Effective Tax Rate Calculation

by Bryan Keythman

    You might think you pay a high income tax rate when you consider only your federal income tax bracket. However, your overall, or effective, tax rate is typically lower. This rate measures your total tax as a percentage of your total income. Your tax bracket represents your marginal tax rate, which is the rate you pay on only the top portion of your income. Other parts of your income are taxed at lower rates. You can calculate your effective rate to see the percentage you pay when you account for deductions, exemptions and the tax rates of different income portions.

    Step 1

    Find the amount of total income you reported on the first page of your Form 1040 federal tax return. This amount is on or near line 22, depending on the year of your return. Your total income is the amount you earned from salaries, investments and other sources during the year before accounting for deductions, exemptions or other adjustments. For example, assume your total income is $250,000.

    Step 2

    Find your total tax on the second page of your return. This amount is on or near line 61, depending on the year. Your total tax is the amount you paid after accounting for applicable tax credits such as education credits. In this example, assume your total tax is $55,000.

    Step 3

    Divide your total tax by your total income. In this example, divide $55,000 by $250,000 to get 0.22.

    Step 4

    Multiply your result by 100 to calculate your effective tax rate as a percentage. Concluding the example, multiply 0.22 by 100 to get a 22 percent effective tax rate. If you are in the 33 percent tax bracket, your 22 percent effective tax rate is less than your 33 percent marginal rate.

    Tip

    • If you are required to pay state income tax, you can factor this into your calculation. Add your state income tax to your federal tax and divide by your total income to figure your combined federal and state effective tax rate. For example, if you paid $10,000 in state income tax, add $10,000 to $55,000 and divide by $250,000 to get a 26 percent combined effective tax rate.

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    About the Author

    Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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