Is the following the proper way to calculate the effective tax rate?
Let:
Taxable income on Federal return = I1 Federal tax on I1= T1 Taxable income on State return = I2 State tax on I2= T2
Federal Effective rate = T1/I1 State Effective rate = T2/I2 Total Effective rate = (T1+T2)/I1
Do you mean _this person's_ Federal tax, or the general Federal tax on that level of income?
Same question.
Why I1 and not I2? Why not actual income rather than either type of taxable?
Seth
Me thinks that I have asked a more appropriate question in my thread "Converting vs. Conversion for a Roth".
I would suggest including Social Security taxes for accuracy. On my returns they are the 2nd highest tax- between federal and state.
For even more precision you could include property taxes and the estimated state taxes in the IRS tables. Plus you need to subtract the SS tax made for deferred income like
401Ks and regular IRAs, because these havent really been taxed yet.I've done this calculation for a couple decades and found a general downward trend in that period thanks to Clinton/Bush tax cuts. (34% -> 29% total effective tax) Alas, I suspect this trend has reached its end.
The effective Fed tax rate is quite a bit below the marginal rate, ditto for the state rate. I'm using the marginal rates to guess the maximum tax damage. For 2011, I'll likely use the effective, rather than marginal rates.
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