Tax Rate

What Is Tax Rate (Tr)?

Tax Rate (Tr) is the percentage of a client’s current year annual gross income (not necessarily the tax year’s income) being allocated toward tax payments.

How Is Tax Rate (Tr) Calculated?

Tax payments include federal income tax, state & local income tax, and payroll tax (for 1099s or business owners).

Example: In 2020, a client paid $16,000 toward federal income tax, $6,000 toward state taxes, $3,500 toward state taxes, and $5,400 toward payroll tax as a 1099 employee. The client’s current income in 2021 is $165,000, so the estimated Tax Rate is 18.7%.

Why Is Tax rate (Tr) Important?

For clients, tax payments represent a significant percentage of their cash outflows, making taxes an essential part of their financial plan. While this guide will not go into details around the importance of tax planning, we’ll simply note that as advisors, it’s important to periodically review a client’s tax situation to make sure the client is capturing all the opportunities available to them, reducing the percent of income going towards tax

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