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Tax Planner Marginal Tax Rates

Tom23

I just started using the Quicken Tax planner and it seems like it would be a good tool to estimate taxes when taking IRA withdrawals, but I am having a problem with the Marginal Tax Rate.

If my total income for 2026 is $135k and my taxable income is $85k it correctly show the Marginal Tax Rate of 12%.

If I adjust my total income to $160k (IRA withdrawal adjustment of $25k) the Marginal Tax Rate is 30%.

With IRA withdrawal adjustment of $50k the Marginal Tax Rate goes to 25%.

There is no 30% or 25% rate for Married Filing Jointly. They are 22% ,24%, 32%. Where is 25% and 30% coming from?

Thanks

Tom

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markus1957

The rate displayed is not the bracket rate. It is the tax rate for an additional dollar of regular income (salary, interest, etc.). It takes into account not only the bracket rate associated with the additional income but also the additional tax from other income being shifted out of a zero-tax bucket into a regular income bracket.

In your case, the IRA withdrawal might move 0% capital gains income into the 15% bracket and/or reduce a senior deduction amount. If you take the difference between the calculated total tax without the IRA withdrawal and with the IRA income, and divide that difference by the IRA amount, it will give you the marginal rate on salary you are seeing.

It's a helpful tool that shows the actual rate the IRA income will cost you (additional tax from IRA income divided by IRA income).

Jim_Harman

Another factor that comes into play is the tax on Social Security income. The number to enter into the Tax Planner is the amount of taxable SS income you will receive. This depends on your income from SS and other sources (MAGI) and the taxable portion can vary from 0 to 85% of the pretax SS income you receive. The Tax Planner does not compute this percentage.

If an increase in your IRA distribution puts you in a higher SS tax bracket, your marginal rate will be higher.

hmday

What is the income that is contributing to "Salary"?

hmday

If I budget SS and assign it a tax line, it automatically posts it to the tax planner at each entry. But you are saying that it does not calculate the taxable amount therefore is an incorrect number for calculating tax liability. I really need to manually post it to get a correct number. I assumed it calculated the taxable amount. Did not know that… Is that correct?

markus1957

I use an income reminder with splits for social security. I estimate the taxable amount and assign the category that reports it as taxable income for the first split. Then assign the remainder amount to a custom category I created called non-taxable social security that has no tax line associated with it.

Regarding the marginal rate, it is regular income that is taxed at the normal bracket rates.

Jim_Harman

Rather than splitting the SS income into taxable and non-taxable portions with separate Categories, I set up a Reminder with the full amount and compute what the non-taxable amount will be for the year. I enter that in the Tax Planner Other Income > Taxable Social Security Benefits section as a negative adjustment.

That way the full SS amount is shown as income in the Tax reports.

Boatnmaniac

(Edited to clarify a few things and make it a little easier to read.)

The stated issue is, as I understand it, that the Marginal Tax Rate being presented in Tax Planner is sometimes incorrect because it sometimes shows 25% and 30% when those tax rates do not exist in the current IRS tax code.

It also needs to be noted that the last time there was a 25% Marginal Tax Rate was in 2018. I also did a Google search and it returned no record of there ever having been a 30% Marginal Tax Rate.

The Marginal Tax Rate is, simply stated, the percentage of tax applied to each extra dollar of taxable income as a taxpayer moves through the various IRS tax brackets. The Marginal Tax Rate does not change until the amount of taxable income has increased to the minimum threshold of the next bracket.

I was able to replicate this issue….at least with the 25% Marginal Tax Rate. I didn't test it further to see if I could replicate the 30% Marginal Tax Rate.

What I did was set up a Tax Planner Scenario for:

2026
Married Filing Joint
$185K IRA taxable distribution
No other income
Standard deduction.

Here is the result:

I clicked on Rates at the top of the Planner and got this pop up which appears to be correct.

Depending on the amount of income entered into Tax Planner, Tax Planner should calculate the amount of Taxable Income and that then determines what the Marginal Tax Rate shown should be. In this example, the Marginal Tax Rate shown should be 22% (based upon the $141,700 taxable income). But not only is Tax Planner reporting 25% which is not a tax bracket for this year but it is also not in agreement with the Tax Rates popup. So it is wrong on 2 counts. Where is that 25% Marginal Tax Rate coming from? IMO, this appears to be a bug in Tax Planner.

Assuming the 30% Marginal Tax Rate can be replicated by someone, then it would appear that this is also a bug in Tax Planner.

Does anyone disagree? If so, what is it that I am getting wrong here?

Boatnmaniac

It seems to me that what you are saying here might be confusing Marginal Tax Rate with Average Tax Rate.

The Marginal Tax Rate is the IRS tax bracket and is based upon the total amount of taxable income, regardless of income source and of how much tax is paid on each source of income.

The Average Tax Rate has nothing to do with calculating what the Marginal Tax Rate should be. It is the actual tax paid divided by the amount of taxable income. This is where the different tax rates for different sources of income (such as Long Term Cap Gains) comes into play.

Am I misunderstanding what you posted here?

markus1957

I disagree. The rate calculated is as you describe it (and as I described it earlier) and as it is described (for the most part) in the Help files. It represents the tax applied to your next dollar of income, expressed as a percentage of the additional tax from the next dollar of income divided by the next dollar of income. It is not a bug. It is intended to show the user what the true impact of receiving an additional dollar of regular income will be.

The OP's what ifs for an IRA withdrawal amount is a classic case where this information is useful. A smaller IRA withdrawal can actually result in a higher tax rate than a larger one. Quicken's rate can help determine the optimal amount for a series of withdrawals taken over a few years. In the OP's case they find that a larger withdrawal results in a lower tax rate than a smaller amount; due to some bucket of other income (cap gains?) that was not getting taxed but now is because an AGI threshold was crossed. Once the 0% threshold is exceeded, the marginal rate will go down until the IRA withdrawal amount causes the taxable income to cross into the next tax bracket.

It is working as designed but I'd agree the terminology is confusing because historically marginal tax rates have been associated with the regular income tax bracket rates. This is not the case for Quicken's "Marginal rate on salary". Quicken computes the actual rate the next dollar of income will cause the user to pay in tax. The Help file indicates it applies to the next $1K of income but that is not correct. It may be more than a dollar, but it is not $1K.

markus1957

You are misunderstanding. I argued with the developers over this terminology but lost. "Marginal rate on salary" is not designed to show the user what tax bracket they are in. It is intended to show them what rate they will pay on an additional dollar of regular income.

It does sometimes show the actual tax bracket. But often additional regular income can cause cap gains and now recently the senior deduction that were taxed at 0% to be shifted into taxable buckets. The marginal rate captures the impact of the tax bucket shifting.

You screenshot example looks to me like it may have captured the impact of the senior deduction being reduced by additional regular income.

Boatnmaniac

Sorry for the misunderstanding and thanks for the clarification. To my understanding "marginal rate on salary" is not a legitimate income tax term and the way Quicken is using it does a disservice to users who use Tax Planner.

BTW, I unchecked the "65 and old" designations in the Scenario 1 Tax Plan that I'd posted below. That changed the Marginal Tax Rate to 22% which is what it should be for that taxable income level. So, yeah, Tax Planner is not calculating/reporting the true Marginal Tax Rate in all situations. That's too bad.