Getting a Tax Perspective by Finding Your Effective Tax Rate
Your AGI is your adjusted gross income — a number you need to know if you’re planning on pursuing deductions. The quickest way for you to determine your AGI is to refer back to your last tax return. You can find your AGI for the previous year at the bottom of the first page of your 1040. If your income and deductible expenses aren’t expected to change much this year as compared to last year, use last year’s AGI for your planning purposes.
Another important bit of information you should calculate while you have your tax return out is your effective tax rate, which is the actual percentage of your gross income that you pay in income taxes. Here’s how you do it:
On the first page of your 1040, find your Total Income.
Locate your Total Tax.
Divide your Total Tax by your Total Income.
This determines your federal effective tax rate.
Approximate your total tax rate by examining your state income tax returns.
Identify your Total Tax and divide that amount by your Total Income.
Calculate your total effective tax rate.
Add your federal tax rate to your state and local tax rates.
By knowing how much of every dollar you earn goes out in taxes, you’re better able to make informed decisions about the real cost of any money decision. For example, if you have an effective tax rate of 30 percent, you’d have to earn about $1.43 to net one dollar after taxes.
You’ll also want to know your effective tax rate to be able to more accurately determine the value of tax-deductible expenses. This knowledge helps keep things in perspective.