For her, I concluded there was an effective rate of as much as 46.25%
on her withdrawals as she passed into the range where the social
security became taxable.

My question - I've referred to this 46% bracket as a "phantom tax
bracket". If that phrase is incorrect, what is it called?

My question - I've referred to this 46% bracket as a "phantom tax
bracket". If that phrase is incorrect, what is it called?

In the current thread discussing Bill W's adoption credit, a number of
people are saying that he (and I) are incorrect to call his current
situation a total 67% marginal rate.
[...]
For her, I concluded there was an effective rate of as much as 46.25% on
her withdrawals as she passed into the range where the social security
became taxable.

My question - I've referred to this 46% bracket as a "phantom tax
bracket". If that phrase is incorrect, what is it called?

what words do I use to describe
the fact that for them, the next $1000 is taxed at something greater
than those 'neat' few marginal rates?

But when I sit
with turbo tax and my senior clients, what words do I use to describe
the fact that for them, the next $1000 is taxed at something greater
than those 'neat' few marginal rates?

(Joe, your favorite example using Social Security is a little different
than the Bill W's tax credit example so keep in mind I'm addressing both
in the next few paragraphs.)

In general, there are at least two problems with trying to inject the
notion of "marginal tax rate" into these situations:

1) Sensationalism -- look at the subject of the previous post. Instead
of focusing on the planning issue (how to maximize the benefit of an
adoption credit), it was clearly worded to spark some outrage or at
least surprise at the tax laws -- gee, how could my marginal tax rate be
so ridiculously high?

2) Reductio ad absurdum

- (absurd conclusion #1) Bill W should strive to *increase* his gross
income sufficiently to get above the phase out level. This will cause
his effective marginal tax rate to come back down to what it was before,
problem (as presented) solved.

- (absurd conclusion #2) He should have taken in a foster child instead
of adopting, since it was the adoption event that increased his marginal
tax rate so drastically (the tax law was designed to discourage
adoptions by people in his income range).

- (absurd conclusion #3) All credits not received should be treated as a
tax paid, as Bill W claims (remember, he says that every dollar of
income is costing him an extra 29 cents in tax). Therefore, the stimulus
rebate, Earned Income Credit, child tax credit, and so on all *raise*
the average tax rate of all higher-income taxpayers who aren't eligible
to receive them.

 It should not surprise anyone that
marginal tax rate and tax bracket are two different things.

In other words, you compute what your tax is on your current gross
income

Do you think the "tax bracket" is anything other than the
"income tax rate at which the last dollar of yoru income is
taxed"?

That's a rhetorical question.

But in "joetaxpayer's" defense, I will note that I stumbled
across an online CCH calculator [1] that computes "your
current tax bracket and your marginal tax rate", as if to say
that these are different.

Rich Carreiro wrote:
[...]
In other words, you compute what your tax is on your current gross
income

I'm not aware of any tax law that specifies how to compute a tax on
gross income.

Well, you're not way off the mark. I took Turbo Tax 2007
and did the following:
Entered W-2 income of $90,000 for a husband and the same
for a wife.
Entered married filing jointly and one child.
Entered a special needs adoption of $11,650 for 2007.
[....]
Total Tax: 24,771.

I then gave the husband a $100 raise to get the marginal
tax rate:
[....]
Total Tax: 24,821

So, for a $100 increase in income, their taxes went up
by $50. [....] That's a 50% marginal tax rate in my book.

My LT cap gain rate is 22.5%. That rate is
real, whether or not it impacts my decision to buy or sell a stock.
[snip]
Joe

Agreed. The SS chart was my first observation of the phantom rate and I
(perhaps mistakenly) made a connection.

For the issue you're discussing, I simply say: "there's a range where
more and more of your Social Security becomes taxable, based on your
total income for the year." And then: "you're well above that range so
this isn't a factor in your planning" or "you're in that range, so we'll
be careful in managing your income each year, and make decisions
accordingly." Marginal, effective, phantom, nominal, bracket
rate...doesn't the jargon just confuse things? Heck half the people on
this thread don't seem to accept standard terms like "tax bracket"...

It's a wonder we humans ever started communicating at all. I like your
choice of wording above, and will adopt it.

1) Sensationalism -- look at the subject of the previous post.

- (absurd conclusion #1) Bill W should strive to *increase*
his gross income sufficiently to get above the phase out
level.  This will cause his effective marginal tax rate to
come back down to what it was before, problem (as presented)
solved.

- (absurd conclusion #2) He should have taken in a foster
child instead of adopting, since it was the adoption event
that increased his marginal tax rate so drastically (the tax
law was designed to discourage adoptions by people in his
income range).

- (absurd conclusion #3) All credits not received should be
treated as a tax paid, as Bill W claims (remember, he says
that every dollar of income is costing him an extra 29 cents
in tax). Therefore, the stimulus rebate, Earned Income Credit,
child tax credit, and so on all *raise* the average tax rate
of all higher-income taxpayers who aren't eligible
to receive them.

If income deferral were a legal, legitimate option, he'd be
better off for having shifted income from 08 to 09.