how's it going subscribers and fellow youtubers! my name is Mike the CPA this
is my sidekick Chipper in this video we're gonna help you expand
your tax knowledge so that you can truly have a better understanding of how much
tax you're actually paying on the income you make so please stick with me through
this video as we discuss the differences between marginal tax rate and effective
tax rate let's get it now I can tell you that most people have absolutely no idea
what marginal tax rate means versus effective tax rate means and in fact I
used to not have any idea myself so why should we even care to learn about it
well the first reason is that by knowing this stuff it's going to help you better
budget your finances and manage your cash flow secondly as you learn this
stuff you're gonna be thinking throughout the year have how to minimize
your taxes and the third reason you want to learn this is so you can confuse the
heck out of people with your new fancy tax knowledge let's start off by talking
about marginal tax I mean what the heck is marginal tax anyway marginal tax is
the amount of tax we pay on each additional dollar we earn let me repeat
that it's the marginal tax rate is the amount
of tax we pay on each additional dollar we earn remember the tax rates follow
tax brackets so as your income goes up so will your tax rate in this example
we're looking at we have chippers income his filing status is single you just say
guys know these tax rates the marginal tax rates are actually coming from the
2018 income tax bracket rates so that's where those are coming from so chipper
let's say it's January 1st ok and he has hasn't made any income yet because as
you as you will see for for most people that at the start of the year their
marginal tax rate is actually zero because they haven't made any income yet
right so chipper is the same way so on January 1st chipper has made nothing so
his tax rate is nothing but now the way this works though is so chipper starts
on January 2nd he starts working and starts making some money now up to the
point where he makes nine thousand five hundred twenty five dollars and all this
stuff is coming from the income tax brackets for a Singler
single filer up until he makes this much money his marginal tax rate will be ten
percent so it's ten percent is marginal tax rate until he exceeds this
amount so that's why I have this little note over here for you guys it says
income from zero to nine thousand five twenty five will be taxed at 10% and so
as you guys can see as the March 31st chipper has made from working nine
thousand five hundred twenty five dollars which means his Knicks dollar
earned will be taxed at a higher rate according to those income tax brackets
so now the second he exceeds this his marginal tax rate the amount he's gonna
make or pay on each additional dollar earned is now going to be twelve percent
so from from nine thousand five twenty five to income a thirty eight thousand
seven hundred tripper will pay twelve percent on that income so from April 1st
through September chippers working away working away paying now on this any
income above this now he's paying twelve percent starting in September he breaks
through this thirty eight thousand seven hundred dollar amounts so now since he's
above this now any money he makes beyond that will be taxed start to be taxed at
twenty two percent so now his marginal tax rate is 22 percent
so that's marginal tax rates in a nutshell so everybody's marginal tax
rate at the beginning of the year is zero until they start to make money the
first nine thousand five hundred twenty-five dollars are taxed your
marginal tax rate will be ten percent as you exceed that amount the next set of
income will be taxed at twelve percent as you exceed that then you'll 22
percent etc etc so when you guys are thinking about marginal tax rate think
about the highest rate of tax you will pay on the next dollar of income you
earn your marginal tax rate will increase throughout the year and your
income increases throughout the year where I see people get messed up all the
time all the time is that they tend to think that all of their income is taxed
at one rate but from this example you can clearly see it's not your income and
our income as you make more money is tax at different rates and once you exceed
certain dollar amounts of income then your rate increases but all this income
is being taxed at different rates as your income climbs you're never
getting taxed on all at just one income tax rate so now you guys will know that
when you hear people saying oh I'm in the ten percent tax bracket I'm in the
twenty five percent max brackett but I'm in the 22% tax
bracket now you guys will know when if you hear people saying things like that
they're actually talking about their marginal tax rate the majority of the
time okay guys now let's talk about the effective tax rate how it works and what
it is it's super simple to explain and it's my favorite way to measure income
taxes I think of the effective tax rate as my real rate of income tax let me
explain what I mean the thing that's important to understand about the
effective tax rate is that the effective tax rate is the average rate of tax we
pay on each dollar we earn let me repeat that the effective tax rate is the
average rate of income tax we pay on each dollar we earn the quickest way to
find your effective tax rate is to actually look back at your last
previously filed return and what you're gonna do is you're gonna look at your
1040 okay and go to page two on page two you're gonna find line 43 see where it
says taxable income go ahead and figure out what your taxable income is there
and let's just say it's 40 thousand this is just I'm not gonna like figure out
the exact numbers and calculations this is strictly for an example this is just
strictly for educational purposes guys but so let's say chippers taxable income
was 40,000 okay so we're he's gonna look at that on line 43 and then his total
tax on that income let's just pretend it was five thousand four hundred twenty
bucks who knows who knows something like that okay that was his total tax so
you're gonna look at on the second page of your 1040 you're gonna look at these
two lines this one line 63 and line 43 and then what you're gonna do is you're
gonna be a lot divided line sixty three of five thousand four hundred and twenty
dollars divide that by line forty three which is your taxable income of $40,000
so I'm gonna type in forty thousand dollars here and there is our effective
tax rate so for chipper if his income was forty thousand dollars and he paid
federal income tax of $5,400 and $5,400 then his effective tax rate is thirteen
and a half percent roughly which basically means that on average for
every dollar he earns throughout the course of the year he's paying an income
tax rate of thirteen and a half percent and that's what the effective tax rate
it's the average amount of tax we pay on each dollar we earn now you guys can
clearly see that is much different than the marginal tax rate which we just
discussed so in summary your marginal tax rate will usually be the same or
higher than your effective tax rate marginal tax rate and effective tax rate
both only cover income taxes that you not cover other taxes like property
taxes Social Security taxes Medicare taxes and things like that your marginal
tax rate is the highest rate of tax on each dollar you earn your effective tax
rate is the average rate of tax you pay on each dollar you earn if you live in a
state that has income taxes you'll have a separate marginal tax rate for state
and a separate effective tax rate for a state as well but they it works just
like federal taxes but for state income taxes now the best part of all now that
you've come across this newfound tax knowledge now it's time to go out there
and talk about this with your friends and family to confuse the heck out of
them nothing will put a smile on your face more than talking about marginal
tax rate effective tax rate and then waiting for their deer in the headlights
look
remember don't be afraid to share your newfound knowledge because most people
will have no idea what you're talking about but you my friend will sure sound
intelligent if you guys want to learn more about income tax brackets or taxes
in general make sure to follow some of my links down in the description section
down below I have a ton of tax videos and I make all new tax videos towards
the start of every single year well guys I hope you found this information
helpful if you did make sure you drop a like to let me know you liked it share
this information with a friend especially somebody who's trying to get
a better grasp on taxes and how they work and be sure to subscribe if you
have not already by hitting that red subscribe button down below now if
you're new to money in life TV welcome to our Channel every single week our
goal is to help you become fiscally fit and we do that by helping you learn
finances investing and taxes and more on a regular basis if you guys have
questions or comments on anything we discussed in today's video just let me
know by leaving a comment down below I'll make sure to get back to you or
just if you want to say hi just say hi okay guys we'll go have a great week out
there it was great seeing all your smiling faces once again here on YouTube
and I will see you guys in the next video use the information you learned in
this video to live your life uncaged see y'all next week bye guys
peace
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