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How to Calculate Your Full Effective Tax Rate

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Preparing Taxes!Now that tax season is in the rear view mirror, it’s time to take a look back to see how much you actually pay in taxes.

It’s very easy to see aggregate tax statistics, like 45% of people don’t pay any tax, and make assumptions about how much you personally pay. It’s also very easy to fall into the trap of looking at tax brackets and assume that’s how much you pay. Ultimately, unless you take a calculated look at your finances, you can’t be sure.

Today, we’ll take such a look. Make sure to bring your tax return with you.

Income Taxes

Your Federal income tax liability should represent the bulk of the taxes you pay in a single year. You will need two numbers from this form. The first is your total income, which you can find on Line 22 of the first page. We use this figure, as opposed to your adjusted gross income, because it doesn’t matter to us that you contributed to an IRA. We want to know Total Taxes divided by Total Income. With that in mind, go down to Line 60, which shows your tax liability.

For President Obama’s 2010 return, we have this:

  • Line 20: $1,795,614
  • Line 60: $453,770

So far, we have an effective tax rate of 25.2%. This makes sense for two reasons. First, there are deductions that reduce his taxable income (and credits that reduce his liability). Second, despite President Obama being in the highest tax bracket, not all of his income is taxed at 35%. The first $379,150 in income is taxed at lower rates as he moves through the marginal tax brackets.

FICA

FICA covers Social security and Medicare and every working American pays these “taxes.” For FICA, you have to 6.2% of your salary up to $106,800 into Social Security and then 2.9% of all of your income into Medicare. For simplicity, let us assume President Obama pays FICA on the full $400,000 Presidential salary for 2010. That means he will pay $6,621.60 into Social Security (the full 6.2% of $106,800) and $11,600 (2.9% of $400,000) into Medicare. (We won’t consider Michele Obama’s income for this, it just adds confusing trying to pull that information from the tax return)

He’s now kicked in $471,991.60 of his $1,795,614 income – a 26.3% effective tax rate.

But wait, there’s more!

State Taxes

We’ve paid the Feds twice now, federal income taxes and FICA, now it’s time for the state and local governments to get in the act. If you itemize your return, you can look on Line 5 of Schedule A, that lists your state and local income taxes because you can deduct them from your AGI for federal tax purposes. If you don’t, you’ll need your state return and hunt for the figure. Since the Obamas itemized, we know from the Schedule A that they owed $52,527 for 2010.

The register now reads in a total tax payment of $524,518.6. Effective tax rate of 29.2%.

Sales & Property Taxes

While there are probably more taxes and fees that you pay to a government body, these are the last two that can make an “impact” on your tax rate. We’ll tackle property taxes since that’s easiest. If you itemize, just look for it on Line 6 of your Schedule A. The Obamas paid real estate taxes of $25,742 in 2010.

For sales taxes, we will have to do a little guesswork using the IRS.gov’s own sales tax deduction calculator. For taxpayers living in states without income tax, you have the option of deducting sales tax. If you don’t keep all of your receipts, you can use the IRS’ calculator to help you “guess.” For this example, I put in $200,000+ income, 4 exemptions, and 20500 zip code (White House) and the calculator spit out – $1,558.00.

The total taxes now paid is $551,818.60. Effective tax rate of 30.7%.

If you have your tax return, you can probably calculate your effective total tax rate pretty quickly – so what’s yours? Mine was around 19%.

(Photo: agrilifetoday)

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12 Responses to “How to Calculate Your Full Effective Tax Rate”

  1. philip says:

    Mine is about 29% and I don’t make that much money! Guess I need to see what I can do to cut that down, 19% seems like a good target to go for.

  2. freeby50 says:

    Don’t forget to consider any tax REFUNDS you get.

    For example if you just look at your paystub and figure out that you make $45,000 but paid out a total of $9000 in taxes that would give you 20%. But if you forgot to subtract a $2000 tax refund then you’re taxes are actually 15.5%.

    • Jim says:

      That’s true, which is why I recommended looking at your tax return – that information should all be integrated into that final “tax” figure.

      • freeby50 says:

        Yes thats right. For some reason it didn’t dawn on my when I first read it that the tax return would cite the total actual taxes.

  3. eric says:

    Using Obama’s tax return was a nice touch :)

  4. Frugal says:

    While this is very informative, I am not sure if I want to do this. I just don’t want to be “depressed” :)

  5. Nick says:

    I didn’t actually calculate this myself, which is why I am looking for the solution, so that I can verify, but according to Turbo Tax, my effective tax rate was -11.10%…that is right, negative. Meaning that because I actually paid “no” taxes and received a refund, my tax rate is negative. The reason I say “no” taxes is because I did not have enough in deductions to itemize, although I did pay property tax. I was laid off for most of the year, like many people in this country, so my wages were $37,480 and $0 tax after credits (before credits it was $201). My refund was for $6,244. Here is the breakdown; withholding $566, making work pay $698, EIC $3514, Addt’l child $12238 and American opp. $228.

  6. Strebkr says:

    Effective tax rates are a good bar to compare how tax effective you are. Just because you make more money doesn’t mean your effective rate will go up. In reality, hopefully it should go down.

  7. Dan says:

    Mine comes out to 26.99& for 2011… Figure includes state, federal, social security, medicare, property and sales tax.

  8. Xentropy says:

    I know this is an old article, but it forgets one thing: FICA taxes are charged both to employees and employers. You take this into account for Medicare–the employee is taxed at 1.45% and the employer also at 1.45%–but not for Social Security. Your employer’s 6.2% would most likely trickle back into wages if Social Security were eliminated overnight somehow, so the best way to calculate this would be to add 6.2% of your income up to $106,800 to both your total income and taxes paid.

    In Obama’s case, we add another $6,621.60 to both taxes owed and income and get $558,440.20 paid on $1802235.60 income, or 30.99%. Note this isn’t a huge difference from your final result, but mainly because the tax only applies to that first ~$107. The effect on the final value for a middle class American with a 5-digit will be significant.

  9. BDA says:

    Ours is 36.4% … Wow, I had no idea. And we are nowhere in the league of the Obama sample you used. Ours filing status is married filing jointly and I used 4.2% for FICA in 2011. I live in NY and included Tax Liability, FICA, Medicare, State, Local and General. No “additional” general sales tax either … but we did get hit with the ATM.

    Here’s our breakdown. We were at 22.2% with Federal Tax Liability. After adding in FICA and Medicare we were at 27%. After adding in NY State Tax, we jumped to 34.1%. Adding in Local Property taxes took us to 35.9% and after adding in the general sales tax we ended up at 36.4%

  10. Jer says:

    I am interested in calculating the portion of my income taxed by inflation. The government sells bonds to the FED which prints money to pay for the government’s bills, causing price levels to rise and my real (not monetary) income has effectively declined. It would be like if the government asked me to pay an extra 5% income tax to pay for the war on terrorism but selling bonds is less transparent and less restrictive on gov’t spending.


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