning purposes I suggest going based on your marginal rate, and reviewing the 2018 tax brackets for basic guidance.

  4. tsx3214 says:

    Good morning, Mike, and thanks for this week's lesson. Very well delivered.
    I'm glad I never thought of it in those terms because after let's say August, I'd be working for the man every night and day at a 25% marginal rate. lol Be well, and enjoy the long weekend!

  5. B.A.B.Y Investments says:

    Actually understanding how taxes work really gets you one step further. It also shows you that the taxmen are actually not that scary and that you actually get a lot of choices when it comes down to paying taxes (like for example, how much when and how to pay them). That also was the reason why my first degree that I ever got from college was in tax accounting, and it has helped me develop my business way faster that others because of tax benefits that not everybody knows about!

  6. Ken Lynch says:

    Mike… Found & subscribed to your channel only 6 months ago. Greatly appreciate the educational & very informative content. Question: What, if any thing, can be done legally to lower one's EFFECTIVE Tax Bracket??? My Filing status is – Single, Retired, with good Pension + SS + a good RMD (from having saved & invested too heavily in the past). = 17.6% Tax Bracket. Also investment mix at 75 / 25 . Can any thing be done legally / wisely to reduce a Tax Bracket for someone in REtirement???

  7. giovanie fletcher says:

    thank you so much……..

  8. Aggressive progressive says:

    Somebody show this to the idiots on fox news.

  9. Mark Burk says:

    In terms of how productive you are, wouldn't your marginal tax rate be more relevant? Because it is a tax on each additional dollar, it would be the determinate as to how hard you decide to work (i.e. how PRODUCTIVE you are) as a function of what it costs you to work vs. not work. If so, then wouldn't it then also be the case that high marginal tax rates discourage individuals from producing more, thereby ultimately decreasing the amount of wealth available to everyone else?

  10. Doug Evans says:

    Nicely put Mr. CPA.

  11. billyrayband says:

    What??? For marginal rate, you forgot to subtract adjustments to income before you pay a dime of tax. You are best to just look at your taxable income on your 1040 line 43 and compare it to the tax bracket table to get your marginal rate…effective rate was OK.

  12. enginminn1 says:

    I would have thought effective tax rate would be Line 63 divided by line 38 (100%of my earnings without standard deduction being applied). I would assume that based on your definition of effective tax rate.

  13. Stephen Soukup says:

    great info. I didnt realize it fluxuates/increases over time but that makes sense. keep up the good work.

  14. 2380knight says:

    I’m trying to find the effective tax rate, but you didn’t explain how you got the total tax to divide by taxable income

  15. Rob & Shay TV says:

    very helpful

  16. Jose Espaillat says:

    Thank you, Mike, The income tax calculation (Tax Bracket and Rates) is performed with the gross income or the adjusted gross income?

    What is the difference between using the percentage method (publication 15) used to calculate the projected income tax and the income tax found using the tax brackets and rates?

    Hope to see future videos on how to claim allowances (W4 form), how to compute projected income tax and how to determine the marginal tax rate and effective tax rate for the state of New York.

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