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.
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.
I removed your file. This is a public user forum and it is not safe to post any personal info here.
Thanks VolvoGirl. I did not realize the forum was public.
It's okay. We want to help you. We didn't need the form to answer your question.
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.