Tuesday, 25 September 2012 12:00

Tax Brackets vs. Effective Tax Rates

The democrats have been successful at focusing the mainstream media on Romney's taxes. They've also been successful at either lying or at least deceiving voters when they talk about middle class citizens paying more taxes than Romney. It is true that Romney's income generally falls in a lower tax bracket, but in reality most middle class Americans pay a lower effective tax rate than Romney.

Let's sort out just how our tax system works. Capital gains (money you make on investments) is generally taxed at a rate of 15%. Ordinary Income (the money you earn from working) is taxed at different levels with brackets from 10% to 35%. The press keeps alleging that Romney pays less taxes than most middle class folks because his income is virtually all from capital gains.

I'll focus on that 15% mark so we keep our comparisons "apples-to-apples". To keep things simple, I've eliminated all the calculations, but you can find many online calculators to check my numbers - like the one here

Your effective tax rate would be 15% if all of your income was all salary and you had nothing other than the standard deduction as follows:

  • $62,500 - Single - 25% tax bracket (Ranks in the top 38% of US total household income)
  • $125,000 - Married, filing jointly, no children - 25% tax bracket (Top 16%)
  • $143,500 - Married, filing jointly, 2 children 28% tax bracket (Top 12%)

If your income is all from salary, you give 10% of your income to charity, and have $3,000 in mortgage interest that you deduct, your effective tax rate would be 15% with the following gross income levels:

  • $74,000 - Single - 25% tax bracket (Top 30%)
  • $139,000 - Married, filing jointly, no children - 25% tax bracket (Top 13%)
  • $162,500 - Married, filing jointly, 2 children - 28% tax bracket (Top 9%)

At the above numbers, your income would be taxed at the exact same 15% whether your income was either 100% salary or 100% capital gains.

As you can see, a rewarding income could be earned without exceeding an effective tax rate of 15% and still filing one of the simplest income tax return forms. For comparison, the median houshold income in 2010 was $49,445.

So, the press is misleading voters in saying that Romney pays a lower rate than most of us. He pays about what the mid-section of America pays, but as a broader point, how many Americans put almost $2 million into the government coffers last year? Not many, that's for sure. Romney certainly paid for government services that go to a lot of folks not paying any taxes at all.


Tax Bracket: Based on gross income, this represents the rate at which you would be taxed on your Taxable Income.
Taxable Income: This is the amount your tax rate would be applied to and is calculated by subtracting any deductible items from your gross income.
Effective Tax Rate: This represents the actual amount of taxes you paid as compared to your gross income.

Bracket Breakdown

 Bracket  Married, Filing Jointly  Single
10% $0 – $17,400 $0 – $8,700
15% $17,400 – $70,700 $8,700 – $35,350
25% $70,700 – $142,700 $35,350 – $85,650
28% $142,700 – $217,450 $85,650 – $178,650
33% $217,450 – $388,350 $178,650 – $388,350
35% Over $388,350 Over $388,350
Published in Blog
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