California Tax Rate Charts

For a spherical chickens in a vacuum, what would be its effective and marginal tax rate?

This is a very simple and straightforward question, but I have never been able to get a simple and straight answer from all the CPAs I’ve used. More than two years ago I did a round of calculation in my previous note on tax rates. With tax reform coming into effect in 2018 and so many rules changing, it’s a good time to revisit the numbers.

I’m charting all these lines to answer the question for a very idealized tax filer (imagine spherical chickens in a vacuum), but it helps get an idea and understand whether the tax reform is saving us living in California any money. For most people, it does!

Here comes the charts :)

First dent in the MTR lines (red&green) is social security tax capping out, reducing marginal tax rate by 6.2%. Second dent in green line is the (imo extremely stupid) “AMT sweet spot”. We can see that green and red lines are not far from each other, i.e. 2018 single tax rate is close to previous rates, but no more sweet spot. Final result is that for single earner with income 360K or higher, their 2018 tax is actually higher compared to 2017.

MTR for 2018 (red line) has several major gaps from the green line, mainly from removing AMT. The dent for social security capping out also shows up after that. Overall Effective tax rate for 2018 is always lower than 2017, and the largest difference is for couples who were hit with AMT, with income roughly between $250K and $500K.

For 2018, SALT deduction limit did raise ETR by several percent, but because of the higher standard deduction, the effective rate (blue line) is always far from marginal rate (red line). Unlike in 2017, at one point we surprisingly have marginal rate lower than effective rate, when the couple’s income is just above $500K.

the spike is due to a California tax credit that is removed at an income threshold

These couples would need to itemize their federal return at some point, cuz 10K capped SALT plus 20K non SALT is higher than 24K standard deduction. The effective rates for 2017 and 2018 (Blue and Orange lines) are much closer to each other here, showing the tax reform did not reduce much tax for these couples, but removing AMT is still a big deal.

Blue line is higher than orange at lower income end, but that part does not make sense anyways since we are assuming a 20K non SALT deduction.

Similar to previous chart. Tax reform mostly reduced the AMT burden for these couples, but otherwise it’s just inflation based regular tax relief.

What caused all the steps in Marginal Tax Rate curve?

I marked the reason of the steps for MFJ with 40K non SALT deduction. Each time the income goes up a bracket, we see the marginal rates go up a step. SALT limit caused a bump at around $200K, and social capping caused a big dent at $255K.

Effective Tax Rate Comparison for 2017/18

note that in 2017, ETR touched briefly for Single and MFJ filers.

in 2018, Single filer’s tax rate is separated from MFJ by a big gap.

Last charts. We can see that after tax reform 20K non SALT deduction doesn’t do much cuz standard deduction is already 24K, but 40K shows some effect.

Disclaimers

1. I am not an accountant. Some assumptions in the calculation are very problematic and/or nonrealistic.
2. The charts are for single (S) and married filing jointly (MFJ) in California with gross income from 0 to $1.25M. Additionally I charted MFJ with 20K non SALT deduction and MFJ with 40K non SALT deduction.
3. The charts use CA standard deduction, or itemize the 20K/40K non salt deduction.
4. The charts used CA tax plus non salt deduction to itemize federal deduction, and use the higher of this or federal standard deduction.
5. I ignored AMT for 2018. With assumptions above I don’t think the filer would hit it.
6. For MFJ equal double income is assumed, hence the social security tax cap is twice as high as single.
7. This chart assumes no donation / 401k contribution as they should not be in taxable income. Medicare tax, Medicare surtax, Social Security tax all tax 401k contribution but that factor is ignored.
8. Real life tax will be more complex than this chart.
9. Terms: S — Single, MTR — Marginal Tax Rate, ETR — Effective Tax Rate, MFJ — Married Filing Jointly, SALT — State And Local Tax, non SALT deduction — think your mortgage interest.

Other Thoughts:

1. I think higher income should result in higher marginal rate. Compare to 2017, the 2018 curves are closer to this idea, mainly by removing AMT.
2. It takes less than $50K of gross income to push your marginal tax rate over 40%. But it takes a lot more income to push effective tax rate above 40%

I hope you find these charts useful. I had great fun making them :)