How to Calculate Your Effective Tax Rate
The U.S. tax system is progressive, meaning that each level of income is taxed at a higher rate. So for example, as of 2011, your first $8,375 is taxed at 10 percent, then every dollar over that amount but under $34,000 is taxed at 15 percent, and the process continues like this until every dollar you earn is taxed. In addition, there are additional withholding taxes that you are charged throughout the year for social programs such as Social Security and Medicaid. So it is hard to determine how much of your income is taxed. The effective tax rate is a definitive measure of how much you pay in taxes in comparison to what you make.
- Difficulty:
- Moderate
Instructions
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1
Calculate your pretax cash income. This includes everything you report on for tax purposes. Examples include wages, rents received, capital gains recognized, and taxable and non-taxable interest. Also, include employer contributions made on your behalf such as employment taxes paid and contributions made to retirement plans. Request a complete listing of all personal benefits and taxes paid by the employer for your benefit from your human resources department or office manager.
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2
Determine if you had income from any other sources. These are generally subsidies provided by the government. If you received employer-paid health insurance premiums, benefited from Medicare, or used food stamps or housing assistance, include that in your calculation.
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3
Calculate your comprehensive income. This is the sum of your pretax cash income and all income from other sources.
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4
Determine how much you paid in taxes. Take your completed 1040 personal return and use the information recorded on line 44. This amount represents how much you owed in income taxes for the year. Then, use your W-2 and add to your income tax amount how much you paid in Social Security and Medicare. This information is listed in boxes 4 and 6.
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5
Divide how much you paid in taxes by your comprehensive income. Multiply this number by 100. This will give you the percentage of income you paid in federal taxes.
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1
Tips & Warnings
If you want to expand and include state and local taxes to determine an effective tax rate, include how much you paid in those levies along with your federal taxes.
