Pop Quiz – What’s your effective tax rate for 2014? How about your marginal tax rate?
Don’t worry if you’re not sure.
Truth is most of us have no idea what either our marginal or effective income tax rates are.
They only seem to matter at income tax filing time, usually appearing as supplemental numbers in a computer generated income tax return.
One of the reasons we tend not to track these numbers is because they’re calculations, which for the most part, have no immediate relevance to us, but also because of complications in calculating them.
Because we have a progressive income tax system — tax rates rise with income — and because there are multiple taxes, the actual numbers can be difficult to calculate. In addition, each rate can change from one year to the next or from complications in the tax code.
We have two tax rate classifications then, marginal tax rate and effective tax rate.
Keep reading and you’ll learn the difference between the two as well as why it’s important to know the difference between them.