How Do I Calculate My Effective Tax Rate Using Excel?

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How Do I Calculate My Effective Tax Rate Using Excel?

Using a few common functions and a precise breakdown of your income per tax band, you may compute your effective tax rate in Microsoft Excel. The majority of the labour consists of researching the Internal Revenue Service (IRS) tax brackets and categorizing your taxable income into the appropriate slots.

IRS Tax Brackets

The IRS publishes its tax brackets, standard deduction amounts, and cost-of-living adjustments every year. Any modifications stated go effective on January 1 of the following year.

If you file your 2021 tax returns in March 2022, you will not use the stated 2022 rates. You will continue to use the rates from the previous year (2021), which should have been released in 2020.

Segregating Earned Income

Consider that the tax rates are split into 10% increments per $25,000 of earned income. You earned $80,000 last year. The following tax rates would be applicable: 10% on the first $25,000, 20% on the next $25,000 to $50,000, 30% on the next $50,000 to $75,000, and 40% on the next $75,000 to $80,000.

Make a new cell for each income tax rate and multiply it by the amount of income in each bracket: $25,000 times 10% for the first, $5,000 times 40% for the second, and so on. This is your income loss per bracket.

Finding Your Effective Tax Rate

In the case described above, your marginal tax rate would be 40%. This is because the government will deduct 40 cents from every dollar earned beyond $80,000.

Your effective tax rate varies. It takes the total amount of taxes you paid and averages them. To compute this rate, add up all of your lost money and divide it by your earned income.

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The government has seized a total of $17,000 in the preceding instance ($2,500 + $5,000 + $7,500 + $2,000). With a $80,000 income, your effective rate would be 21.25% ($17,000 / $80,000).

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