Tax Bracket vs. Effective rate

[samclem]

Overall effective tax rate (computed as (Income tax+ self employment tax)/AGI) = 24%

The "self employment tax" is the tax paid by self-employed persons to fund SS and Medicare. The tax is 15.3% (though the tax code mercifully alllows people to take a deduction for 1/2 of the amount paid from their income before computing the "regular" income tax, which reduces the bite somewhat).

It looks like a lot of folks probably didn't include their payroll taxes when they responded to this question. It looks like the present method of deducting SS and Medicare from paychecks is having the intended result of making these taxes less noticeable/objectionable to taxpayers. If we added these taxes (the total 15.3% of pay--whether paid by the employer or the emploee, the truth is that it is part of the compensation total the employee would otherwise receive) we'd have a more complete picture of what we pay to the government.

My effective tax rate without the SS/Medicare component (Income tax/AGI) = 11.6%

 

[se012101]

We just did our 2008 taxes a few weeks ago. Marginal rate = 28%, effective tax rate = 16%

 

[FUEGO]

It looks like a lot of folks probably didn't include their payroll taxes when they responded to this question. It looks like the present method of deducting SS and Medicare from paychecks is having the intended result of making these taxes less noticeable/objectionable to taxpayers. If we added these taxes (the total 15.3% of pay--whether paid by the employer or the emploee, the truth is that it is part of the compensation total the employee would otherwise receive) we'd have a more complete picture of what we pay to the government.

Payroll taxes only apply to earned income and not dividends and capital gains. I'm assuming most retired folks and many Young Dreamers have a significant portion of income from passive investments that don't have payroll taxes assessed.

When I'm looking at my marginal rate on earned income, I use the employee portion of payroll taxes only, since I can't get the employer portion under our current system of taxation. And if I run my pay through a cafeteria plan, I only avoid the employee portion of payroll taxes and do not recoup the employer part - they keep it.

 

[LOL!]

If one uses AGI and not (AGI+tax_deferred_contributions_to_[401k,FSA,HSA]), then aren't things inconsistent because later AGI will include taxed_withdrawals_from_401k?

And how do you want to use tax credits in the equation? If one pays foreign tax on investments, one gets a credit. The tax reduced your income and the credit reduced the tax to the IRS. Other tax credits are different. I received some tax credits in 2008 just for being alive.

For 2008, our marginal tax rate was 25% and the effective rate was 8%. I miscalculated how much not working would reduce our tax burden.

 

[kaneohe]

And how do you want to use tax credits in the equation? If one pays foreign tax on investments, one gets a credit. The tax reduced your income and the credit reduced the tax to the IRS.

I was under the impression that foreign tax reduced your
"take home" income but that when reported on the 1099DIV, it actually gets added back so that your gross reported ordinary dividend includes the foreign tax which is also reported separately as foreign tax.

My "cash flow" records of dividends always seem to differ from the 1099 numbers by the amount of the FTC.

 

[LOL!]

Right, I should have the word "take-home" inserted into "reduced your income". My 401(k) contributions reduce my take-home income as well.