When Form 1120 C Insights 2023-2024

My name is Jesse McComb, the founder of You Need a Budget. You can find us at taxinsight.youneedabudget.com. Today, I want to discuss the difference between your average or effective tax rate and your marginal tax rate. The income tax is graduated, meaning different segments of your taxable income are taxed differently. Let's say that on the first $10,000 you earn, you're taxed at 10%. Then, on the next $20,000, you're taxed at 20%, and so on. These different tax rates contribute to the differences between the effective tax rate and the marginal tax rate. Let's imagine I have a dollar. If I am taxed at 10% on this dollar, and then 20% on the next dollar, and 30% on the one after that, you may be wondering, as my potential client, how much of your next dollar will be taxed. In this case, it would be 35%, which is your marginal tax rate. When evaluating any tax strategy, it's crucial to consider the marginal tax rate for the next dollar you earn, rather than focusing on the previous tax payments. Your effective tax rate is the average of all your dollars and takes into account different tax rates applied to different income segments. In our case, the effective tax rate would be slightly under 24%. It's important to always use the marginal tax rate when evaluating a strategy. In our Tax Insight app, you can easily see your marginal tax rate. Let's say you're married filing jointly with four kids. You input a salary of $60,000, interest income of around $400-500, and freelance income of about $8,000 per year. When you click on your total tax liability, it will show you the tax on the next dollar of business income earned (30.3%), the next dollar of salary earned (22.7%), and the next...