How Deductions, Credits, and Other Benefits Impact the Actual Marginal Rate

Jan L. Williams, PhD, CPA, and Phillip J. Korb, MST, CPA, and John N. Sigler, JD, CPA, and Thomas E. Vermeer, PhD, CPA

When taxpayers receive additional taxable income from any source, they generally believe the related increase in tax depends solely on their tax bracket. There are, however, various provisions in the tax code where increased income phases out deductions and exemptions, causes an increase in taxable income from certain sources, or reduces the amount of a tax credit, meaning that the actual marginal income tax rate from an additional dollar of taxable income can increase quite significantly. Tax professionals should be especially aware of the issue given recent changes in the tax code, such as the recently enacted first-time home buyer credit, the Making Work Pay Tax Credit (phased out for income above $75,000; $150,000 for couples) and the American opportunity Credit (phased out for income levels above $80,000; $160,000 for couples). Given these recent tax changes and existing income-limiting provisions in the iRC, professionals should remind taxpayers that their actual marginal income tax rate could be significantly higher than expected.