Stephen Merritt, CPA, PC | Certified Public Accountants | (757) 420-5778
233 Business Park Drive, Suite 104, Virginia Beach, VA 23462
- What is the Difference Between Your Marginal Tax Rate and Your Effective Tax Rate?
- Happy Birthday Louis!
- Managing Customer Service with Technology
What is the Difference Between Your Marginal Tax Rate and Your Effective Tax Rate?
Have you heard the phrases “marginal tax rate” (or tax bracket) and “effective tax rate” and wondered what the distinction is between them? In order to explain the difference, it is first important to note that in the United States, we do not pay a flat tax – we are on a graduated system and therefore pay taxes in tiers.
Let’s say that you are a Single filer, and you have taxable income of $60,000 for the 2020 tax year. According to the IRS tax tables, that puts you in the 22 percent tax bracket – in other words, that is your marginal tax rate. Twenty-two percent of $60,000 is $13,200, but luckily, you don’t have to pay that much. If you calculate the tax based on the 2020 IRS Tax Tables, the amount of tax is $8,990, which is less than the $13,200 based on the 22 percent marginal rate.
This scenario illustrates the difference between your marginal tax rate (tax bracket) and your actual effective tax rate. Even though you would be in the 22% bracket based on $60,000 of income, you do not pay 22 percent flat tax. You would pay less than that since there is one bracket below your tax bracket: the 12 percent bracket. (There are really two for you math geeks: 12 percent and 0 percent.)
The rate that you actually pay in taxes is your effective tax rate. This rate is unique to you individually and is simple to calculate. Just take your total tax liability and divide it by your taxable income. In our example, that would be $8,990 / $60,000 = just about 15 percent. Compare that to the 22 percent marginal rate and it sounds pretty good!
The effective rate is often more useful because it gives you an average rate you pay on all the money you make during the year. It is much more accurate in terms of gauging what you might owe based on your projected taxable income. In most cases, the effective tax rate is less than the marginal rate.
The marginal tax rate is still helpful to know for tax planning. For example, you can get a feel for how much potential benefit you could receive from an additional deduction. For example, how much would you benefit from making a $6,000 IRA contribution? Your taxes would be reduced by $1,320, or 22 percent of $6,000. Looking it up in the tax tables is another way to double-check the math and yields the same savings.
Managing Customer Service with Technology
- How fast you can respond to a customer
- How well you solve the customer’s problem
- How to track a customer’s issue if it has to be open for a while before it can be solved
- How to do all of this in a cost-effective and efficient, yet friendly, manner
- Phone calls and voice mails
- Text messages
- Social media accounts, for all the platforms you have a business presence
- Posts, replies, and comments
- Any other methods you have set up in your social accounts
- Chat feature on website
- Snail mail
- What forms of payment do you accept?
- What is your shipping policy?
- How can I get help if I need it?
- What is your return/refund policy?
- What is your guarantee?
- Is my data secure with you?
- How do I update my credit card/address/phone/email?
- When will my items arrive?
- What licenses do you have?
- What are your hours?
- Do you have hours for seniors?
- How do I login?
- How do I access my digital items?
- What are your covid-19 policies for your employees? For customers?
- Are you hiring? How do I apply? What are your employment policies?
- Support for multiple languages
- Customer response to tickets, as well as customers can view status of their tickets
- Uptime of system – service-level agreements
- Tracking, such as number of open tickets, tickets on hold, and the like
- Reporting metrics, such as wait time, ticket servicing time, and number of tickets handled by each agent
- Ticket tagging and categorizing
- Feedback loop for customer suggestions of product improvements
- Ease of use for customers and agents