Why is the equivalent tax rate so different when I add a W-2 of less than $8000?

[drsalfano]

Why is the equivalent tax rate so different when I add a W-2 of less than $8000?  Income of $162547 yields tax of $32467 for rate of 19.9%.  Income of $170202 yields tax rate of $34610 for rate of 20.33%.  Additional income of $7655 is apparently taxed at $2143 for a rate of 28%.  Why so high for the additional $7655 income?  I have attached my TurboTax file; just toggle the Kohl's W-2 on and off to see the differences.

[VolvoGirl]

I removed your file.  This is a public user forum and it is not safe to post any personal info here.

[drsalfano]

Thanks VolvoGirl. I did not realize the forum was public.

[DanielV01]

It's okay.  We want to help you.  We didn't need the form to answer your question.

[DanielV01 · Accepted solution]

This is correct.  In tax terminology this is what is meant by tax brackets.  While your average tax rate is 20.33%, your marginal rate (or tax bracket) is 28%.  Any additional income you receive will continue to be taxed at 28%, until you reach the next tax bracket of 33%.

The tax bracket system does not mean that all of your income is taxed at a specific rate, but rather you are gradually taxed at a higher rate as you have more income.  The lowest tax bracket is 10%, then 15%, then 25%, then 28%.  In other words, when your taxable income is more than 0 up until the first bracket line, you are taxed at 10% of the taxable income amount.  Income above that is taxed at 15% until the third tax bracket; and so forth.  So that is why your realized tax is less than your marginal tax rate, but is also why the amount you are seeing is taxed at 28%, because you are in that bracket.