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What's the deal with tax rates? - 1/19/2023

Flat, marginal, graduated, progressive and effective tax rates. Tax brackets. These are the terms used regarding taxes, but do you understand what they mean and how they impact your money?

A flat tax rate is when all taxable income is taxed at the same rate, no matter the dollar amount or how it was earned. As of this time, 9 states use the flat tax rate for their individual income taxes.

Marginal, graduated, and progressive tax rates are basically the same thing. These are part of the system where tax brackets are used to determine overall taxes. Your tax rate may be *10% for the first $20,000 of taxable income but will raise to 12% for the next dollar up $80,000. It will then increase at set intervals above that. Your next dollar of taxable income may be taxed at a higher tax rate than your previous dollar of taxable income. *(these are sample tax rates and taxable income thresholds)

The effective tax rate is the computation that results in the overall tax rate for all of your taxable income. The formula is total tax divided by total taxable income. On a flat rate computation, such as some states offer, the effective tax rate is the same as the tax rate. On a marginal tax rate, the effective tax rate should be somewhere in the middle of the various tax rates paid on the overall taxable income.

Understanding the difference between these will help you to better understand how much you are paying in tax for your income. In addition, there are different tax rates for capital gains, qualified dividends, and other items, as well as certain types of nontaxable income so make sure to pay attention to your taxable income compared to your overall income.

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