Tax Planner & Tax Center- Rename "Marginal Rate on salary" to "Effective Marginal Tax Rate"

markus1957

I’ve noticed recurring confusion in the community regarding the 'Marginal Rate on salary' field. The label is misleading because it implies this is just the tax bracket applied to wages, but the calculation performed is actually much broader.

In tax and economic analysis, the 'marginal rate' is not just your statutory tax bracket; it is the Effective Marginal Tax Rate (EMTR). This is the accurate term to describe the rate paid on the next dollar of total income, which must account for the statutory bracket plus the loss of credits, deductions, and phase-outs (like those found in various IRS provisions).

Why this change is needed:

1. Accuracy: Users often compare the software's number to the IRS tax tables and conclude the software is 'wrong' because the numbers don't match. An 'Effective' label correctly signals that the number includes these additional hidden costs.
2. Professional Standard: Terms like EMTR are standard in fiscal modeling (used by the CBO and Tax Foundation) when calculating the true economic impact of additional income.
3. Reduced Confusion: By labeling it 'Effective Marginal Tax Rate,' we set the expectation that the number will be higher than the simple statutory bracket, which helps explain the variance users are currently flagging as an error.

Can we update this label to align with standard fiscal terminology and help users better understand their tax 'what-if' scenarios?"

If changed, the label also needs to be changed in Tax Center where it shows as Marginal Rate.

Jim_Harman

I agree that a change to the label would be helpful. The Help is actually pretty clear on this, if you can find it:

Marginal Rate/Average Rate: The Marginal Rate is the percentage of tax you'd pay on the next $1,000 of income you earned. The Average Rate is the percentage of your income that you owe for federal taxes, on average. It is calculated by dividing your total tax by your adjusted gross income. Although many textbooks define the marginal tax rate as the percent of tax paid on the last dollar earned, we chose a calculation based on the next $1,000 of income. We believe that, given the stair step nature of the tax rate structure, it better represents the amount you're being taxed on additional (marginal) income.

But it appears that the calculation (or the Help) is not quite correct. The Tax Planner Summary says my marginal rate is 25.0% but if I add a $1,000 adjustment to my projected salary, the Tax Planner say my refund decreases by $259, or 25.9%. It appears that even though the marginal rate in the summary shows tenths of one percent, the calculation is being rounded or truncated to a whole percentage point and/or some dollar amount other than $1,000, maybe $100, is being used for the increment.