I was researching some tax issues this weekend (by research I mean reading Facebook posts on various candidates’ tax returns) when I noticed what appears to be a gap in the average taxpayer knowledge of what is actually paid in taxes. For instance, I noticed that one Facebook pundit claimed to pay an effective federal income tax rate of 15.5% on a family gross income of $60,000. This would result in a federal tax bill of approximately $9,300.
Intrigued by this firmly stated “fact,” I decided to perform a little more research. I went to the recently-created AICPA Total Tax Insights calculator and entered some basic information for a family of four (two parents and two dependent children) and determined that a typical family of four would owe approximately $2,900 in federal taxes, or approximately a 4.8% effective rate.
Why would anyone publicly claim to pay over 300% more in federal income taxes than is typically owed? I could argue that this is an intentional distortion to prove whatever political view the Facebook pundit is espousing. Or possibly the individual needs to hire a CPA to calculate their taxes correctly vs. going to the local mall tax return shop.
However, I know my Facebook friends are basically honest and would not intentionally distort the facts (at least they were honest when I really knew them personally 30+ years ago). I would hazard a guess that many individuals do not distinguish among the various tax withholdings on their annual W2. The same calculator noted above estimates that this family would owe the following in federal and state taxes:
Federal Income Tax $2,900
State Income Tax $1,800
County Income Tax $600
Social Security Tax $2,500
Medicare Tax $900
Total Taxes $8,700
Using this total tax calculation number gets us in the ballpark of the tax rate (actually 14.5% total effective rate). I made a few additional assumptions that the AICPA Total Tax Calculator estimated that this typical American family paid an additional $4,700 in other taxes. (I did make one adjustment to arrive at this number by adjusting the estimated real estate taxes for the Indiana tax cap). If we add all these estimated taxes together we arrive at a total effective tax rate of approximately 22.3%.
Given all of the focus on the budget deficits and the approaching sequestration, I would encourage all CPAs to take a few minutes to review this new AICPA tool that is available to the public. It is quite likely that we will have more opportunities to provide tax education to the general public than at any time in the past.