FREE NEWSLETTER
Go to main Forum page »
HD contains numerous articles and comments about taxes, many of which talk about avoiding or minimizing those taxes. There are some like FICA that are certain. But income taxes are far more complicated and I guess you could say flexible.
I have the impression that Americans are unique in complaining about taxes, in part because they don’t see the connection between taxes and what they provide, at least not as much as many Europeans do.
The United States is not a high tax country, in the lower one third in taxation as a matter of fact.
Many people I talk with confuse the tax brackets with the taxes they actually pay. I had one friend complain about the withholding taken from a bonus, assuming the withholding percentage of 20% was the taxes he would pay.
What really matters is a person’s effective tax rate. Have you ever calculated your federal effective tax rate?
In 2024 mine was 18% which actually surprised me because it felt much higher.
Should we be complaining?
My Federal effective tax rate is 16%, plus plus 4% state. This is not bad for a single retiree with a very large income. Of course, I’m paying IRMAA too.
living in fla with an income of almost 400k and 20% eff tax rate-whats better
Our preliminary estimate for 2025 is 13.5% Fed and 4.4% State effective/average rate. Looking back at our earnings history, most of the funds we are living on today were deferred into our pre-tax 401(k) accounts at marginal 28% or 25% rates before 2018 and 22% after. It seems our tax rate in retirement IS lower than while working if you compare on that basis.
A key reason your federal effective tax rate is usually lower than your marginal tax rate is that your marginal tax rate only applies to income above that income level. Your earnings at levels below that are taxed (or not) at the respective rates for those levels.
You may also be getting dividends and capital gains in the 15% or 18.3% bracket, which is less than the 22% or 24% you might otherwise pay. This will lower your average rate.
That and deductions and credits that may apply. Although apparently not technically accurate, I also include any tax free income in the calculation, that is, start with gross income not AGI. That seems more accurate to me.
My “Effective” tax rate, including federal and state income taxes was 7.5% when I calculated it in early 2025, after all income was accounted for. It seems last year’s taxes might be a little less.I’m retired, so I no longer pay FICA tax or the Medicare tax. For workers, this increases tax paid significantly. To get a better understanding in the past I would also include real estate taxes, but we now only pay a “property tax” which is less than $400 annually (we do own a home). Including sales tax paid would increase our taxes paid by about 1%. (Some states have none). Our county is 8.7%. We’ve done things to manage the taxes owed. As a retiree, one factor which has lowered our taxes is our Roth-IRAs.We live most of the year on a resort property and we pay an annual resort fee, but I don’t consider it to be a tax, as we get direct value for this. For the rest of the year we travel in an RV and rent a site with another stationary RV, which we own.Tax management would probably be an interesting topic. But to really do so it might be necessary to relocate, and many people won’t do that. We’ve lived for the past 25 years to minimize taxes paid, and that includes our locations.By the way, the budgets I have run for the past 30 years have been very helpful in determining all taxes paid, and then taking steps to minimize them, as well as other costs.
Like many other discussion on HD, we have wandered into the badlands of word definitions. I think anyone who pays FICA would clearly think of it as a tax on income. However, it is not an Income Tax nor part of its calculation. Likewise, anyone who received muni bond interest, or dividends on a ROTH account, (just to name a couple of examples) enjoyed collecting these items, while knowing that they were not going to be taxed.
Perhaps the entire financial system in the US, is a kind of electronic game which only the well off can win.
Those who are not well off (to be defined) pay little or no taxes or in some cases are in a total credit position.
While the gap between the wealthy and the poor continues to grow.
That’s a fair point regarding the gap between perceived and actual tax rates. However, your effective rate depends heavily on your home state and where you sit on the income spectrum.
For high earners in states like Minnesota, California, or New York, the math shifts significantly. When you layer a top federal bracket of 37% with state income taxes that can exceed 9% (and even reach 13% in some jurisdictions), the combined effective rate can quickly climb toward 50%.
At those levels, tax planning isn’t just about complaining—it’s a matter of stewardship. This is especially true for those who hit these high brackets for only a few years in a decades-long career (like during the sale of a business or a peak-earning window). For them, executing strategies to move an effective rate back toward 30% is a necessary step to protect their family’s long-term financial well-being. While the U.S. may be “low tax” on average, the burden is highly concentrated at the top, which drives the intensity of the debate.
Already filed my taxes. TurboTax calculates the effective tax rate. Ours was 7.43%. Our “spending” income was 52K. That is why I decided we needed to spend more this year and thus we pulled the trigger on a week in Barbados staying in a nicer hotel than we usually do. 12 K of “income” was to pay taxes due to a large Roth conversion. Unfortunately I under converted by 10K despite posting, and had confirmed, on HD the maximum income to stay in the 12% maximum tax rate. I had already thrown out my calculation sheet. Man am I kicking myself!
David. Your mention of Barbados, is there still a problem with seaweed on the beaches?
Our Federal tax rate as a percentage of AGI was 12.6% for 2025.
Including State taxes, the total tax burden was 15.04% of AGI.
I can’t complain about that.
AGI calculation, for non-US peeps:
How to calculate AGI
I always thought the US had very low tax rates…18% doesn’t seem that low considering I pay 21% which includes all healthcare premiums with no deductibles or co-pays.
When I add the amount of money we pay in a year for medical coverage (premiums) to the annual income tax, our effective tax comes out to about 3% higher. 2025 Effective Tax: 14.1%, 2025 Effective Tax which include Medical Premiums: 17.07%.
The lower 50% income wise have an average effective tax rate of 3.7%
I created my own effective tax rate. I call it Dan’s Effective Tax Rate. It differs from the real rate, by including all income, such as non taxable Social Security, tax free interest, dividends, and capital gains. This method results in a very low tax rate.
Regarding the conversation you had about the guys bonus check. I can’t even guess the number of times I had that conversation with a client who had gambling winnings or an early distribution from a 401k, or similar. “How come that’s on there (the tax return), I paid taxes when they gave it to me”
Actually, I thought that’s the way the real effective rate is supposed to be calculated. Tax credits factored in too.
It’s actually based on dividing your tax liability by your taxable income. So the non taxed SS, long term capital gains and qualified dividends that may not be taxable for many folks, are not included in the calculation. The standard or itemized deduction also reduces taxable income. I add all that stuff back in.
I see now you are right, but in that case the effective tax rate is meaningless in my view.
The real effective tax rate is overstated if gross, including non-taxable income is excluded.
What if a person lived on SS and Roth withdrawals? They could have an effective tax rate based only on a portion of SS. That doesn’t seem accurate.
With the increased availability of the Roth 401k, I bet there will be more and more retirees whose sole income will be from Roth and Social Security. In that case, even if part of SS becomes taxable, their standard deduction may result in zero taxable income.
In some respects, while taxes are the fuel for keeping things running (generally), I tend to believe there is far more angst over the way the money is purportedly used. Can’t say the volumous tax code thrills many taxpayers either. But like others, I have yet to submit my proposed tax code for consideration. To many, this is what taxes feel like:
Line 1: How much did you make last year? ___________
Line 2: Tax due – copy the amount from Line 1 here. ____________
Submit the amount from Line 2 to the address provided below.
GW, I think your comment, angst over the way the money is purportedly used, is right on. We’ve all heard stories about the $300 hammer, or the $1000 toilet seat. No doubt there is plenty of waste occurring, but hopefully not as much as we think there is. At least I hope not🤔
Every society has used taxes of some type. Even the Bible tells people to pay their taxes.
The code is indeed too complicated and too long. I suspect there will never be agreement on how all the money is used. But what I might object to others see desirable.
I’d like to see a flat rate income tax plus a VAT, but the people like Dan would not have a business. 😢 Imagine the vested interests who would be opposed, yikes‼️
To your flat tax comment, I always ask “what percentage rate would you use and, to what income would would you apply that rate?” We have TI and more than one AGI/MAGI. There is a snowball’s chance of politicians resolving those questions. The first page of the IRC states “Thou Shall pay taxes,” every page thereafter provide exceptions. Committee Reports provide interesting reading.
Jeff, you ask a key question; what % would you use? Advocates for a flat tax have to be careful what they wish for. Many clients who sang the praises of a flat tax, had effective tax rates well under 10%. I wonder how they would react if the flat tax was 15 or 20%?
Like the ‘post card’ tax return of 2017, which was actually worse than the 1040 it replaced, the ‘special interests’ would have a flat tax so carved up with exceptions and exclusions that tax preparers would end up with more job security than ever. One beautiful piece of paper, 🤣🤣🤣🤣🤣🤣🤣