We’ve all heard the cliche: there are only two certainties in life – death and taxes.
There’s a reason this is one of the most-frequently quoted cliches in American pop culture – because it’s true. Despite what fans of cryogenics may have you believer, you can only prolong death for so long; and, likewise, if you don’t pay your taxes – or at the very least, file them – the IRS will go all Al Capone on you.
Mitt Romney: Bringing Effective Tax Rates To The Masses
While I’ve long been familiar with my marginal tax rate, it wasn’t until Mitt Romney hit the political scene that I became well-versed in effective tax rates. In fact, Romney’s effective tax rate has been a centerpoint of the political campaign. His most recent returns show he paid a 13.9% percent effective tax rate on his federal returns; he recently said he’s never paid less than 13% over the past decade or so, a claim that’s been fodder for the (so-called “liberal”) media.
Whether you’re a Republican or Democrat, it’s important to understand exactly what an effective tax rate is, how it compares to your marginal tax rate, and what your rates really are.
Note: For the purpose of this post, we’ll be looking only at the effective tax rate for federal returns – not total effective tax rate, which includes state, sales, and property taxes.
My Marginal Tax Rate
I’ve always known about my marginal tax rate. It’s the amount of taxes I pay based on the IRS’s tax brackets. When I file my taxes next April for the 2012 tax year, I’ll pay the following tax rates:

  • 10% on the first $17,400 in joint income (I file jointly with my husband)
  • 15% on our joint income between $17,401 and $70,7000
  • 25% on our income above $70,701 (the upper threshold of this tax bracket is $142,700 for married couples filing jointly but, suffice it to say, we won’t be breaking through that glass ceiling)

Of course, higher earners have an even higher marginal tax rate. There are 28%, 33% and 35% tax brackets too. But for my finances and my life, 25% is likely the maximum I’ll ever see working as a freelancer with a husband in law enforcement.
My Effective Tax Rate
To calculate your effective tax rate, you first have to get out your 1040 form. I’ve got mine from the 2011 tax year sitting right in front of me. Start by searching for line 22 -it’s at the bottom of the “Income” section. This is your total income, before any adjustments or deductions. We’ll call this I. Now, search for line 61 (it was line 60 if you’re looking at your 2010 federal returns). This is your total tax. We’ll call it T.
To get your effective tax rate, simply divide T by I. If you were looking at Romney’s 2010 federal tax returns, the equation would look like this:

$3,009, 766 (reflecting his total tax responsibility) / $21,661,344 (reflecting his total income) = .1389

So in 2010, his effective federal tax rate was – as previously mentioned – just under 13.9%. Now, I’m using his numbers because I’m not going to publish my total income, nor my total tax responsibility; after all, I’m not running for president, so I don’t have to 🙂 That said, I will tell you that in 2010, my effective federal tax rate was 6.7%; in 2011, it was even lower – just 4.5%.

What Your Tax Rate Means

I have to admit, when I first calculated my effective tax rate for the past two years, I was surprised. I kind of felt guilty that I – admittedly once part of the “liberal” media – was paying a lower rate than even Mitt Romney, who has been lambasted for paying so little in federal income taxes. Then I read this 2011 article from CNN Money, that showed that 67.5 million households making under $100,000 – like mine – didn’t owe any federal taxes in 2010… that made my 6.7% burden seem pretty high by comparison.

Talking about our taxes in terms of effective tax rates is usually more accurate than simply describing our actual tax bracket; after all, I went from the 25% bracket all the way down to 6.7% in 2010 (We were only in the 15% bracket in 2011, after I left my full-time job at the tail end of 2010). Because we have a tiered tax system, a person in the 35% bracket will never pay a 35% effective tax rate; we all pay 10% on some of our income, no matter if you make $1 million or $10,000 a year.

Anyone up for calculating their effective tax rate – and sharing it?