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How to Calculate Your Full Effective Tax Rate

Posted By Jim On 05/02/2011 @ 7:59 am In Personal Finance | 12 Comments

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 [3], and make assumptions about how much you personally pay. It’s also very easy to fall into the trap of looking at tax brackets [4] 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 [5], 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 [6] 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 [7]. 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 [8])


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/calculating-full-tax-burden.html

[3] 45% of people don’t pay any tax: http://money.cnn.com/2011/04/14/pf/taxes/who_pays_income_taxes/?section=money_latest

[4] tax brackets: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html

[5] President Obama’s 2010 return: http://www.bargaineering.com/articles/president-obamas-2010-tax-return.html

[6] FICA: http://en.wikipedia.org/wiki/Federal_Insurance_Contributions_Act_tax

[7] sales tax deduction calculator: http://www.irs.gov/individuals/article/0,,id=152421,00.html

[8] agrilifetoday: http://www.flickr.com/photos/agrilifetoday/5229193100/sizes/l/

Thank you for reading!