# Federal Income Tax Calculator

I’ve developed a tool that can be used for tax planning purposes. In order to make decisions like how much to work, how much to save in a 401(k), etc, you have to know what your effective marginal tax rate is. Unfortunately the tax code is so complex that knowing one’s effective marginal tax rate requires nothing short of a miracle.

Here’s an example of the marginal tax rates facing me as a parent of 5 young children:

The winding up and down of the earned income tax credit, child tax credit, phasing in and out of the AMT, etc., produce a wild path of effective marginal tax rates over the plotted income range. At low income levels, the effective marginal tax rate goes from -60% to 31%, which is an unbelievable swing. In particular, this is what’s happening for my particular scenario with 5 kids:

• At the onset, the earned income tax credit (EITC) ramps up at a rate of -45% effective marginal tax rate (EMTR).
• At 3k in income, the additional child tax credit (ACTC) provides an additional -15% EMTR for a combined -60% EMTR
• At 15k, the ETIC plateaus, leaving only the -15% EMTR caused by the ACTC.
• At 25k, the EITC ramps down at a rate of 21%, bringing EMTR to 6% (21% ETIC -15% ATCT).
• At 38k, the additional child tax credit max’s out, bringing effective MTR to 21% for ETIC.
• At 41k, taxable income is finally non zero due to income > standard deduction + personal exemptions, entering 10% statutory tax rate combined with 21% effective MTR for EITC for an EMTR of 31%.
• At 55k income, the EITC is officially dead bringing effective MTR to statutory rate of 10%.
• At 61k we enter 15% statutory rate.
• At 111k, we enter phase-out of child tax credit, adding 5% effective tax rate for a combined rate of 20% effective tax rate.
• At 117k, we enter the 25% statutory rate for a combined effective tax rate of 30% (25% statutory + 5% ACTC phase-out).
• At 181k, we enter AMT territory with effective tax rates of 38%.
• Etc, etc, etc.

It is unbelievable how complicated our tax code is in practice, with all the phase-in’s and phase-out’s of credits. If you’re into optimizing, like I am, it will pay to understand these nuances and make tax sheltering decisions in a strategic manner. I’m hoping this tool will empower normal people to make wise tax decisions in the face of a hopelessly complicated tax system. By viewing how tax rates change as a function of income, one can optimally choose the right amount to shelter in a 401k, etc.