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.
More from Liz Weston
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.
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The primary function of our tax system is "social manipulation". A tax break for this behavior,(I had to buy that truck, tractor, building, etc to save on my taxes) and so called "sin taxes" on other behavior.
That's the government getting inside your head to pressure your choices. Secondly, it fosters jealousy and strife between income classes to get people to argue and hate each other and miss the real issues of how to solve the problem. Why?
Because all the solutions are very counter productive to the government's goal of increased size, power, and control. For example, a flat tax with ZERO deductions for anyone or any organization. NONE. Gone is the ability to manipulate and intimidate. Term limits with ZERO benefits upon leaving (not retiring from) government for ALL elected positions. (no path to riches thru government career of buying elections with more hand outs). Outlaw gerrymandering......all districts a simple grid of squares adjusted for size of population. (no more custom drawn districts by party bosses guaranteeing easy election for chosen candidates.) We should end with-holding taxes. Every American should be made to WRITE THE CHECK every month or quarter for every dime they owe. (no more anesthetizing people from the pain of taxes buy making the money dissapear before you hold it in your hands).
We are NOT undertaxed.....the government overspends.
Here's the thing that astounds me about conservative talking points. Ask them who is to blame for the recession, for the national debt and who to "pinch" to fix it:
Now, let's look at the system. Who has the least amount of power? The least amount of ability to shape laws? The least amount of political influence? Illegals, poor, elderly, infirm... So you're telling me the people with the LEAST amount of power are the ones who benefit the most and created all the problems?
Now, who do certain liberals blame? Wall Street, lobbyist, major corporations. Those who actually do tend to have power.
From a purely logical point of view, which makes more sense? That those with no power are "ruining" this country? Or those with money and power are?
This is why I will side with the candidate who wants to empower and help those with little power, rather than blaming them. And why I will side against the candidate who wants to give breaks to those who already have power at the expense of those with nothing.
Before you set any tax rate, close the personal deduction loopholrs. A person should not be able to receive a a refund of more than they paid. All the un-earned credits are a crock of . Why should som bum, getting welfare and food stamps, living in Govt. housing, be able to work a couple of weeks a year , claim as many deductions as allowed, then get a big refund chek??? Tax payers have already paid for his or her kids. Don't forget medi-caid. IT IS EVEN WORSE WITH mexicans claiming dependents that don't even live in the U.S. Harry Reid could have stopped this.
As a CEO, I am privileged to have a position that affords me a decent living. It is a living that I could not earn, quite frankly, if not for my coworkers who make a lot less than I do. To suggests that they pay the same percentage tax as I do does not make any sense. They need all of the money they make to get by. I don't.
If life were fair we'd all earn the same amount, we'd be born with the same aptitudes and we'd all work the same but, of course, life isn't fair. Thank God, it isn't. To me, the tax is a small price to pay for the opportunity to be a leader. Call me a fool but I'm grateful to be an American and grateful to contribute.
Our tax system is not designed to conform to some personal vision of entitlement. It's designed to get the money it needs to function from the people who have it. That happens to be from people like me who are lucky enough to have money.
Said: Can't we just have a flat tax?
Better than a flat tire. The Fair Tax.
Flat tax won't work, because you still will be taxing REPORTED income and bellieve me there is plenty of UNREPORTED income in this country. And that income never gets taxed, at least at the federal level. Does at the state level, most states anyway. Why, because they have a sales tax. And what do people do with both REPORTED and
UNREPORTED inocme. They spend it.
It is my conteniton that the more one makes the more they spends. You want everyone to
pay their fair share. Well, the fair tax might just do the trick, even for the rich who pay very little
in tax now. Remember investment income will no have any special rate with the fair tax. And
for those that do report their income for tax purposes.
So a sales(consumption tax) would make a lot of sense, at least to me.
Revenue will be recovered from all income, both what is now REPORTED and
what is NOT.
I think it is incumbant on everyone who complains about the current tax
system to read about the Fair Tax. IMO, the best idea out there to replace
the current monstrosity.
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. '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 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
roughly the same amount, and he proceeded to work out the amounts each
And so The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $ 5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four
Continued to drink for free. But once outside the
restaurant, the men began to compare their savings.
'I only got a dollar out of the $ 20,'declared the sixth man.
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
'That's true!!' shouted the seventh man. 'Why should
he get $10 back when I got only two? The wealthy get all the
'Wait a minute,' yelled t he first four men in unison.
'We didn't get anything at all. The 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 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 college
professors, this is how our tax system works. The people who pay the
highest taxes 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.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
Paradoxical Quote of The Day From Ben Stein:
"Fathom the hypocrisy of a government that requires every citizen to prove they are insured... but not everyone must prove they are a citizen."
Now add this, "Many of those who refuse, or are unable, to prove they are citizens will receive free insurance paid for by those who are forced to buy insurance because they are citizens."
Our Budget has reached a point where it can no longer be balanced regardless of the political party in power nor by that party adding any amount of new tax burdens on US CITIZENS........tax ALL ILLEGALS at 50% and take away all their "free" benefits and we might be able to balance the budget
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