Poll:What's your 2020 effective tax rate?

[Time2]

I'm seeing percentages that I don't understand, as in, a very low effective rate but a high marginal rate.
My understanding of terms.
Effective tax rate- Tax due divided by Gross income, 2020=4.25%

Marginal tax rate- tax on last dollar earned. 2020=12%


2019, I used all LTCGs and paid $0 and 0% tax


2020, I've only entered data in Dinkytown so far. MFJ, I have tax planned up to the top of the 12% Tax Bracket. The approximate numbers are below

Gross is $114,600, I had $28K of LTCGs, $75k of Roth conversions, approx. $7k dividends and interest, $1.5k Short term gain. we put $8,1k into an HSA.

 

[Freedom56]

So far it looks like I will be at 32% (federal) and 9.3% state for 2020 driven by taxable interest income and trading gains from flipping securities last March. My pension alone puts me in the 22% Federal and 9.3% state brackets.

 

[scrabbler1]

I'm seeing percentages that I don't understand, as in, a very low effective rate but a high marginal rate.
My understanding of terms.
Effective tax rate- Tax due divided by Gross income, 2020=4.25%

Marginal tax rate- tax on last dollar earned. 2020=12%

2019, I used all LTCGs and paid $0 and 0% tax

A progressive tax system will generally result in having a lower effective, or average, tax rate on all dollars earned up to a given point than a marginal rate on the next dollar after the same given point. You probably knew that already.

As for me, between the Standard Deduction and QD/LTCGs, only 28% of my (federal) income is taxable, and at 10%. So, my effective tax rate is 2.8% even though my marginal rate of ordinary income is 10%. And that doesn't include how additional income reduces my ACA premium subsidy, at a rate of about 18%. Taken together, that's a 28% marginal rate, and that doesn't count state taxes which include a 6% rate. So, all 3 items together results in seeing 34% of additional (ordinary) income taken away in taxes and ACA premium subsidies, an overall rate I hadn't seen since my working days.

 

[SecondCor521]

I'm seeing percentages that I don't understand, as in, a very low effective rate but a high marginal rate.
My understanding of terms.
Effective tax rate- Tax due divided by Gross income, 2020=4.25%
Marginal tax rate- tax on last dollar earned. 2020=12%

My understanding of the terms matches yours. I am one such person who has a very low effective tax rate but a very high marginal tax rate.

In my situation, this is primarily due to three things: non-refundable tax credits, being on the ACA with two kids in college, and choosing to dial my AGI to the point where my tax obligation exactly soaks up my non-refundable tax credits but no more.

In my case, the non-refundable credits include a $500 credit for other dependents for my DD19, the $1500 non-refundable portion of the AOTC for that same DD19, plus a $93 residential energy credit for some insulation I added last year. Total of $2093 on line 21 of my 1040.

Using tax software, I then dialed up my AGI through Roth conversions until my tax due on line 16 was just above that $2093 number. My line 9 AGI ended up being a five figure amount, and my line 24 tax due ended up being a single digit amount. The ratio of those two, my effective rate, is well under 1%.

If I increased my AGI further beyond that sweet spot, I would face the following tax consequences, all in parallel:

* federal income tax of 12%
* Idaho state income tax of 6.925%
* ACA subsidy loss of ~16%
* increased FAFSA EFC for DS21 of ~9%
* increased FAFSA EFC for DD19 of ~9%

Add that all up and you get approximately 52.625%. Since I calculate my age 75 tax rate at 36.805%, doing more Roth conversions did not make sense.

Even tax gain harvesting wouldn't make sense. It would not be subject to the 12% federal income tax, but the other taxes above would still occur, so that would be a rate of 40.625%, still more than 36.805%.

As the EFC tax impacts go away in a few years, my calculus will change and I will likely do more Roth conversions, and possibly some tax gain harvesting. I plan to make similar adjustments once the ACA subsidy loss no longer impacts me, which at this point I expect to be age 65.

 

[mckittri2000]

0%. I have to keep our AGI low to get the ACA subsidy. This will change when I start receiving social security.

 

[RetireAge50]

Can you give us a clue how you did this? I'm at the top of the 12% bracket and paying almost twice what you are.

We are about half way into the 10% bracket. Marginal is 10% tax and 14% ACA reduction. We live on pensions and cash.