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Marginal Tax Rates Key for Taxpayers


Posted by Rhett Brooks on Wednesday, October 10th, 2012, 4:16 PM PERMALINK


The looming Taxmageddon could affect how taxpayers look at their taxes. In a post by Roberton Williams of the Tax Policy Center, Williams presents the increasing importance of marginal tax rates (MRTs) relative to average tax rates.  Williams states that “MTRs matter more than usual this year because of the impending [Taxmageddon].”

Taxmageddon contains numerous tax hikes scheduled to increase MTRs, including increases on earned and investment income. In addition to the Taxmageddon tax hikes, the Obamacare law will also raise taxes on investment income. 

The effects of Taxmageddon and Obamacare will be devastating to taxpayers as the top MTR on earned income will jump from 35 percent to 44.0 percent – 18 percent higher than the current rate.  In addition to the increase on earned income, those with investment income will see their MTRs rise even higher as there will be no distinction between the earned and unearned income rate.  Dividends will almost triple from 15 percent to the earned income rate of 44.6 percent (Pease and health care rate included) and capital gains will increase from 15 percent to 25 percent. 

To make matters worse, no one with taxable income will be excluded from the pending tax hikes. If the 10 percent tax bracket expires, it will increase taxes on those in the bracket by 50 percent.  Furthermore, taxpayers in the 15 percent tax bracket and below will have their capital gains and dividends rate increase from zero to 10 percent and zero to 15 percent, respectively – a massive hit to low-income earners. 

In light of the possible changes to MTRs over the next few month taxpayers should be focusing more on their MTRs than average tax rates. Incentives are important to taxpayers and the changes scheduled to be made to MTRs could change their investment and charitable behavior.       

Below is a graph that displays the current 2012 MTR and the possible 2013 rate:    

 

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