So, I wondered how much my average or effective tax rate was. All this talk of Gov. Mitt Romney’s millions and his low tax rate of 14 percent made me pull out my tax returns from the last two years.
We have a good income, better than most in the state, but we’re not even in Romney’s ballpark. We take advantage of several deductions, such as mortgage interest and charitable contributions. I think in politispeak these are called loopholes. Regardless, they lower our overall income upon which the tax hammer falleth.
Our tax system looks at income in two main ways. One type of income is called earned income. This is reported on W-2s if you work for someone else. It’s reported as self-employment income if you have your own business. Earned income is taxed in increments, through our increasing tax bracket system. The brackets start at 10 percent and climb to 35 percent. A portion of my earned income is taxed at 10 percent, the amount above is taxed at 15 percent, and so on and so forth until I run out of income based on the brackets in the IRS tables.
The other type of income is investment income. This comes from dividends, capital gains, and interest from my stocks and bonds. Interest from bonds is taxed just like my earned income (don’t ask me why), but income from dividends and capital gains has a lower set of brackets. In fact, the top bracket for investment income is 15 percent.
That’s where Gov. Romney’s millions come in. Currently, most of his income is investment income, not earned income. That means he can make a bucket load of money and end up paying a top RATE of 15 percent on that income. It means that his income as a hedge fund manager back in the Bain days was also mostly investment income. Add in his loopholes, and you get an average or effective rate of about 14 percent. Sweet!
And my effective tax rate? In 2009, it was about 18 percent. In 2010, it was about 19 percent. Trust me. No millions were involved.
>>> Nancy Lottridge Anderson, Ph.D., CFA, is president of New Perspectives Inc. in Ridgeland — (601) 991-3158. She is also an assistant professor of finance at Mississippi College. Her e-mail address is email@example.com, and her website is www.newper.com.