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How does one appropriately assign tax rates to the various spiky income/deduction streams?

Simple. The IRS has a form that gives you that information. It's the "Tax Computation Worksheet for Form 1040". Very specific instructions, too. You enter your Taxable Income (Line 15), perform the math (multiply by 22%, 24%, 32%, etc.) subtract the "Subtraction Amount", and voila: there's the tax owed. If Taxable Income is below $100,000, you just look it up in the Tax Table.

Note that the Taxable Income is just the total of the income you had in the year, it doesn't matter if it was spiky or steady. Whether you withdraw $50,000 from your IRA on January 2 or on December 30, the tax is the same.

Here's the nut of the Tax Table, in picture and in text:
https://specials-images.forbesimg.com/imageserve/5dc2fdd4f04...

MFJ
Taxable income Tax owed
$0 to $19,750 10% of taxable income
$19,751 to $80,250 $1,975 plus 12% of the amount over $19,750
$80,251 to $171,050 $9,235 plus 22% of the amount over $80,250
$171,051 to $326,600 $29,211 plus 24% of the amount over $171,050
$326,601 to $414,700 $66,543 plus 32% of the amount over $326,600
$414,701 to $622,050 $94,735 plus 35% of the amount over $414,700
$622,051 or more $167,307.50 plus 37% of the amount over $622,050


This is not hard, and I don't understand the confusion.


However, when income/ deductions are spiky, 30-50% happening in a couple of months, such as commissions, capital gains, or business profits. Thus I've always used the effective tax rate as the tax rate for all income/ deduction streams.

This doesn't make sense. Your tax is computed as above. $X plus YY% of the amount over $zz,zzz. Whatever the YY% is (from the tax table) that's the tax rate for the next dollar of your income. You can't know your effective rate until you know your tax. And your tax depends largely on how far you are above the base of your tax bracket.

If in December your taxable income so far is $100,000, and you decide to withdraw another $1000 from your IRA, your tax on that $1000 is $220. Not the $71 that your effective tax rate of 7.1% would predict.

And, really, that's the issue that us financially independent retirees always face. "If I want $5000 to buy this thing, how much do I need to make the IRA withdrawal for?" That answer is always given by your marginal rate, not by your effective rate.

"Q: What is the difference between tax rate and effective tax rate?
A: The marginal tax rate is the rate of tax charged on a taxpayer's last dollar of income. ... The effective tax rate is the actual percentage of taxes you pay on all your taxable income."
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