Tuesday, February 07, 2012

Effective Tax Rate

Republican presidential hopeful Mitt Romney has taken some flak for paying a relatively low tax rate for someone who makes as much money as he does. I'm not going to go there, but it did get me thinking. Do I pay a lower tax rate than Mitt Romney?

On a related note, I was very much looking forward to doing our taxes this year, because this year, we could claim a dependent for the first time. Tax savings! Yes! But how much does having a kid save you on taxes, exactly?

To help answer both of those questions, I calculated our effective tax rate (taxes paid divided by adjusted gross income) for each of the past six years, including the 2011 return we filed just this week. While I won't publish the exact monetary amounts that we earned and paid, I don't see any harm in releasing our effective tax rates.

2006: 10.0% Federal, 5.2% North Carolina
2007: 11.9% Federal, 5.9% North Carolina
2008: 11.6% Federal*, 5.9% North Carolina
2009: 10.0% Federal, 5.5% North Carolina
2010: 11.1% Federal, 5.6% North Carolina
2011: 7.8% Federal, 4.9% North Carolina

(* - The 2008 tax rate does not factor in the first-time homebuyer credit of $8,000, because I've always considered that less of a "tax credit" and more of a "government-subsidized discount on our down payment".)

Regarding the first question: Yes, I pay a lower federal income tax rate than Mitt Romney.

Regarding the second question: Having a kid lowered our effective federal tax rate by 2 to 4 percent, while offering only a slight savings on North Carolina state taxes. Just wait until we have our second kid!

Of course, I should also point out that our income was a few thousand dollars less in 2011 than it was in 2010 due to Amber's maternity leave. That alone more than offset the tax savings. I don't want to give anyone the idea that having a kid is a surefire way to ensure financial stability. (Ha!) But it is nice to get at least some of it back.

And being able to claim an extra exemption is only the beginning! For example, I only recently discovered that the cost of day care is tax deductible, to a point. (Up to $3,000 per year for one child, or up to $6,000 per year for two or more children; certain restrictions apply.)

We're going to be getting a HUGE refund check in a few weeks, but only because we never got around to reducing our withholding once we had Marla. For one thing, I wanted to wait until we filed in order to see exactly how much we should reduce it by. Sure, it's nice to get a big refund check, but I'd rather get that money sooner; otherwise, we're basically giving the IRS an interest-free loan.

The home mortgage interest deduction also helps a bunch, but I don't know if we can attribute the entirety of the 1.6% drop from 2008 to 2009 to that. Tax laws change from year to year, and I think they lowered taxes around then. I also can't explain why our tax rate went back up to 11.1% the following year. (Note: 2009 was the first year in which we claimed itemized deductions rather than the standard deduction.)

So, there you go. Raising a child costs a lot of money, but at least the IRS gives you a slight discount on your investment.

1 comment:

Spartangoogle said...

For us it is 16.8 % But we are, after all, subsidizing the 50% of Americans who apparently pay no taxes. Can't wait to be on the "receiving end " of those checks from Social Security.