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Assuming similar income, assets and liabilities as well as dependents and deductions, would the effective tax rate from last year be a good proxy for effective tax rate this year?

I'm asking primarily from the context of seeking to optimize withholding.

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    If taxable income, deductions, dependents and filing status, and eligibility for credits if any is about the same, yes your tax will be about the same. In addition to (some) investments which unpredictably throw more or less income, one possible surprise is if you had overwithheld state (or local) tax last year, and included it in itemized deductions, when you receive a refund this year it is taxable. ... Jul 28, 2017 at 10:52
  • ... Assets and liabilities are irrelevant for income tax, with one exception: cancellation of debt income is normally taxable but not if (and to the extent) you are insolvent. If assets include foreign accounts or investments over a threshold you must report them on your income tax return, and also to FinCEN, but they don't affect tax liability. Jul 28, 2017 at 10:52

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It would be pretty close, since there is no pending legislation to change tax rates, and the tax bracket boundaries have only shifted slightly.

However, keep in mind that your marginal tax rate is often more useful that your effective tax rate. Your marginal rate comes into play when you make a financial decision that affects your taxable income, e.g. contribute to a tax-deferred retirement account, an educational savings plan, or earn extra income.

Suppose your effective tax rate is 12% (meaning that your tax bill was 12% of your gross income), but your marginal tax rate is 25% (meaning that you are in the 25% tax bracket). If you contribute $1,000 to an IRA, your tax savings would be $250, not $120.

I am trying to figure out what my 2017 effective rate will be based on my 2016 effective rate so that I can adjust my withholding accordingly to make my amount owed/refunded from the IRS as close to 0 as possible.

In that case, I typically look at the entire estimated tax for the year, not necessarily as a percentage (although the math isn't much different). I then look at my withholdings and extrapolate that our for the year to see if I need to increase or reduce my allowances.

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  • Thanks D Stanley. I added a line to indicate my primary context of optimizing withholding which seems to me to be more related to effective than marginal. I would like to owe the IRS close to nothing and/or receive close to no refund
    – Garren
    Jul 28, 2017 at 1:37
  • @Garren, your effective tax rate is an after the fact calculation. Whenever you're considering deductions you consider the income "come off the top," to to be removed from calculation related to the highest attained marginal tax rate. This will change your effective rate, but the actual savings will exceed your effective rate.
    – quid
    Jul 28, 2017 at 4:38
  • @quid I may not have articulated this as well as I should have or I'm just not getting it. I am trying to figure out what my 2017 effective rate will be based on my 2016 effective rate so that I can adjust my withholding accordingly to make my amount owed/refunded from the IRS as close to 0 as possible. So if I owed $10,000 total for 2016 on $100k AGI but paid $15,000 tax, netting $5k refund, I want to then calibrate my withholding to total $10k for 2017 so as to avoid paying the IRS at all or getting a refund
    – Garren
    Jul 28, 2017 at 5:53
  • @Garren If your goal is adjusting withholdings, can you explain why just filling out Form W-4 (with all applicable worksheets for deductions and the like) isn't going to work out the way you want? What's your effective tax rate got to do with it?
    – user42405
    Jul 28, 2017 at 18:33
  • @PeterCooperJr. Effective tax rate would help me ensure the amount I pay the IRS by adjusting my W4 is roughly equal to my total liability
    – Garren
    Jul 28, 2017 at 19:26

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