Login | April 29, 2025
Talking tax rates
THE MOTLEY FOOL
Ask the Fool
Published: April 29, 2025
Q: What, exactly, does it mean if I'm in the 22% tax bracket? That I pay 22% of all my income in taxes? -- E.S., Bath, Maine
A: You're smart to ask, because many people assume that's the case -- and it's not. That 22% is your "marginal" tax bracket -- your highest rate, paid on your top tier of income.
For the 2024 and 2025 tax years, there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Each bracket applies to a certain range of earnings. Let's say you're single and your taxable income for 2024 is $75,000. You'd pay 10% on your first $11,600 of income (that's $1,160), 12% on your income from $11,601 to $47,150 ($4,266) and 22% on your income from $47,151 to $75,000 ($6,127). (That 22% bracket covers income up to $100,525, by the way.) Add those three amounts for your total tax: $11,553. Divide that by your taxable income of $75,000, and you'll see that you paid a little over 15% of your income in federal taxes. That's your effective tax rate, reflecting your total taxes paid, and it's more meaningful than your marginal rate.
Q: What's the "efficient market" hypothesis? -- T.R., Grand Rapids, Michigan
A: It suggests that all (or most) available information is factored into the price of stocks. Therefore, a particular stock can't be over- or undervalued, and investors can't outperform the overall market consistently by using their brains.
Critics of the hypothesis see the stock market as only somewhat efficient, as many investors act on emotions (such as greed or fear) instead of rational reasoning. They point to the long-term outperformance of investors such as Warren Buffett as proof that the market isn't purely efficient.
Fool's School
Asset Allocation and Rebalancing
Many investors go years without engaging in -- or even understanding -- asset allocation and rebalancing. That can be a costly mistake. The term "asset allocation" refers to how your portfolio is divided among various asset classes, such as stocks, bonds and cash.
As an example, you might decide that you want to have your portfolio consist of 70% stocks, 20% bonds and 10% cash. Here's where rebalancing comes into play. Since stocks tend to change in value faster than bonds, in a few years your portfolio's allocation might have become 85% stocks, 10% bonds and 5% cash. If so, you've got more in stocks and less in bonds than you wanted to have. So you "rebalance" -- perhaps by selling some stocks and buying some bond investments -- to get back to your ideal allocation mix.
Many people change their asset allocation as they get older, shedding some stocks and adding some bonds. ("Target-date" or "life-cycle" funds will do this for you automatically.)
It's worth reassessing your portfolio's asset allocation annually and rebalancing as needed. It can be quite easy to do if you're invested mainly in low-fee index funds -- such as ones that track the overall stock market and overall bond market. As examples, the Vanguard S&P 500 ETF (VOO) will instantly have you invested in 500 of America's biggest companies, and the iShares Core U.S. Aggregate Bond ETF (AGG) will invest you in a broad range of bonds. You'll simply sell and buy the number of shares you want.
If you've invested in individual stocks, you might identify your least promising ones and sell some or all of those. You might also want to shave some shares off any stock holding that's grown a lot. For example, if one terrific stock soared so much that it's now 35% of your portfolio, you're holding too many eggs in that one basket. It's true that letting your winners run can be a powerful move, but keep your risks in check.
My Dumbest Investment
Blindly Following Advice
My most regrettable investing move? That's easy: I have a sense of what will happen in the future, but there's a lot I don't know, so I sometimes blindly follow advice. And that has come at a cost -- most recently, $40,000 just this year. I know I should take in what everyone says and then evaluate it all, not making any moves until I see the logic and am confident that I'm making an informed decision. The problem is, I learned that lesson and then relearned it twice this year alone. I've got it now. Losing money leaves a big impression. -- P., online
The Fool responds: Experience is one of the best teachers, but it can be a painful way to learn. You're smart to have figured out that no financial advice should be followed blindly, as your hard-earned dollars and perhaps your future financial security are at stake. If you like what you read about a certain investment, take some time to hunt down the risks it faces -- because almost every investment opportunity has some upsides and downsides. Weigh them, consider them in light of your risk tolerance and make a decision you can take responsibility for.
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Foolish Trivia
Name That Company
I trace my roots back to 1904, when two fellows who made cars in England joined forces to build four models. (One of them had broken the land speed record in 1903.) The new cars were big successes, and a venerable brand was born. An early iconic model was my Silver Ghost, and I still sell Ghosts today -- for north of $350,000 apiece. My hood ornament, the "Spirit of Ecstasy," was registered in 1911. I'm also a major supplier of business aircraft engines, and I make advanced combat systems and nuclear power plants. Who am I?
Last Week's Trivia Answer
You could trace my roots back to the 1997 founding of an online travel company that let you name your own price. In 2004, I acquired ActiveHotels.com, and a year later I bought the company whose name I would later bear. I was added to the S&P 500 index in 2009 and became the world's largest online hotel reservation system in 2010. Today, with a recent market value near $164 billion, I'm home to brands such as Priceline, Agoda, Kayak and OpenTable. More than a billion room nights were booked through me in 2024. Who am I? (Answer: Booking Holdings)
The Motley Fool Take
A 'Fintech' Giant
PayPal (Nasdaq: PYPL), a pioneer in internet payment processing, is undergoing a transition. The financial technology ("fintech") company's management is culling unprofitable products and segments to build a more profitable business. That's weighed on the company's revenue growth, but it's likely not a long-term concern.
Last year saw a strong recovery in adjusted earnings per share, up 21% year over year. Still, management expects the transition to continue in 2025, and it's projecting single-digit growth in the near term. But PayPal, also home to Venmo, is still the leading payments network on the internet. That gives it a significant competitive advantage, enabling it to win more merchants and, in turn, drive more consumers to sign up for its digital wallet.
So long-term investors have an opportunity to buy shares now at a lower price. PayPal's stock recently sported a forward-looking price-to-earnings (P/E) ratio of 14, well below the five-year average of 20. For a stock capable of growing quickly, that's a discount.
As management focuses on improved profitability, steady revenue growth and profit margin expansion should result in healthy growth in net income. Combining that with a focus on repurchasing shares, PayPal stands a good chance of growing its earnings per share substantially in the coming years. (The Motley Fool owns shares of PayPal and recommends its stock and options.)
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