How to Calculate Effective Income Tax Rates
The US follows a progressive taxation system. This means that the tax rate increases as you earn more money. The higher tax rates are only applied to income that reaches above a certain level. You can easily calculate your effective income tax rate if you are curious as to how much income tax you will pay this year.
- Calculate your total income. In order to estimate your effective income taxes, you will need to calculate your total income before taxes. This includes tax-free interest that you have earned as well as other forms of income. Depending on your situation, you may have income sources other than your main job or paycheck.
- Determine the amount of income tax you have paid. Obtain copies of your prior tax returns to review the amount of income tax you have paid over the course of the last few years. If your income varies, you might want to review tax returns over the last 5 years and determine the average amount of income tax you pay yearly.
- Do the math. Divide the amount of income tax you paid by the amount of your total income. This will give you your effective income tax rate in decimal form. You will calculate an answer such as 0.20 or 0.15 after you do your division.
- Convert your tax rate to a percentage. You can easily convert your decimal answer to a percentage. Simply multiply your effective tax rate by 100 to convert it. Following our example, you would multiply 0.15 by 100 to calculate 15 percent, or 0.20 by 100 to calculate 20 percent.