How to estimate income tax rate for making a budget?

Question

I am currently applying for jobs in a variety of U.S. cities, and I'm trying to estimate what my net monthly salary will be based on different gross yearly salaries. I have a draft budget in a spreadsheet, and I basically want to be able to "turn the dial" the gross annual salary and see what effect this will have on the overall budget.

MonthlyNet = ((AnnualGross / 12) - MonthlyPreTaxDeductions) * (1.0 - TaxRate)

I'm having a really hard time estimating what my total federal + state + local income tax will be (the TaxRate term in this formula). I've consulted charts of federal and state tax brackets, which are a bit dense for the layman. I've also tried out a handful of online income tax calculators, including one from the IRS, but got different answers from each one. It's not critical that I get this is super accurate, but the answers I'm getting range from 8% (which seems low) to 30% (which seems high). The extremes of that range make a huge difference in terms of what we can afford.

In the past, I've always waited until I got my first paycheck or two to see what my actual net income is and adjusted my budget accordingly, but for my pending career change I need a better idea of what I'm getting into financially.

For a given city or state, how can I estimate my combined federal and state income tax rate?

Answer 1

To have a "universal formula" which applies to every state and city in addition to Federal taxes, you'll need 43 state tax tables, and a lot of city tax tables baked into your spreadsheet.

The simplest thing to do is figure out the "dense" tax tables from the Intarweb, then sum up the separate Fed, State and local taxes. Just remember that your taxes aren't based on your W-2, but the Adjusted Gross Income, which also takes into account:

• 401(k)/403(b),
• Traditional IRA,
• deductions (standard or itemized),
• interest and dividend income, etc.

EDIT: Note also that if you're paid bi-weekly that your effective monthly income will be slightly different, and leave you with an extra paycheck 2x per year:

MonthlyNet = ((AnnualGross / 26 * 12) - BiWeeklyPreTaxDeductions) * (1.0 - TaxRate)

EDIT: Now when I want to calculate taxes, I use ADP's online paycheck calculator. They have one for salaried people, and another for hourly wage earners.

Answer 2

Budgeting is challenging for a number of reasons. Getting bogged down in taxes and pay frequency can preclude people from doing budgets and those things are not necessary.

If you know your pay frequency, salary, deductions, and state you can pretty accurately calculate your net pay using this handy online calculator.

Once you know your gross pay then it is far easier to proceed with a budget.