[kky617]

Hi, I use Roger CPA and cannot understand this:

The Text reads:

Withdrawals from either type of IRA prior to the age of 59.5 may result in a tax penalty of 10% of the amount withdrawn (in addition to the inclusion in gross income). The penalty does not apply, but amounts are still included in gross income when the withdrawal is the result of

– Payment of medical expenses exceeding 7.5% AGI

– Payment of qualified higher education costs.

The penalty is taxed at your marginal tax rate, which is the rate at which your last and your next dollar of taxable income are taxed. Your effective rate is the average rate of taxation for all your dollars (total tax/total taxable income).

So, I understand that early withdrawal on contributions to retirement plan is subject to 10% penalty. However, if you used the withdrawal to pay off medical expenses exceeding 7.5% of AGI or Qualified higher education cost, you are subject to “Marginal Tax Rate.” Effective rate is different from marginal tax rate because it is the tax rate for ALL of my income. Please correct me if I am not understanding it correctly.

The question is I don’t understand how marginal tax rate works.

Q1. What is it mean by “rate at last and next dollar of taxable income?”

Q2. Is the “Marginal Tax Rate” somewhat related to the tax bracket? Doesn’t tax bracket for the “Effective Tax Rate?”

Please help me :)!

Thank you!!!!

[NYCaccountant]

Effective tax rate is basically the average rate your paid taxes. The marginal rate is the rate your last dollar of AGI is taxed at.

For example, You have AGI of 30,000, the first $8,925 is taxed at 10%, the next 21,075 is taxed at 15%, so your total tax owed is ($8,925*10%=892.50 + $21,075*15%=$3,161.25)= 4,053.75

Your effective tax rate is $4,053.75/30,000=14% Rounded The actual rate you was taxed at.

Your marginal rate is 15% though, because it's the rate at which your last dollar was taxed at.

The IRA Penalty is 10% on top of your marginal tax rate, so the distribution would be taxed at 25%.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Effective tax rate is basically the average rate your paid taxes. The marginal rate is the rate your last dollar of AGI is taxed at.

For example, You have AGI of 30,000, the first $8,925 is taxed at 10%, the next 21,075 is taxed at 15%, so your total tax owed is ($8,925*10%=892.50 + $21,075*15%=$3,161.25)= 4,053.75

Your effective tax rate is $4,053.75/30,000=14% Rounded The actual rate you was taxed at.

Your marginal rate is 15% though, because it's the rate at which your last dollar was taxed at.

The IRA Penalty is 10% on top of your marginal tax rate, so the distribution would be taxed at 25%.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Author]

Replies