Tax questions

[meccos]

I have two questions.

 

Last year I had a situation where my marginal rate was calculated at 28%, but effective rate at 34.7%.  income was 330k

This year income around 400K with a marginal rate of 35% and effective rate of 34.5%

How is this possible?

 

Second question.  my wife and I both did backdoor roths in 2015.  We both got a 1099.  Is this normal?

[jfoxcpacfp]

1. Cannot tell without seeing the numbers.

2. Yes, but it should be a 1099R. You will report it but it is not taxable.

[meccos]

what numbers would you need to see?

jfoxcpacfp wrote:

1. Cannot tell without seeing the numbers.

2. Yes, but it should be a 1099R. You will report it but it is not taxable.

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Not sure which numbers you need but last year I had a total income of about 335k. AGI was 256K. total taxes paid was 75k, 23k of which was self employment taxes. Could the self employment taxes cause my effective rate (34.5%) to be higher than marginal (28%).

[jfoxcpacfp]

meccos wrote:

last year I had a total income of about 335k. AGI was 256K. total taxes paid was 75k, 23k of which was self employment taxes. Could the self employment taxes cause my effective rate (34.5%) to be higher than marginal (28%).

Click to expand...

If you were self-employed last year and worked as an employee this year, the tax software probably didn't count your withheld FICA taxes when calculating your effective tax rate. That is the way ours works, but it does count SE taxes. Just a quirk of the system. Of course, I'm also presuming you are looking at federal only. You should be able to analyze all of the numbers and figure out how it was computed. Good luck.

[meccos]

jfoxcpacfp wrote:

meccos wrote:

last year I had a total income of about 335k. AGI was 256K. total taxes paid was 75k, 23k of which was self employment taxes. Could the self employment taxes cause my effective rate (34.5%) to be higher than marginal (28%). 

Click to expand…

If you were self-employed last year and worked as an employee this year, the tax software probably didn’t count your withheld FICA taxes when calculating your effective tax rate. That is the way ours works, but it does count SE taxes. Just a quirk of the system. Of course, I’m also presuming you are looking at federal only. You should be able to analyze all of the numbers and figure out how it was computed. Good luck.

Click to expand...

I think I am confused with definitions.  Could anyone verify if I have this correct:

total income = my total earnings
adjusted gross income = total income minus adjustments (IRA, HSP, etc)
taxable income = adjusted gross income minus itemized or standard deductions


Marginal tax rate is calculated using total income, AGI or taxable income?
Effective tax rate is calculated using total taxes paid/ total income, AGI or taxable income?


my tax returns summary show that my marginal rate was calculated using taxable income and effective tax rate was used by calculating total taxes paid/taxable income.

 

thanks

[jfoxcpacfp]

• Total income is on line 22 of page 1 of Form 1040


• AGI is on line 37


• Taxable income is on line 43 of page 2 of Form 1040 (AGI minus itemized ded's + exemptions)


• Marginal tax rate is the rate at which your next dollar of taxable income is taxed.


• Effective tax rate is more subjective. Do you include state income taxes? FICA paid? Self-employment taxes paid? What measure of income do you use, total income, AGI, or taxable income?

I understand and appreciate the difficulties you are having. I can give you the formula used by our tax software, but it is a standardized formula (see my prior answer) and not necessarily one I would use when tax planning with a client. This Kitces article should provide more insight.

What is most important is to use whatever formula you choose consistently from year to year and understand that your definition of effective tax rate may differ from another taxpayer's definition for rates posted on this blog and elsewhere.