I’m writing a spreadsheet and I need a formula to calculate the combined sales and federal income tax rate using the individual values for Sales and Federal Income tax rates.
The only formula I have seen via the internet is:
EIT = (1-FTR)*(STR)+FTR
EIT = Effective Income Tax Rate
FTR = Federal Income Tax Rate
STR = State Income Tax Rate
I obtained the above formula from here. The link explains that this formula is used to compensate for itemized deductions due to overlap between Federal and State taxes. It also notes that this formula is only valid over a “certain” level of income.
If anyone knows of a more general formula, please let me know.
If you want to combine the sales tax rate with the federal income tax rate, you’ll need some sort of algorithm to determine the average annual purchases subject to sales tax correlated with the varying levels of federal taxable income.
Otherwise if you’re really talking about state income taxes and not sales taxes, then the formula you cited is an adequate estimate.
I don’t think you are going to find one, more general formula given that there are so many special cases, etc. Even the formula you have only applies to the approximately half the population that itemizes their deductions.
It comes to the same result, but feels more logical to me. The first part calculates the effective Federal rate after subtracting the State Tax deduction, and then adds in the State Tax Rate. To me that reflects how you work out your taxes better than the formula in the article linked in the OP.
However, neither formula applies to everyone. As mentioned in other posts, it does not apply to people who do not itemize deductions. Among those who do itemize, it is still inaccurate for people who:
[ul]
[li]Have deductions reduced because of high income[/li][li]Are subject to AMT (state tax is not deductible for AMT)[/li][li]Would not exceed the standard deduction without taking into account state tax[/li][/ul]
