What is the after tax cost of the deductions for the following question?
Simon’s marginal tax rate is 28%. If Simon can increase his tax deductions by $3,000 at the end of the year, what is his after tax cost of the deductions?
Tags: Marginal Tax Rate, Tax Deductions
The answer for your homework assignment can be found by multiplying the marginal tax rate by the increase in the deductions.
This is actually not the correct answer because it does not consider the effect on the earned income credit or the alternative minimum tax.
His cost is 28% or less than the original amount. It depends upon how close to the bracket threshold he is. If he’s only $1 into the 28% bracket, all but $1 of it will be at the 25% bracket and the savings would therefore be a hair over 25%.