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What are Effective and Marginal Tax Rates? What is Adjusted Gross Income? How do Tax Brackets Work? - YouTube
Channel: Navi Maraj, CPA
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hey guys in this video I'm gonna explain
quite a few topics that most folks just
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don't understand such as what is a
marginal tax rate what is an effective
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tax rate what's the difference between
the two what does it even mean to be in
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a twenty four percent tax bracket how
much taxes am I actually paying if I'm
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in a twenty four percent tax bracket all
these topics and more coming up in this
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video all right so let's jump right into
the video if you don't know my name is
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Navi Maraj i'm a certified public
accountant helping real estate
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professionals and small business owners
save thousands of dollars in taxes but
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today's video is for everyone whether
they're a small business owner or not
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and I'd like to explain this by way of
an example because I think that's the
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best way to learn and so in this example
this individual earned one hundred and
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seventeen thousand four hundred dollars
now as I said that could be because they
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work for an employer or maybe they ran a
small business and after deducting their
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expenses this is what they arrive at
included in this number could be things
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like dividend income and interest income
and so on and so from that number we're
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gonna deduct adjustments adjustments
hour handful of items that come off the
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gross income number and in this example
I'm using something that you might be
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familiar with the traditional IRA so a
traditional IRA contribution is an
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adjustment and that reduces the 117 by
$5,000 and we arrive at one hundred and
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twelve thousand four hundred for this
individuals adjusted gross income right
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that term sometimes confuses people all
adjusted Grossmont gross income is is
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their gross income minus these handful
adjustments that they may be allowed to
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take and so now that we're at AGI of one
hundred and twelve thousand four hundred
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you now have the decision to take the
standard deduction or you can itemize
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your deductions
now with the tax cuts and Jobs Act you
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know the standard deduction was
increased quite a bit so it's difficult
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for most Americans to get itemized
deductions above and over this amount so
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if your itemized deductions are less
than this amount then you'll take the
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standard
which is this example that's what this
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taxpayer did now we're at taxable income
so we had gross income deduct the
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adjustments arrived at AGI minus the
standard deduction arriving at a hundred
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thousand dollars of taxable income now
in our sister tax system here in America
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not every dollar is taxed the same and
so the tax brackets now come into play
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and so this individual happens to be a
single individual and so all their
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hundred thousand dollars that they
earned or that's taxable rather the
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first nine thousand eight hundred
seventy five dollars is taxed at 10% so
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in this example is sex at nine hundred
eighty seven dollars and it goes on and
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on and on and so for example of the
hundred thousand dollars forty thousand
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one twenty six through eighty-five 525
or tax at a twenty two percent tax rate
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and because this person sort of maxed
out if you will at a hundred thousand
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they're gonna their last set of tax
dollars fall within this bracket here
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between 85 and 163 three so on that sum
of money to eighty-five 526 through to
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the hundred thousand they paid three
thousand four hundred seventy four
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dollars in taxes and so there's a big
misconception out there that because I'm
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in a twenty four percent tax bracket
that must mean that twenty four percent
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times my taxable income is equal to the
taxes I paid but that's not your being
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correct if you assume that the taxes
that you paid are the total of these
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amounts here so in this example it's
eighteen thousand seventy nine dollars
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now another question I get is what is a
marginal tax rate marginal tax rate just
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means what is the last dollar or rather
what's a lacks taxable income dollar
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what rate was a tax debt so in this
example if this individual had another
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dollar worth of income here taxable
income that is they would pay twenty
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four percent tax on that dollar or
twenty four cents in this example and so
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you know the marginal tax rate again is
a rate at which the last dollar your
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is tax data now what is an effective tax
rate there's a few different ways that
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professionals like to calculate this but
the most common way that you'll probably
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see if you use software such as TurboTax
for example it would be your total taxes
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paid divided by your adjusted gross
income and in this example your
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effective tax rate is 16 point one
percent that was the eighteen thousand
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seventy nine dollars divided by the 112
four so their effective tax rate the
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amount of money they paid against this
AGI amount was sixteen point one percent
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so in this video hopefully you'll learn
you know what is adjusted gross income
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what is a marginal tax rate what is the
effective tax rate and how the whole tax
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bracket kind of system works if you
found this video insightful or if you
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have a question please comment below
like and subscribe and I'll see you in
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another video thanks
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