Proper tax planning for clients relies on understanding what the tax consequences will be for various tax strategies - in other words, what tax rate, at the margin, will apply to the next dollar of income or deductions. Whether it's taking advantage of charitable deductions, calculating the true after-tax cost of tax-deductible interest, of evaluating the consequences of a Roth conversion, it's crucial to know how the client's tax liability would be impacted, on top of the existing "base" income that already exists, if the planning strategy is implemented.
However, for tax strategies that shift the timing of income - most notably, decisions like to whether to a traditional or Roth retirement account (or whether to convert from traditional to Roth) - it's important to evaluate not only the current marginal tax rate, but also the one that will apply in the future. After all, if the reality is that a Roth conversion accelerates income from future (tax rates) to the present day (tax rates), it's crucial to know whether today's tax rates are actually likely to be lower - or higher - than they would have been down the road!
While the conceptual process for determining a marginal tax rate is fairly straightforward - the tax rate that will apply at the margin after accounting for the underlying base income - the situation is much more complex in light of the various factors that impact marginal tax rates beyond just the client's tax bracket itself. The situation is further complicated by how inflation will change tax brackets in the future, and compounding growth can change the income and wealth picture as well. Nonetheless, it remains crucial to make reasonable estimates of how a client's tax situation will change over time, or it's impossible to make good tax planning decisions!