Computing Marginal Tax Rates

Using python-taxes, you can compute real marginal tax rates on both ordinary income and long-term capital gains. The examples below estimated for tax year 2014 were generated with 2014est/example_marginal_rates_joint.py and 2014est/example_marginal_rates_single.py.

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.