How is average tax calculated? How does it differ from the marginal rate?
The more money you make, the higher tax bracket you move into – this is a familiar concept. What that actually means is that the federal government taxes larger earnings at a higher rate, so that as your income grows, so does the percentage of it you will pay in taxes. To implement this system, the government taxes the first X dollars of your income at a certain percentage (the “X” in this case varies from year to year) and then taxes the remainder of your income at a higher rate. That higher rate is called your marginal tax rate, and is the tax rate you’re accustomed to hearing referred to as your “tax bracket.” So being in a “22% tax bracket” means that you paid 22% tax on all income over the X base income. The tax rate used by the Retirement Planner, however, is your average income tax rate. To calculate your average income tax rate, take the income tax you paid over a given period (some number of years) and divide it by your gross income over that same period. This value will be di
