Do you really know your effective tax rate? Our team says ‘Don’t be so sure.’
When we think about the taxes coming from a monthly or bi-weekly paycheck, many individuals assume that about 30% is going out the door. But our question is around what you’re really paying when you add in all the other taxes: income, capital gains, property and sales taxes. A great tool our team uses to determine a client’s effective tax rate is www.moneychimp.com.
Most tax calculators don’t show all the areas that take a hefty chunk out of your paycheck. FICA and state income taxes are two of the big eaters at the paycheck buffet. Here’s what I mean:
Let’s say the Joneses earn $110,000 a year. Although their overall effective rate is only about 18 percent, the moneychimp tax calculator more accurately indicates their tax bracket is 25 percent. That’s because our tax system is progressive; you pay a higher percentage on your earnings as they go up and pass certain thresholds.
So 18 percent now seems like a pretty good deal. And, for most of you lucky retirees, 18 percent is pretty representative of what you pay overall. But for us working folks, 18 percent is just the tip of the iceberg.