For each scenario below, assuming a single tax filer, calculate the federal income/capital gains tax, the federal payroll tax, and the state income tax that each person will owe, showing your work. Then calculate the effective tax rate (adding up all their tax, dividing that by their total income) for each one. Close with 1-2 sentences: what did you learn from this exercise?

Step by step guide:

1. Subtract pre-tax income (incl. ½ the payroll tax for the self-employed, anything “pre-tax”) to get adjusted gross income

2. Subtract deductions (standard or itemized) to get taxable income

3. From taxable income, calculate federal income and/or capital gains tax owed.

4. From the adjusted gross income, calculate payroll tax owed (capital gains not subject to payroll tax, self-employed subject to both halves of it).

5. From the same taxable income, calculate state taxes owed (if you live in a state with an income tax).

6. Take the sum of steps 3, 4, 5

7. Divide step 6 by your total income.  

Charts are provided below for your reference.

Scenario A: You are a self-employed freelancer in New York, making $35,000 gross profit (after paying your expenses) per year.

Scenario B: You are a salaried employee in New York making $110,000 contributing 20% of your income to a pre-tax 401k, and itemize your deductions of home mortgage, state property taxes, and state income taxes, which total $29,000 per year.

Scenario C: You earn $150,000, entirely from capital gains on sale of stocks (held long-term) in your investment portfolio. While you spend some time in New York, for tax purposes you live year-round in Florida (where there is no state income tax).