Your effective tax rate can be calculated using Microsoft Excel through a few standard functions and an accurate breakdown of your income by tax bracket. Most of the legwork involves looking up the Internal Revenue Service (IRS) tax brackets and segregating your taxable income into cells.
Key Takeaways
- The IRS announces its inflation adjustments online annually, adjusting the income that each tax bracket spans.
- You can determine your tax for the year by applying each tax bracket percentage rate to the income that falls into that span.
- Add the results of all brackets together.
- Divide this number by your taxable income for the year to determine your effective tax rate.
IRS Tax Brackets
The IRS announces its inflation-adjusted tax brackets, income thresholds for tax breaks, and standard deduction amounts annually. The changes become effective the following Jan. 1.
Important
You would not apply the announced 2025 rates when preparing your 2024 tax return in 2025. Use the 2024 rates that were released at the end of 2023.
Segregating Earned Income
Tax brackets are divided into spans of income to which a tax percentage applies. This was the breakdown for single filers in 2024:
- 10%: $0 to $11,600
- 12%: $11,601 to $47,150
- 22%: $47,151 to $100,525
- 24%: $100,526 to $191,950
- 32%: $191,951 to $243,725
- 35%: $243,726 to $609,350
- 37%: $609,351 or more
The percentages remain the same in 2025 but the income ranges are adjusted for inflation:
- 10%: $0 to $11,925
- 12%: $11,926 to $48,475
- 22%: $48,476 to $103,350
- 24%: $103,351 to $197,300
- 32%: $197,301 to $250,525
- 35%: $250,526 to $626,350
- 37%: $626,351 or more
Create a cell for each income tax rate and multiply it by the amount of income you had in that bracket in 2024. This is the tax return you’ll file in 2025. It would look like this if your 2024 income was $60,000:
- $11,600 x 10% for the first $11,600
- $35,550 ($47,150 – $11,600) x 12% for the next income increment
- $12,850 ($60,000 – $47,150) x 22% for the last income increment
Add the bracket results together to determine the total tax you’d owe before claiming any tax credits, deductions, or adjustments to income
- $11,600 x 10% = $1,160
- $35,550 x 12% = $4,266
- $12,850 x 22% = $2,827
Finding Your Effective Tax Rate
Your marginal tax rate is the bracket percentage that applies to the top dollar of your income. It would be 22% in our example: the rate you’d pay on your income from $47,150 to $60,000.
Your effective tax rate is the percentage of all your income that you pay in taxes. You can calculate this by dividing your total tax due by your earned income.
Your total tax in our example would be $8,253: $1,160 levied at 10% plus $4,266 levied at 12% plus $2,827 levied at 22%. Your income was $60,000 so your effective rate would be 13.75%: $8,253 / $60,000.
What Is Adjusted Gross Income?
U.S. tax law provides for “adjustments to income” that can be subtracted from your total income to determine how much you’re taxed on. These adjustments include student loan interest you’ve paid and some retirement contributions you’ve made.
You won’t pay tax on your entire adjusted gross income (AGI), however, because you can then subtract your standard deduction or itemized deductions from this amount. You can’t itemize and claim the standard deduction, too. You must choose one option or the other.
Your AGI also determines your eligibility for certain credits and other tax breaks.
What Is Modified Adjusted Gross Income?
Your modified adjusted gross income (MAGI) is your adjusted gross income with some adjustments to income added back. The IRS also uses this number to determine your eligibility for tax provisions such as education tax credits and how much you can contribute to a traditional IRA.
How Does the Standard Deduction Work?
The standard deduction also reduces your taxable income because it’s subtracted from your AGI. The resulting number determines your marginal tax rate, the percentage you’ll pay on your top dollars of income.
The standard deduction is based on your filing status and the amount is adjusted each year to keep pace with inflation. A single individual can claim a standard deduction of $15,000 for tax year 2025, up from $14,600 in 2024. The deduction increases after you reach age 65.
The Bottom Line
Calculating your effective tax rate is a matter of basic math after you’ve determined how much of your income falls into each applicable tax bracket and its associated percentage rate.
Create a row in Excel for each income tax rate. Enter the applicable portion of your income that falls into that bracket and multiply it by the percentage. Enter the result in the last column then total the figures that appear in that column. This is your total tax. Divide this number by your taxable income for the year to arrive at your effective tax rate.
Read the original article on Investopedia.