Computing Marginal Tax Rates

Using python-taxes, you can compute real marginal tax rates on both ordinary income and long-term capital gains. The marginal rate is the rate of tax you would pay on an additional dollar of income. The examples below estimated for tax year 2014 were generated with 2014/example_marginal_rates_joint.py and 2014/example_marginal_rates_single.py.

Note: Since this example is for 2014 before the Tax Cuts and Jobs Act of 2017, the marginal rates are much different than they are today in 2024. However, the latest tax years still have example_marginal_rates_*.py scripts you can run to see what the rates look like today.

For these plots, I am making the following assumptions:

• No dependents.
• Income is entirely from wages, and for the joint return, exactly half these wages are earned by each spouse.
• State tax is being paid at an effective rate of 9% on the income.

The payroll tax (social security and medicare) is not included in the computed marginal rates although I do include the "Additional Medicare Tax" in these rates.

I can interpret the features on these plots:

A

10% tax bracket applies.

B

15% tax bracket applies.

C

25% tax bracket applies. Long term capital gains now taxed at 15%.

D

State tax becomes deductible when it exceeds the standard deduction. This deduction effectively lowers the marginal rate of both ordinary income and LT cap gains by 2.25% (0.25 * 0.09).

E

28% tax bracket applies (state tax deduction lowers rates by 2.52%).

F

Alternative Minimum Tax (AMT) kicks in at a rate of 26%. However, because the AMT exemption phases out, 6.5% is added to the effective marginal rate, making it 32.5% for ordinary income and 21.5% for LT cap gains. State tax deduction also no longer applies with AMT.

G

At 200k for single and 250k for joint, a) the Additional Medicare Tax applies to wages at a rate of 0.9% and b) the Net Investment Income Tax (NIIT) applies to LT capital gains at a rate of 3.8% (although because a portion of state tax can be deducted from the NIIT, its effective rate is only about 3.5%).

H

AMT rate change to 28%. The AMT exemption phase-out inflates this by 7% to 35% for ordinary income and 22% for LT cap gains. Additional Medicare Tax and NIIT applies on top of this.

I

AMT exemption phase-out ends, bringing marginal rates down to 28% for ordinary income and 15% for LT cap gains. Additional Medicare Tax and NIIT applies on top of this.

J

The 39.6% tax bracket applies. This doesn't affect the ordinary income marginal rate because we are paying AMT. However, it comes with a rate change to 20% for LT cap gains which does apply.

K

Regular tax exceeds AMT. We now pay 39.6% on ordinary income and 20% on LT cap gains. The state tax deduction is back, effectively lowering rates by 3.6%. However, the Pease limitation now applies, raising rates by about 1.2%. Additional Medicare Tax and NIIT also still apply.