About the income tax rate that Money uses

You probably know your income tax rate (from your federal taxes), but may be confused why Money shows a much lower rate.

While you may be in a 28% or 36% tax bracket according to your federal tax forms, this number is somewhat misleading. In fact, your income is taxed incrementally: The first $40,000 or so (joint income) is taxed at a lower rate (probably around 15%), the next $40,000 or so you earn is taxed at a higher rate, and the next amount is taxed at a still higher rate.

The tax bracket you're in reflects the highest rate at which any of your income is taxed. Money must use a different tax rate, however, to calculate the tax impact of different events in your financial plan. The tax rate Money uses is called your effective income tax rate.

The effective income tax rate is calculated by adding federal, state, and local taxes together, and dividing the sum by the amount of your gross income. Using the effective income tax rate is a more accurate way of assessing what percentage of your income actually goes to taxes.