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What your tax goal should be
A naive taxpayer assesses how well (or poorly) she did on her tax return by the size (or lack) of a refund.
But getting a big(ger) tax refund shouldn’t be your goal.
Instead, a sophisticated taxpayer focuses on reducing her effective tax rate, or ETR.
Your ETR is percentage of your taxable income that you paid in tax:
Effective tax rate = Total tax ÷ Taxable income
To calculate your 2021 federal ETR, Total tax is on Form 1040, US Individual Income Tax Return, Line 24, and Taxable income is on Line 15.
Notice that tax payments, which affect your refund or balance due, do not factor into your ETR.
It’s possible to have a lower ETR (pay less tax relative to your income) and not get a refund, or to have a higher ETR (pay more tax relative to your income) and still get a refund.
This is why judging your taxes by the size of your refund is a mistake! It would be like judging your last trip to the grocery store by how much change you got rather than looking at how much you spent relative to how much groceries you got.
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