Updated: 9/18/2012 9:15 PM ET|
What's your real tax rate?
With a little math, you can find out how your effective tax rate compares with President Obama's and Mitt Romney's.
Effective tax rates have been in the news lately, and that will continue as the presidential election heats up.
To understand what all the fuss is about, you should do a little math with your own taxes. That way, you'll have some benchmarks to understand the discussion.
For the purposes of the election discussion, "effective federal tax rate" means a filer's total federal income tax owed divided by the filer's adjusted gross income, or AGI. You can find those figures on your 2011 tax return and quickly calculate your own effective tax rate.
● On Form 1040, your AGI is on line 37, and you'll find the total tax figure on line 61.
● On Form 1040A, line 21 has your AGI, while your total tax is on line 35
● On Form 1040EZ, your AGI is on line 4, and your total tax on line 10.
Divide the smaller number by the larger one to get your effective rate.
Ready? Then let's recap. Warren Buffett kicked up a storm when he noted that his effective federal tax rate in 2010 was less than his secretary's. (He paid 11% of his AGI in federal taxes that year.) That's because investment income is taxed at a lower rate than wages and salaries. Buffett questioned the fairness of that situation. The controversy led to the Buffett Rule, a proposal by President Barack Obama that would create a minimum 30% tax rate on people making more than $1 million a year.
The rule likely would apply to Republican presidential contender Mitt Romney, whose AGI in 2011 was $20.9 million and whose effective federal tax rate was 15.4%.
The rule would not likely apply to his running mate, Paul Ryan (20% effective tax rate on $323,416 AGI), or to Obama (20.5% on $789,674), or to Vice President Joe Biden (23.2% on $379,035). (You can find these figures on the Presidential Tax Returns section of the Tax History Project site.)
If you're like most people, your effective federal tax rate is less than what these guys pay -- maybe a lot less. The average federal tax rate was just over 11% in 2009, according to the Internal Revenue Service, and many people paid a lot less.
|Average federal tax rate for taxpayers with positive AGI*|
|Minimum income||Average federal tax rate|
|*All taxpayers with positive AGI in 2009, the latest year for which statistics are available.|
In fact, a good chunk don't pay any federal income taxes: 46% of all filers, according to the Tax Policy Center. Some don't earn very much, while others have their tax obligation offset by credits of various kinds. To find out if you're one of them, you may need to do a little more math. On the 1040, for example, the credits on lines 64 to 67, 70 and 71 all reduce your total federal tax bill. If you claimed any of these, subtract them from your total tax figure to determine what (if anything) you paid in federal income taxes.
Taxpayers in the lowest income bracket often have a negative federal tax rate. This happens when taxpayers get refundable credits, such as the earned income and child tax credits, that exceed their federal tax bill.
These numbers don't tell the whole story, of course. Most people who work have payroll taxes (Social Security and Medicare) deducted from their checks.
So get out your calculator again, and use your W2s from last year to add in any Social Security and Medicare taxes you paid. Add that to your federal tax bill, and compare it to your AGI.
Obama's share of payroll taxes on $394,821 in wages and salary would have been a little over $10,000 in 2011, boosting his total effective federal tax rate to 21.8%. Biden's would be 25.6% and Ryan's 22.1% once payroll taxes are included. Romney's rate would not change, since he reported no wages or salary for 2011.
Unfortunately, I couldn't find a real apples-to-apples comparison for the rest of us. The Congressional Budget Office keeps track of effective tax rates that include both federal income and payroll taxes. But the CBO's definition of income is a lot broader than the AGI figures we've been using so far. In addition to what's counted on your income tax forms, the CBO adds in:
- Contributions to 401k plans.
- Employer-paid health insurance premiums.
- The employer's share of Social Security, Medicare and federal unemployment insurance payroll taxes.
- The share of corporate income taxes borne by workers.
Also, the CBO includes both employer and employee contributions to Social Security and Medicare taxes when figuring individual tax rates. (Usually, the split is equal: employer and employee both pay 6.2% into Social Security up to a certain wage cap, plus 1.45% into Medicare. Currently, though, the employee portion of the Social Security tax is reduced to 4.2%.)
The CBO's figures show that the average federal tax rate -- households' federal taxes, including income and payroll taxes, divided by their incomes -- was 17.4% in 2009 for all households. The rate ranged from 1% for households with the lowest incomes to 23.2% for households in the top 20%. (The figure was 28.9% for those in the top 1%.) The bottom line was that in 2009, the latest year for which these statistics are available, the CBO calculations found that the vast majority of Americans paid less than 15% of their incomes in federal taxes.
|Income bracket||Average before-tax income||Average federal income tax rate||Average payroll tax rate||Average effective tax rate (federal and payroll)|
Your tax rates may be quite different from the average for your income group, of course. For example, if all of your income is from wages and salaries and you take the standard deduction, you'll likely wind up with a higher tax rate than someone who is living off investments and itemizing deductions.
If you're looking for ways to reduce that tax bill, check out MSN's Tax Center. If you want to weigh in on what the nation should do about tax rates, vote in the November election.
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Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
VIDEO ON MSN MONEY
THE TAX SYSTEM EXPLAINED IN BEER
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100...
If they paid their bill the way we pay our taxes, it would go something like this...
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7..
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do..
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? The paying customers? How could they divide the $20 windfall so that everyone would get his fair share? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% saving). The sixth now paid $2 instead of $3 (33% saving). The seventh now paid $5 instead of $7 (28% saving). The eighth now paid $9 instead of $12 (25% saving). The ninth now paid $14 instead of $18 (22% saving). The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
"I only got a dollar out of the $20 saving," declared the sixth man. As he pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more benefit than me!" "That's true!" shouted the seventh man. "Why should he get $10 back, when I got only $2? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible
Looks like the wealthy might not want to fund our beer anymore, so they will just get up and leave. Simple is it not?
No representation, without taxation!
A flat tax would give everyone an equal stake in our country. And it would take away all the loopholes lawmakers give themselves and their friends.
Where are the gambling taxes, alcohol taxes, cigarette taxes, toll bridge taxes, state with holding & sales taxes, luxury taxes in some states(like owning a boat), home sales taxes, home worth taxes and the list goes on & on with county & city taxes? All of this & more must be added to the federal taxes for your real tax rate. No wonder people stare at their pay check wondering where it all went so quickly.
Truth is the government has made so many laws and loop holes concerning taxes that figuring taxes is next to impossible. The real lie is that anyone deserves or should get a break. Flat tax will work without all the lies of deductions. Once money is taxed it should be safe from taxing a second time. For one reason or the other this is not the case. If you work hard and get rich or get ahead enough to make it into the middle class your considered ripe for picking. As always the poor and welfare recipients live off the others, just a fact of life. Some by necessity have to live that way but many make it a lifestyle choice of living off others. The big lie is flat tax won’t work. The problem is with flat tax is that multitudes of civil service personal in the IRS would lose jobs. There would be no need for them, because taxes would be taken out of your paycheck with no additional paperwork. Just think! You wouldn’t have to file tax returns every year because the government would already have the information in their computers. Thousands of trees would be saved from being sent to paper mills. All those losers working for the government would have to find real jobs.
Pursuant to my work I often see tax returns of other individuals and have this comment....instead of worrying how much the "rich " pay - how about focusing on those who don't pay "their fair share" and abuse the system that make the following possible:
Actual example: A woman filed a tax return as head of household with two children, making $18,446. She paid $1237.00 in federal taxes and received a refund of $6,861.00. In actuality, she is married - to an illegal alien who works and lives in this country, who doesn't file a return and pays no income tax.
I am more disgusted with the above example, than making an issue of what percent the "rich" pay. Im tired of working two jobs, being a good citizen, paying taxes - and seeing all the entitlements handed out to those that are not doing the same.
PS - AND while I am venting..... When Kennedy ran for president - was there an issue of what he or his family made or reported on their income tax - or for that matter - how their money was made???
Capital gains taxes are based on a longer period of time than salary, which is why the rate is lower. Plus you have to take money you already have (and paid taxes on) and invest it for long periods of time, during which you have no access to that money to spend, in order to make money.
Think about it this way: the interest you gain from your savings accounts at the bank is a capital gain. Right now, it is taxable at a pretty low rate. But you are getting that money because you took your hard earned salary, paid taxes, and then let someone else use that money, at the risk of losing it. In the case of a bank account, the risk is low, but so is the interest you earned. But if Obama stepped in and said you had to give him a third of your gain, would you be OK with that? What is next? If you grow food in your garden will the government take a third of that too? It is the same thing.. you pay for the seeds and the fertilizer and the garden tools with dollars that have already been taxed.. you paid for the land with dollars that have been taxed.. So why should you pay for what comes from the seeds, ferilizer, and land? This is what capital gains are - the result of cultivating what you already have and already paid taxes on.
Keep in mind, Romney may have a lot of money, but whatever he has he already paid taxes on.. if he didn't (ie if he got paid in something that is deferred, like stock options) then he pays when he collects on it (if he ever collects the principle). If he inherited it, then he paid the death tax on anything over a million (10 million if it was in the last 10 years), at a rate of about 45%. So the money he is collecting, albeit a LOT of money, is the INTEREST he gets for loaning his money to companies. And the amount he pays on what he collects each year in gains is substantially more than any hundred people here will ever pay.
On the same note, 41% of WORKING Americans don't pay ANY federal taxes. Many get money BACK that they didn't even pay in. The millions that people like Romney have paid in goes to pay for these tax breaks.
The fact is, The more you make in salary, the higher percentage of it you pay in taxes. Sure, you can defer some of it, but you aren't getting away with anything, you WILL pay sooner or later. It is easy to say it is FAIR when you are paying 7% of your $30k salary in taxes ($2,100) and the guy making $300k per year is paying 28% ( $84,000). But if you suddenly got $300k after years of aquiring hundreds of thousands in college debt, and years of working far more hours than the average American for pennies or even for nothing as an intern, and found you had to shell out almost $100,000 in taxes, you would probably really question the fairness of it all. As long as it is someone else's money, then it is OK to ask for more from them while you pay less, isn't it?
The same old story: rich against poor, powerful against weak... Why Romney's wealth is so important now...? why was not important when Kerry, Clinton, Carter, Johnson and Kennedy? Whom the Senate represent? Get a freaking life... Everybody should pay tax:
No loopholes and exceptions
1% for $10,000 or less
2% for $20,000
3% for $30,000
and so on & so forth up to $1,000,000 over 1Mil 15%
income from investment that create jobs 10%
investment that create wealth 25%
no taxes on fuel and food. Everything else a flat 7%
No wealthfare, don't work, don't eat (unless disable)
Retirement at 60 (75% of last year income)
Private health insurance for everybody (cover all) payment adjusted to income
Private education for everyone (tuition payment adjusted to income)
Criminals will work and will live under the same conditions our Soldiers live in war time.
The only way to calculate a tax is add all taxes, SS tax, Fed income tax, medicaid tax, state tax, county tax, city tax, sewer tax,UE /Dis, all taxes you pay whenever you buy something or eat out, charitable contributions you make through your employer, dry cleaning charges for your suits which are required at work etc etc.
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