![]() ![]() If you're in a higher tax bracket, you may want to prioritize pre-tax savings such as those in a traditional IRA or 401(k) to reduce your current tax bill. Elder, wealth manager and partner at Merit Financial Advisors. "We often find clients will calculate the amount to convert to Roth, how to contribute to a retirement plan, when to sell or hold long-term capital gains, and potentially how much to give to charity based on their tax bracket," says David S. Your marginal tax rate can also inform your other financial decisions. Knowing your marginal tax bracket can also influence how you approach the available deductions, such as if you choose to use the standard deduction or itemize, and perhaps give a large lump sum to charity to reduce your taxable income, Reddy says. Likewise, understanding which bracket you're in helps you understand how changes in your earnings will affect your overall tax burden, says Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group. If your marginal tax rate doesn't tell you how much tax you'll actually pay, why do you even need to know what it is? For one thing, it's because you can only determine your effective tax rate by calculating total tax liability. Why is it important to know your tax bracket? Your marginal tax rate is the highest tax rate your taxable income falls into. ![]() Note: Your effective tax rate is the actual percentage of taxes you pay overall. You calculate your effective tax rate by dividing your total tax liability, $6,538, by your annual taxable income, $51,150. The actual percentage you pay on the entirety of your taxable income is called the effective tax rate. So putting it all together, your total federal income tax for the year would be $6,538.
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