Want to see just how much you envy Mitt Romney and his 15% effective tax rate? Get out your tax return and calculate your Effective Tax Rate in seconds!
Effective Tax Rate Calculator
1. Taxable income (1040, Line 37; 1040EZ, Line 6):
2. Income tax less credits (1040, Line 55; 1040EZ, Line 10):
3. Self-employment tax (1040, Line 56; not on 1040EZ):
4. Social Security and Medicare taxes paid -- add the amounts on Lines 4 and 6 of all your W-2 forms. If not available, multiply the first $106,800 of wages (1040, Line 1; 1040EZ, Line 1) by 0.0665 (for 2011 only) or 0.0765 (for 2010 and prior years):
5. Add the amounts on lines 2, 3 and 4:
6. Divide the amount on line 5 by the amount on line 1 and multiply by 100 to get percentage:
The percentage on line 6 is your Effective Tax Rate. Read 'em and weep!
Remember, the Effective Tax Rate is not the same as the "marginal" rate. The marginal income tax rate is the rate you pay on particular categories of income -- but that doesn't take into account the exemptions, deductions and credits you are entitled to claim. Taxes on long term capital gains -- and, notoriously, the pay of hedge fund managers -- are generally capped at 15%. "Ordinary income" -- that is, income you actually have to work every day to earn -- is taxed at anywhere from 15% to 35%, depending on income level. On top of that, the first $106,800 of wages incur an extra Social Security and Medicare tax (lowered for 2011 to 6.65%, but usually 7.65%. Wages above that level pay no Social Security tax. Even worse -- self-employed and freelance individuals (who file Schedule C) pay double the Social Security tax that wage earners do.
When Mitt Romney says his "effective" tax rate is around 15%, he means that his total Federal tax was 15% of all the income he took in. His marginal rate may be more than that, but deductions (like mortgage interest and charitable contributions) probably made some of his income tax-free. Not to mention offshore tax shelters in the Caymans. The Effective Tax Rate -- the average tax on all his income -- more accurately shows the real tax bite, or lack of bite, on an individual.
So take out your tax returns, do the calculations, and compare yourself to Mitt. You may be surprised. I did the calculation, and my effective tax rate in 2010 was 21.55%. Feel free to post your Effective Tax Rate as a comment. Then, for extra credit, tell me why the income of people who don't work and live off inherited wealth should be taxed at half the rate of the wages of those who actually produced that wealth.
If you pay state or local income taxes, you may pay an even higher effective rate, but I wanted to standardize this tool to enable apples-to-apples comparisons across the US.