Managing your money requires knowing how to calculate tax burden. Your tax burden is the amount of your wealth or income that is allocated to taxes. Knowing how much you pay is crucial for making wise financial decisions.
L&Y Tax Advisor presents how to calculate tax burden with 6 easy steps.
Determine Your Taxable Income
Finding your taxable income is the first step in figuring out your tax burden. For individuals, it comprises your:
- Wages
- Salaries
- Bonuses
- Investment income
- Other earnings
Subtract any allowable deductions from your total income to get your taxable income. Deductible expenses are:
- Medical bills
- Student loan interest
- Retirement contributions
You get your adjusted gross income (AGI) after deducting them.
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Identify Applicable Tax Rates
Find out your income bracket’s current tax rates. In progressive tax systems, tax rates climb as income grows.
For instance, the tax system in the United States is tiered. Depending on your income, different parts are taxed at different rates.
Choose the appropriate tax rate for your AGI to calculate your income tax correctly.
Calculate Income Tax
To calculate your income tax liability, multiply your adjusted gross income (AGI) by the relevant tax rate. Remember this before looking at any credits or deductions that can further lower your tax obligation.
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Account for Deductions and Credits
Deduct any eligible credits and deductions from your income tax. Some examples are:
- Mortgage interest
- Medical bills
Dependents or educational expenses may qualify for credits
The taxes due can be significantly reduced by taking advantage of these credits and deductions.
Calculate Your Total Tax Burden
The sum of all taxes due is your overall tax burden. It also includes:
- Sales tax
- Property tax
- Income tax
- Other taxes relevant to your finances
You may have a better understanding of your total tax due by taking into account all forms of taxes.
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Calculate Your Effective Tax Rate
Determine your effective tax rate to see how your tax burden affects your finances.
To calculate this, divide your total taxes paid by your total income. Displaying the percentage of your income allocated to taxes helps you better comprehend your financial status.
The Bottom Line
To learn how to calculate tax burden includes the evaluation of the above following steps. Doing so helps you better manage your money and clearly understand your tax liability.
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