1. Effective Tax Rate, 2011 Edition

    Glancing back through some older posts yesterday, I discovered that I never took the time (last year) to talk about my household’s effective tax rate for 2011. My write-up for our 2010 effective tax rate was the last time I covered this red-hot, bawdry topic.

    Can’t let that stand, now can we?

    Calculating Our Effective Tax Rate

    I won’t spend a lot of time delineating all the numbers which go into our “effective tax rate,” since I covered it pretty in-depth in my 2010 article above. Basically, the formula looks like this:

    On the tax side, all federal taxes are added in there, as well as state taxes, property taxes, utility taxes, and — as best I can estimate from Quicken reports — sales taxes. Same goes for income; it’s all in there.

    Excel Does the Math

    So where’d we end up in 2011? Well, as it turns out, our ETR went back to where it was in 2008:

    And when I say it went “back,” what I really mean is that it went “back up.” Our ETR in 2010 was 21.9 percent, and the year before that, 21.5 percent. So this particular measure of financial progress is going the wrong way, to my thinking.

    Though I’m sure there are many in D.C. (and other levels of government) who are all smiles right about now … now that almost one quarter of our earnings are going into the Tax Man’s pouch.



  2. Amazon To Collect Sales Tax in Two More States

    According to a post at Don’t Mess With Taxes, Amazon has reached deals with two more states to start collecting sales taxes on purchases from those states.

    Nevada and Texas can now add themselves to the list of states for whom Amazon collects and submits sales-tax revenues. My state of Oklahoma isn’t one of them — yet — but I know the day is coming. Actually, since I pay my use taxes annually anyway, it’d actually be easier for me if Amazon started collecting OK sales taxes on their own. But hey — it’ll happen when it happens.

    For those of you who still play the “I buy online because then I save on sales taxes!” game, well, Kay lays it out best in her post above when she says:

    Eventually, though, shoppers had better start preparing to pay sales tax on all their purchases, regardless of how they buy them.

    Yup. It’s just a matter of time before the presumed-sales-tax-free internet goes bye-bye.

    The Tax Man will not be denied.



  3. State Taxes Compared

    Ever wanted to see how your state’s taxes stack up against those of your neighbors? Well, here comes Intuit with a nifty visual tool:

    Turbotax.com: Comparative Look at State Taxes

    It’s an interactive presentation, and I’m particularly fond of the page’s ability to rank states based on sales taxes, gas taxes, income taxes, and pretty much whatever else a financial dork like me could think up. Oh yeah — median income’s in there, too. Pretty timely that I discovered this page just now, as here in a few weeks I’ll be rolling out a post on my household’s effective tax rate for 2011.

    NOTE: Special thanks to Chris, a student in Ms. Cramer’s social-studies class in Goodyear, Arizona, for tracking this down … and to Ms. Cramer for sending me the URL!



  4. Effective Tax Rate, 2010 Edition

    Each year, once I’ve completed and filed our income taxes, I like to spend a little time calculating my household’s effective tax rate. What’s an “effective tax rate,” you ask?

    Well, it’s a way for me to get outside of the usual “What tax bracket are you in?” thinking that so many folks seem mired in. Yes, income-tax brackets get all the media focus and hubbub, especially when tax rates change, but last time I checked, I pay more taxes than just the “income” variety.

    Since income taxes are really only part of our overall, real-world tax picture — think Medicare taxes, Social Security taxes, property taxes, and so on — it strikes me that figuring a more comprehensive “effective tax rate” gives a much better feel for how much of our money is really going out the door to the Tax Man.

    What’s Included in ETR?

    When I calculate my effective tax rate (“ETR,” for short), I start by figuring out my household’s gross annual income. That includes total wages and salaries (Form W-2, Box 3), interest earnings, non-retirement-account investment income, and any other sideline income that existed for that tax year. Added together, all those items get me the “Gross Income” figure for my formula below.

    On the taxes-paid side of things, I tally up our federal income taxes paid (Form 1040, Line 60), minus any credits below that line — the last two years’ “Making Work Pay” credits would qualify here. Added to that are state income taxes paid (if any), Social Security taxes, Medicare taxes, and any property or local taxes that I forked over during the year. If I have any excise or other taxes that I paid during the year, I lob those in here, too.

    Since I do separate some of my utility-bill taxes in Quicken, those figures go here, as well.

    What About Sales Taxes?

    Yes, to get a true tax picture, the year’s cumulative sales taxes also should get figured in.

    However, tracking sales taxes in Quicken with any sort of precision would mean that most every transaction becomes a split. Whilst I love me some in-depth financial data, I’m just not gung-ho enough to go that far. You gotta draw the line somewhere, right?

    (My annual use taxes do get figured in, though, because they’re included in the amount shown on the tax-form line I use for my Oklahoma “state taxes paid” above.)

    Initially, I planned to omit sales taxes altogether. But as I wrote this, it occurred to me that I could simply fire up an annual cash-flow report in Quicken, export it to Excel, and remove all categories that either (1) aren’t sales-taxable, or (2) already had use tax paid applied. I could take the remaining categories and do a little math on them.

    So I did. Figuring a rough estimate of total sales-taxes paid wasn’t too hard, with exception of auto fuel and its “cents-per-gallon, plus X percent sales tax” setup. Everything else? Pretty simple.

    For instance, our sales-tax rate on groceries was 8.25 percent, and we spent $5,332 on groceries last year, taxes and all. We can estimate that $406 of this was due to sales tax. [5332 − (5332 / 1.0825) = 406]

    Once I dumped that Quicken report into Excel, and autofilled the correct formulas, the sales-tax math was a breeze.

    (Yeah, over time, changes in sales-tax rates will complicate this. But again, all I’m looking for is a rough estimate!)

    A Tax Rate That’s “Effective”

    Once all those items are tallied up, the rest is easy:

    And that’s all. Take your [Total Taxes Paid] amount, and divide it by your [Total Gross Income] amount. The rate that results is your Effective Tax Rate.

    Now, I’ve been calculating my effective tax rate for years, though prior to 2010 I focused only on income taxes. Because I’m a dork who finds such comparisons fun, I tried to standardize things a bit this year so that I could go backwards through our tax returns and see how our ETR — now expanded to include all the other taxes we pay — has changed over time.

    2010 Effective Tax Rate: 21.9%

    So, for tax year 2010, roughly 21.9 percent of our income went toward taxes of one kind or another. For 2009, our effective tax rate was 21.5 percent. And back in 2008? A bit higher, at 23.9 percent.


    For a while now, I’ve really preferred to think of my tax burden in terms of this overall “effective tax rate,” rather than in terms of federal and state tax-bracket rates … which is what so many people do. Income taxes are only part of the picture, after all. Until you look at your tax burden in total, taking into account all the directions from which the Tax Man gets into your wallet, then it’s pretty easy to miss the immense impact that taxes have on your total financial picture.

    As the figures above show, I might be in the 15 percent federal tax bracket … but that sure doesn’t mean I’m handing a mere 15 percent of my income to the tax authorities!



  5. Sales-Tax-Free Internet: Days Numbered?

    It’s a battle that’s playing out in state after state these days: Cash-strapped and budget-strained, what are your state lawmakers willing to do to goose tax revenues? And is that more important than, say, bringing in a few thousand new jobs?

    Folks in Tennessee are about to find out, it appears:

    USA Today: Tennessee Retailers Oppose Amazon Sales-Tax Pass

    Amazon wants to build a pair of new distribution centers in Tennessee, which would create roughly 1,400 jobs for the Rocky Top state. What they don’t want to do is to have to collect sales tax on purchases from Tennessee customers, which the distribution centers (by virtue of creating an Amazon physical “nexus” in the state) would bring about.

    Currently, the responsibility of paying Tennessee sales tax on Amazon.com purchases rests with the individual consumer. Just like all states with sales-tax mandates on the books, Tennessee has a counterpart “use tax” that’s required to be paid on all products purchased outside the state for use within the state.

    (My home state of Oklahoma approaches sales and use taxes the same way. Yes, I track my use-tax payables in Quicken, and pay all my online-purchase use taxes as required by law, and I keep all receipts each year to prove the same. As far as online consumers go, though, I suspect I’m in the, uh, minority.)

    Line 20: Use Taxes

    The Bigger (Online) Picture

    As I read the story above, it’s hard for me to think that we’re going to go much longer without some sort of sales-tax mandate applied to ALL online retailers (which, because I sell spreadsheets, includes me), even if it has to be done federally — think VAT.

    Given the ever-increasing funding needs of government at all levels — ain’t debt-n-promises wonderful? — I just don’t see how this can be avoided. The online-purchase world currently figureheaded by Amazon is just too big of an untapped money bucket for any self-respecting politician to ignore.