For most projection scenarios, the marginal tax rate will offer the precision and relevance needed. However, if the goal is to take an ultra-conservative stance, the effective rate can serve as a useful tool.
For many tax projection scenarios, especially those that involve future income or deductions, the marginal tax rate often provides a more accurate and practical perspective. This is because any additional income or deductions are likely to be taxed (or saved) at this rate. Thus, when making decisions or projections based on incremental changes to income or deductions, the marginal rate should be your go-to choice.However, there are scenarios where the effective rate might be more appropriate. Specifically, when CPAs aim to be ultra-conservative with their tax projections, using the effective tax rate can offer a broader view of a taxpayer's overall tax liability relative to their total income. This approach may cushion against unforeseen tax liabilities or provide a conservative estimate that caters to clients who prefer a more cautious approach to their financial planning.
In Conclusion
While both tax rates have their merits, understanding the context is key. For most projection scenarios, the marginal tax rate will offer the precision and relevance needed. However, if the goal is to take an ultra-conservative stance, the effective rate can serve as a useful tool. As always, context and the specific needs of each client will guide the best choice. CPAs should always remain adaptable and consider the broader financial picture when advising on tax matters.