Yesterday I mailed off our federal and state tax returns. 2014 was a good year for us, both in income and reducing our tax burden. Reducing the amount of taxes that you pay is in my opinion, the best way to increase savings. You don’t have to work any harder (more hours, second job, etc.) and you don’t have to decrease your spending (i.e. being frugal).
Our marginal tax bracket was 25%, but by contributing to tax advantaged retirement accounts, like a 401k, we were able to drop down into the 15% marginal tax bracket.
Our effective tax rate, what percentage of our income we actually had to pay after all of the deductions and credits was 10.96%. In other words, we had to earn $1.12 in order to spend $1. You can figure your own effective tax rate by dividing your total tax (line 63 of form 1040) by your total income (line 22 of form 1040).
The following chart from 2010 shows effective tax rates (AGI instead of net income) grouped according to the income earned. Our rate is high for our income because it includes the self employment tax (social security and medicaid that is normally paid by your employer). If we fiddled with our numbers and took out the self employment tax and used adjusted gross income instead of net, our rate would be 6.2%
All in all, I feel like we are successfully managing our tax burden.
Some other points of interest
Our effective rate dropped about 1% point from 2013, thanks largely in part to Frugal Boy. The extra deductions and credits that come with having a dependent make a sizable difference in your tax bill.
Here are some previous blog posts about reducing one’s tax burden:
- Saving for College – This helped save us money on our state taxes
- Harvest Time – Discusses how to optimize the selling of stocks to minimize capital gains
- Childcare FSA vs Tax Credit – Explains how to make dependent care more affordable for dual income families
Last year’s post about this topic can be found here.