Overview
Main Menu Name: Marginal
Calculates the after-tax rate on an investment, and the net after-deduction cost of borrowing. It accounts for both federal and state taxes.
In this article:
Background
The term "marginal tax bracket" means the tax rate that is multiplied by the taxable income in excess of income taxed at the next lowest bracket. The term, "combined marginal tax bracket" is the highest rate on which taxes are collected. It is important to remember that this includes not only federal taxes but also state income taxes as well.
Assuming a deduction is allowed against the federal income tax for state income taxes paid, the following formula is used to find the combined federal and state marginal bracket:
CMTB = F + S (100% -F)
Where:
CMTB = Combined Marginal Tax Bracket
F = Federal Tax Bracket
S = State Tax Bracket
To calculate the CMTB of individuals who do not itemize their deductions, add the federal bracket and the state bracket together.
Knowledge of the combined marginal tax bracket is essential in realistically appraising either the true return on an investment or the net cost of borrowing for investment purposes. This concept is basic to financial analysis. For instance, if an individual has a combined federal and state bracket of 34%, and 10% before-tax return on investment equates to an after-tax return of 6.6%.
The same principle applies to the extent the interest paid on an investment can be compared with the after-tax cost of financing that asset, it is easier to decide whether or not to borrow money to finance the investment or even to make the investment at all. Obviously, the greater the spread between the after tax return and the after tax cost, the more likely investment results will be positive.
Why should I use this calculator?
- To determine the true return on income.
- To determine the true cost of borrowing.
Getting Started
The term "marginal tax bracket" means the tax rate that is multiplied by the taxable income in excess of income taxed at the next lowest bracket. The term, "combined marginal tax bracket" is the highest rate on which taxes are collected. It is important to remember that this includes not only federal taxes but also state income taxes as well.
Assuming a deduction is allowed against the federal income tax for state income taxes paid, the following formula is used to find the combined federal and state marginal bracket:
CMTB = F + S (100% -F)
Where:
CMTB = Combined Marginal Tax Bracket
F = Federal Tax Bracket
S = State Tax Bracket
To calculate the CMTB of individuals who do not itemize their deductions, add the federal bracket and the state bracket together.
Knowledge of the combined marginal tax bracket is essential in realistically appraising either the true return on an investment or the net cost of borrowing for investment purposes. This concept is basic to financial analysis. For instance, if an individual has a combined federal and state bracket of 34%, and 10% before-tax return on investment equates to an after-tax return of 6.6%.
The same principle applies to the extent the interest paid on an investment can be compared with the after-tax cost of financing that asset; it is easier to decide whether or not to borrow money to finance the investment or even to make the investment at all. Obviously, the greater the spread between the after-tax return and the after-tax cost, the more likely investment results will be positive.
Entering Data
- Federal Tax Bracket: Enter the applicable federal tax bracket for the client.
- State Tax Bracket: Enter the applicable state tax bracket for the client.
- Before Tax Return on Investment: Enter the estimated before tax return on investment.
- Before Deduction Borrowing Rate: Enter the borrowing rate before deduction.
Results
The program calculates the combined marginal income tax bracket, and it determines the after-tax rate of return actually earned on an investment, and it calculates the net cost of borrowing.
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