Marginal Tax Rates
Tax minimization and tax planning require knowledge of the marginal tax rate. For example, one could decide to postpone a gain from a year with a marginal (Fed+state) of 33% to one with a marginal rate of 22%. Since the program already has to use a marginal rate to tax the last taxable dollar, it seems it would be very easy to simply display the value.
This could be extremely important for cases where Social Security becomes taxed, where exemptions and credits phase in or out, where the AMT kicks in, etc.
RSS
Actually, we already capture that information in XML form but don't do anything with it. If you want to see what the "tax return" calculated year by year by ESPlanner look in the Temp folder for a file of the form:
main.*.TaxReport
I have plans to eventually provide a tax report for those folks interested in such things but there have been other, more pressing, issues.
Best,
Dick Munroe[/]
The data in the .xml file show AGI, AMT tax, regular tax, and taxable income in $$, but does not show the marginal rate in %. So I do not see much value in the .xml file contents.
The marginal tax rate in % (Federal) begins with the Federal marginal %rate that can be deduced from the Taxable Income value and a tax table with some effort (like accounting for effect of LTCG on TI), but even that rate is difficult for future years. Then compare that to AMT. To the higher of tax table %rate or AMT %rate you have to add/subtract Social Security taxes (like when you have Sch C income or if you exceed the SS earnings limit), Medicare tax, loss of EIC, %rate changes for child care credit, phaseouts of additional child credit and personal exemptions and itemized deductions, and so on.
By far the easiest way to do it is to have ESPlanner calculate the total tax burden at Taxable_Income+$500 and at Taxable_Income-$500. Subtract the two values and divide remainder by $1,000. That is the marginal Federal tax rate.
Since it is already calculating total tax burden on Taxable Income, the program is only one addition, two subtractions, and a division away from yielding a marginal rate.
With that value we could just add our state's rate, or it could calculate state marginal rate the same way. (technically it would be [F + S - F*S] to account for federal deductibility of state taxes).
Well the tax / AGI should be the marginal rate, but I'll be more than glad to stuff that into the XML for you as well.
Best,
Dick Munroe
Dick -
The Tax/Total_Income ratio (Tax/TotInc), Tax/AGI, etc. are Average tax rates, which are essentially useless in decision making (at least that is what the professors taught us in grad school).
These same professors tell us that we must use the Marginal tax rate for decisions. The marginal tax rate is delta_Tax/delta_TotInc. If you earn another $1,000, recognize a $1,000 capital loss, or make another $1,000 contribution to charity, you will get three different marginal tax rates (Don't worry - these differences are already handled by ESPlannerjavascript:emoticon(':D') ).
I assume ESPlanner calculates total taxes as SUM[Social_Security+Medicare, FedIncTax, FedTaxCredits, State_Tax] where each of these 4 is individually calculated before summing. So the marginal tax rate is simply deltaSUM[Social_Security + Medicare, FedIncTax, FedTaxCredits, State_Tax] / delta_TotInc.
ESPlanner already calculates total taxes at Taxable_Income+$0 and is available in the file main.1-14-p04-00.TaxReport.xml. By far the easiest way to calculate the marginal tax rate is to have ESPlanner also calculate the total taxes at Taxable_Income+$500 and at Taxable_Income-$500. Subtract these two tax totals and divide remainder by $1,000. That is the marginal overall tax rate.
Note that this number could be exceedingly high or low. It could approach 100% on an additional $1,000 of income for a 65-year-old widow on Social Security who began self-employment work at $20,000 a year in order to care for her newly-orphaned dependent grandkids. It could also be very low (or even 0% for tax-exempt interest). I do not know, but it is conceiveable that it could even be negative in the case of some refundable credits at low incomes. But you won't need these details; these are already encoded in ESPlanner.javascript:emoticon(':D')
A perfect outcome would be for the annual marginal rates to be a new column on the Details - Taxes page. While cumbersome to extract, the information is valuable enough that I would extract it from the .xml file.
Best Regards,
Michael
HI, WE'LL ADD DISPLAYING TOTAL EFFECTIVE MARGINAL TAX RATES TO OUR TO-DO LIST. IN THE MEANTIME, YOU CAN HAVE THE PROGRAM CALCULATE YOUR CURRENT MARGINAL TAX RATE BY A) ENTERING A TAXABLE SPECIAL RECEIPT FOR THE CURRENT YEAR OF, SAY, $1000, B) ADJUSTING THE STANDARD OF LIVING INDEX DOWN FOR EACH FUTURE YEAR BY THE SAME AMOUNT, SUCH THAT THE NEW RECOMMENDED CONSUMPTION FOR ALL FUTURE YEARS REMAINS WHERE IT WAS WITHOUT EXTRA $1,000, AND C) EXAMINING HOW MUCH CURRENT RECOMMENDED CONSUMPTION RISES. IF, FOR EXAMPLE, IT RISES BY $673, THIS MEANS YOUR MARGINAL TAX RATE IS ($1000-$643)/$1000 OR 57 PERCENT.
CALCULATING MARGINAL TAX RATES FOR FUTURE YEARS IS TRICKIER BECAUSE SPECIFYING EXTRA INCOME IN A FUTURE YEAR WILL AFFECT YOUR CONSUMPTION AND SAVING N EACH YEAR UP THROUGH THAT YEAR AND, THUS, YOUR TAXABLE ASSET INCOME IN THAT YEAR.
See http://people.bu.edu/kotlikof/Does%20It%20Pay%20to%20Work%20and%20Save,%20December%209,2006.pdf for further discussion.