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How to calculate Effective tax rate?

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  • How to calculate Effective tax rate?

    Pretty new to investing and looking to calculate some of the numbers WCI recommends (net worth, savings rate, marginal/effective taxes, etc...). I see everyone posting their numbers on this blog and I am trying to figure out how to calculate mine. Marginal seems pretty easy but was curious how to calculate effective. I know it seems like total taxes paid/total income but usually I just pay taxes during the year and then submit everything to my accountant and he tells me how much money I owe in federal, state, taxes, etc... beyond what I've already paid throughout the year. So, when calculating effective tax rates...

    -Do you include FICA, federal, and state taxes for calculating effective rate? I'm assuming add all three up and divide by income? Or do most people only report just the effective rate on federal taxes?

    -Where on your tax returns (form a line) can I find the actual numbers that I've paid (federal, FICA, state) so I can compute my tax rate?

    -I'm assuming divide by gross income instead of net (before any deductions for HSA, 401k, etc...). Where to locate this number?

    -For marginal, is everyone just reporting their federal marginal rate and ignoring any taxes owed to state or FICA?


  • #2
    Your CPA should be able to print a report that shows your effective tax rate. Our software spits out a 1-page summary with every return showing marginal, effective, etc. and compares current to past year. Check your prior year return if you haven't gotten this year's back yet and see if it is with the reports at the end. If not, just ask - your CPA may include extra reports that he/she believes won't be needed, just to cut paper use and costs.

    We report effective tax rate for federal and state separately. FICA is not included, but (oddly enough) our software counts SE taxes because they appear in the final total of taxes due. AMT is included, also.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      For my effective tax rate I use 1099 line 63 divided by 1099 line 22


      • #4

        For my effective tax rate I use 1099 line 63 divided by 1099 line 22
        Click to expand...

        You've sure got a lot of lines on your 1099. Sure you don't mean your 1040?

        All kidding aside, I think that's a good method, but only if you're self-employed. If you are employed, I think you ought to add back in whatever payroll tax they withheld. Heck, if you really want to be accurate, add in the payroll tax they paid too and add it to the numerator and denominator!

        The one downside of this method is it doesn't account for skill at getting something to be a business expense (that you would have bought anyway) since that comes out before line 22.

        Helping those who wear the white coat get a fair shake on Wall Street since 2011


        • #5
          Read the posts above. But doesn't simply taking line 63/line 22 not count your contributions to pre-tax investment vehicles such as 401ks, IRAs, etc... And doesn't that exclude FICA taxes and state tax?


          • #6
            Edit:  posted in wrong thread, sorry