Marginal Tax Rates and Investment Choices

Bruce Bartlett's recent column Tax Rates has some interesting math that I've decided to immortalize with a tool here at Political Calculations^(TM). Since the math revolves around information you have in your 2004 Form 1040 U.S. Individual Income Tax Return (reference this 180.2KB PDF document), I'll give you a few minutes to complete your return, if you haven't already, and have it ready to use with the calculator....

Okay, now that you've finished your return, let's put it to good use. We're going to calculate your average tax rate (the amount of taxes you paid relative to your income) and your marginal tax rate for 2004, or rather, the tax rate you paid on the highest dollar of your earnings last year. As noted in Bruce Bartlett's column, this latter information is really useful if you are planning to choose between a taxable versus a tax-exempt investment, since your marginal tax rate will determine which is more beneficial to you. Start by entering the indicated information from your 1040 form in the data input fields below, followed by your potential investment data:

1040 Tax Return Data for 2004
Input Data	Values
Line 62: Taxes You Owe ($USD)
Line 22: Your Total Income ($USD)
Line 8b: Income from Tax Exempt Bonds ($USD)
Your Filing Status	Box 1: Single Box 2: Married, Filing Jointly Box 3: Married, Filing Separately Box 4: Head of Household
Line 42: Your Taxable Income ($USD)
Potential Investment Information
Spread Between Taxable and Tax-Exempt Investment (%)

Tax Rates and Preferred Investment Choice
Calculated Results	Values
Your Average Tax Rate (%)
Your Marginal Tax Rate (%)
Preferred Investment Type

Hopefully, this calculator has helped you make an investing decision based on your taxes from last year. If you expect that your income will be significantly different this year, you should re-run the calculator with new values to account for the difference, since it may make a world of difference in your choice of investments.

Update: Via e-mail, Bruce Bartlett notes the marginal tax rate computed by this calculator represents:

a first approximation of one's rate, because phase-outs and other provisions can greatly affect the rate one pays on a particular range of income.

The effects of these phase-outs and other provisions are important to note - you may find that once your income creeps above one of the many arbitrary income thresholds that define whether or not you are eligible for a particular allowance, deduction or tax credit, that it may be more advantageous to put your money in a tax-exempt investment even if the raw marginal tax rate determined by this calculator indicates you would be better off with a taxable one. Chalk another headache up to our ever growing more complicated tax code....