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ttaxhomebiz
New Member

Should I pay 40% tax when my effective tax rate is 13.8%?

I have filed my tax return, and got my refund. Then I realized that although my effective tax rate is 13.8%, I pay 40% , I tested this by minus 100 from my income, and I got $40.19 more refund back.
3 Replies
MichaelMc
New Member

Should I pay 40% tax when my effective tax rate is 13.8%?

You are conflating the concepts of "marginal tax rate" and "effective tax rate."

In the US, we have a federal income tax and state income taxes, that are based on the idea of a "progressive tax," that is, the more you earn, the higher your marginal tax rate. The lowest tier of income is taxed at a low rate. The next higher tier of income is taxed at a slightly higher rate. At each step of income, the tax rate becomes higher. You proved this to yourself, when you found that the "last" $100 that you earned was taxed at 40%.

Now, if you calculate a weighted average of the tax rates paid on each step of your income, that is you effective tax rate.

So, while you paid 40% tax on the last or highest increment of your income, the average tax rate on all of the dollars you earned is 13.8%.

SweetieJean
Level 15

Should I pay 40% tax when my effective tax rate is 13.8%?

You are asking from TT Self-Employed. Be aware that your SE profit is subject to an additional approx. 15% SE tax, besides the regular income tax.  Also, any increase in income can reduce some deductions and/or credits.
ttaxhomebiz
New Member

Should I pay 40% tax when my effective tax rate is 13.8%?

What does TT Self-Employed mean? Turbo Tax Self-Employed?
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