Calculating Your Effective Federal Tax Rate

Income tax terms and laws can be quite confusing; however, one term you will want to learn about is your effective federal tax rate, or simply effective tax rate. An effective tax rate is defined as the net rate that taxpayers pay on their incomes. Figuring your effective tax rate is actually quite easy if you follow the steps listed here.

Calculate All Pretax Cash Income

Tax RateThe first thing you will need to do to calculate your effective federal tax rate is to calculate all of your pretax cash income that you received during the year. This includes all income you reported on your federal income tax forms. Examples of these types of income are as follows.

  • Wages
  • Self-Employment Monies Received
  • Rents Received
  • Taxable and Nontaxable Interest
  • Capital Gains Recognized
  • Employer Contributions Made on Your Behalf

Calculate Any Other Forms of Income

Ask yourself whether or not you had any other forms of income that were provided by the government. This typically includes such things as employer-paid health insurance premiums, housing assistance, unemployment, Social Security, Medicare and food stamps. Add your result to your pretax cash income. The figure you will get is known as your comprehensive income.

Calculate Your Total Taxes Paid for the Year

Next, you will need to determine how much you paid into taxes during the year. You can typically find the federal taxes you paid on your W-2 form. It will be listed as federal income tax paid. After you find this amount, look at your W-2 form again and find out how much you paid into Medicare and Social Security taxes.

Add all three of these amounts together. Finally, divide how much you paid in taxes by your comprehensive income and multiply the result by 100. The final figure is your effective federal tax rate. It is essential to note that this information gives you instructions on how to calculate your effective tax rate for all federal taxes paid.

Effective Tax Rate Based Solely on Federal Taxes

The information above will give you a higher effective tax rate than if you simply calculate your tax rate based on just your federal income taxes paid. To calculate your effective tax rate based on just federal income taxes paid, divide your total federal taxes paid during the year by your adjusted gross income.

You can find your adjusted gross income, or AGI, on your 1040 tax forms. The line you will find your adjusted gross income on will vary depending on which 1040 form you used to file your taxes. However, on all forms, the line will be labeled as “your adjusted gross income.”

Where Do You Stand?

Knowing your effective federal tax rate can help you understand how much of your salary is going out to taxes each week, month and year. While you may not think that calculating your tax rate is important, it can give you a good idea of how much money will be taken out of every dollar you earn.

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Anastacio Mindiola is a tax expert who teaches homeowners how to save money on their property taxes. He works for Republic Property Tax in Houston, Texas.