Here’s what HIVE AI had to say about “How do I calculate my marginal vs. effective tax rate?”:

Calculating your marginal vs. effective tax rate

What each rate means

Marginal tax rate

• The marginal rate is the percentage you’d pay on the next dollar of taxable income. It’s determined by the tax bracket your last dollar falls into (and can be affected by phase-ins/phase-outs and other surtaxes).
• Put simply: it’s your “next-dollar” rate.

Effective (average) tax rate

• The effective rate is your total tax divided by your total income (often AGI or taxable income; when comparing across years/people, use total income or AGI consistently).
• Put simply: it’s your “overall” rate across all dollars.

How to compute your rates from your return

Step 1: Compute total tax

• Prepare your return as usual. Your “total tax” appears on Form 1040, line 24. This already includes regular income tax, self-employment tax, AMT, NIIT, additional Medicare tax, etc., as applicable.

Step 2: Compute your effective rate

• Choose your denominator:
  • Effective rate on taxable income = line 24 ÷ line 15 (Taxable income).
  • Effective rate on AGI = line 24 ÷ line 11 (AGI).
  • Effective rate on total income = line 24 ÷ line 9 (Total income).
• Multiply by 100 to express as a percentage.

Step 3: Identify your marginal bracket

• Use the tax rate schedule for your filing status and taxable income to find the bracket your last dollar falls into. For example, IRS publishes tax tables and rate schedules that show bracket thresholds and the tax “multiplication” and “subtraction” amounts for each band. An excerpted 2024 schedule shows the structure: multiply your taxable income by the bracket rate and subtract a fixed amount specific to your bracket; your marginal rate is the percentage tied to your band 1.

Step 4: Adjust for marginal-rate “gotchas”

• Certain items can change your “next dollar” tax more than your nominal bracket suggests. Your true marginal rate is the extra tax from $1 more income (or $1 less deduction), which may include:
  • Credit phase-outs and deduction limitations
  • Additional Medicare tax/NIIT thresholds
  • AMT triggers (if Form 6251 applies, extra income can increase AMT at 26% or 28% rates, plus interact with preferences) 2.
  • State income taxes (if you’re measuring an “all-in” marginal rate)
  • Payroll taxes on wages and self-employment (computed at the time wages are received) 3.

Quick example

• Assume single filer with:
  • Taxable income: $120,000
  • Total tax (1040 line 24): $22,500
• Effective rate on taxable income = 22,500 ÷ 120,000 = 18.75%
• To find marginal rate, locate the bracket containing $120,000 using the IRS rate schedule/tables for your filing status. If $120,000 falls in a 24% band, your marginal rate is 24% before considering phase-outs, AMT, or payroll taxes 1.

A precise way to measure your personal marginal rate

Small-change method

• Re-run your return with $1,000 more ordinary income (e.g., add $1,000 wages or interest), keeping everything else constant.
• Marginal rate ≈ (New total tax − Original total tax) ÷ $1,000.
• This captures the impact of brackets, credits, AMT, NIIT, and payroll taxes automatically.

For capital gains and qualified dividends

• Repeat the small-change method with $1,000 more of long-term capital gains or qualified dividends to compute a separate marginal rate for preferential-income types. Interactions with AMT and surtaxes will be captured 2.

Special cases that affect marginal vs. effective rates

Midyear rate changes

• If Congress changes rates midyear, a straddle-year proration applies: compute “tentative taxes” at pre- and post-change rates on full-year income, then prorate by days; the practical result is an effective blended schedule for that tax year 4.

Dual-status or nonresident years

• Dual-status taxpayers combine resident-period worldwide income and nonresident effectively-connected income at citizen/resident rates, while non-ECI nonresident income is taxed at flat treaty/30% rates. Your “marginal” rate can differ by income type and period 5.

Payroll taxes in marginal analysis

• On earned wages, the “next dollar” may also face 7.65% employee FICA up to applicable bases and 1.45% Medicare (plus 0.9% additional Medicare above thresholds). Employer-side FICA doesn’t change your individual income tax, but affects total labor cost. The employee tax is applied at the time wages are received 3.

Using IRS tables vs. formulas

• IRS tax tables and schedules present each bracket as “multiply by X% and subtract Y.” That structure both computes your tax and identifies your marginal rate as the X% linked to your bracket band 1.

Practical tips

• Use tax software’s “what-if” tool to run the small-change method for ordinary income and preferential gains.
• Be consistent about which income measure you use for your effective rate (AGI vs. taxable income vs. total income).
• If your income sits near a credit or deduction phase-out, use the small-change method; your marginal rate can exceed your nominal bracket due to the phase-out clawback.

If you share your filing status, approximate taxable income, and whether you have items like AMT, self-employment income, or large credits, I can estimate your exact marginal and effective rates for this year.

Sources

1 – IRS.gov – 1040 TAX AND EARNED INCOME CREDIT TABLES (2024) 📄 Summarize
2 – IRS – Form 6251 Alternative Minimum Tax – Individuals 📄 Summarize
3 – Treasury Regulation 31.3101-2 📄 Summarize
4 – IRC § 15(a) 📄 Summarize
5 – IRS.gov – Taxation of dual-status individuals 📄 Summarize

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