Three common methods of determining an effective tax rate for damages

When applying income taxes to the damages related to an injury or death, there are three common methodologies to determine the effective tax rate to apply:

  1. Utilizing the individual’s historical taxes
  2. Relying on historical effective taxes of similar individuals
  3. Referring to tax tables published by the IRS

If the person’s historical 1040 tax returns are available, these detail both the earnings they received in a year as well as their tax liability. An effective tax rate can be determined by comparing the adjusted gross income to the total income taxes owed. By utilizing their historical effective tax rate, their personal details are used in the analysis, such as their deductions (either standard or itemized), marital status and number of dependents.

The historical effective taxes of similar individuals may be utilized based the IRS’ statistics on tax returns. The IRS’ statistics of tax returns contain aggregate amounts of income and tax liability by various sizes of income. These totals are available by various return types, such as married filing jointly or single filer. The effective rate of federal taxes paid can be calculated for each size of income by comparing the average adjusted gross income and average taxes paid.

Tax tables may also be used to determine an effective tax rate to apply. Tax tables detail the marginal tax rates, or tax rates owed by level of earnings. When utilizing tax tables, the individual’s taxable earnings should be used. That is, the total earnings they received, less their deductions and amounts for exemptions. The calculated taxes can then be compared to their adjusted gross income to determine their effective tax rate.

You can learn more tax rates here.

Damage Guide calculates economic damages in personal injury, wrongful death, employment, and business cases.

View our services, fee schedule, and contact us to get started.

Do you have a case in which a damage analysis would be beneficial?
Contact us to discuss your case.

If you would like to receive our educational newsletter each month, subscribe here.

We also have writings and calculators available to help you learn more about your client's economic damages.