How Much Are You Really Paying in Taxes?
The following is a guest post from Money Smart Guides, a personal finance blog that will help you learn a little about personal finance, spark your interest, learn more, and remove any stress you have about money.
Regardless if you have completed your taxes yet this year or not, if I were to ask you how much you pay in taxes, you may respond with your tax bracket of 10% or 25%. If this was your answer, I would say you are wrong – and by a lot!
I am currently in the 25% tax bracket for Federal income tax purposes. But my state also hits me with a 3% income tax, and my city adds another 1% too. Unfortunately, my taxes don’t stop there. I pay Social Security and Medicare tax of 7.65% out of each paycheck. After all of these taxes are taken out of my pay, I am still not off the hook.
I own a home and pay property tax. That is another 3%. Almost everything I buy in my state is hit with a 6% sales tax. Luckily for me, it doesn’t stop there. There are all of the other taxes I pay: 8% on gas, 5.5% on my cell phone, 8% on electricity, and 6% on cable. All of these taxes add up. Don’t believe me? Check out the chart below that shows how much I pay in taxes.
That’s right, 59%. Of course to be fair, I do get to reduce my federal income tax with deductions. When I completed my taxes this year, my Federal tax rate after deductions came to 10%. So, after all is said and done, I pay 44% in taxes.
My numbers don’t even take into account all of the taxes I pay. I just list the most common ones. Do you smoke? If so, there is a tax on that. Same for alcohol. Are you going on vacation? There are taxes on airline tickets, rental cars and hotels. I’m sure I’m forgetting others.
Many of you reading this are in the same boat, maybe even worse. Most of us only focus on the federal taxes we pay because it is an event each year. Every year we sit down, figure out your taxes and pay in or get your refund. We are oblivious to all of the other taxes we pay because they are either worked into the price already or the bills we receive are so hard to read, we just accept the total amount for what it is. Sadly, these taxes are the real killer. They keep going up. Politicians argue over the federal tax rates, saying certain people should pay more while some should pay less. You get excited when the tax bracket you are in gets dropped from 15% to 10%. But then a bill is passed that isn’t mentioned in the news and it increases the tax on gasoline and electricity. The increase in your electric bill may be from taxes, not because you used more electricity last month. When you add all of the increases, there goes your 5% federal tax reduction.
The taxes on these services are more hurtful to you because you cannot get deductions for them like you can on your federal taxes.
Keep this in mind the next time your hear politicians lobbying for lower income taxes. Most likely the decrease in your income tax will be offset by the increase in other services that are taxed. In fact, you will probably end up paying more in taxes. It’s easier to hide these taxes in your monthly bills and for smaller amounts than you would think.
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Personally I just try to look the other way about all the taxes I pay since there’s not much I can do about it. Our provincial government here has been bragging that they are not increasing taxes, but instead they increased pricing on government run services such as insurance and electricity.
You’re right. All you hear about is cutting the Federal income tax rate, but you never hear about the increases of tax on all of the other services.
I think adding it up this way is a bit disingenuous because when you pay for gasoline tax then you are not paying for cell phone taxes on the same purchase.
Here in Thailand the top tax bracket kicks in at 4M THB per year or $133K USD per year and then it’s a flat 37% tax rate. The 30% tax rate kicks in from 1M THB and up or $33K USD- so effective tax rates for a good earner is in the low 30% levels… Couple that with a VAT rate of 7% for everything this is a 40% tax rate or so… for a country that offers few services when compared to other countries with higher tax rates.
Living overseas as a US citizen drops the US effective tax rate, and because of double taxation agreements credits can be accumulated for foreign taxes paid and carried over to subsequent years- to take advantage of them requires earning money in a low tax country like UAE or Singapore and applying the foreign tax credits from a high tax country (Thailand) to offset this income.
-Mike
You’re correct in that when you are filling up your car you aren’t paying a tax on cell phones. The point I was making was that as a whole, in a given year, this is what I pay in taxes.
Interesting to know what the taxes in Thailand are too.
My (sometimes-not-so) handy-dandy tax pro is running the numbers on all the state/fed stuff as we speak. I’ll definitely check back once that’s done but I’m afraid it’s going to end up at about 40-50%. Non-smoker here, so at least I’m not paying THAT sintax.
But in order to not puke on my shoes twice a month, I generally only look at the after-tax income and not all of the withholdings… although I do a little tax planning w/ my investment accounts by selling losers and going into similar, but not too similar to count, ETFs or mutual funds to lock in a few deductions.
My calculations don’t even include capital gains taxes. Add that one to the list!! When does the madness end?
It doesn’t work to add percentages across differing amount of money, that’s simply a math error. Example: 10% of 100,000 is 10,000 plus 90% of 10 is 9. The answer is 10,009 / 100,010 = 10.008%, not 100%.
However, the premise is correct. And when asked how much in tax I pay, my response is usually “too much.” Or “only the amount legally required.”
Yes, you explained the point I was going to make much better than I did!
I think I follow what you are saying. Here is my response: I added up the total amount of money I spent on gasoline for the year and figured the tax I paid on that. So, of the money I spent on gas, 8% of it went to towards taxes. So, $0.08 of every dollar I spent went towards taxes.
OK, my bad then. I misread what you were doing. The table above makes it look like you were just adding %s. You must spend a ton of money on gas! Holy smokes! I’m lucky that I get to take the bus and offset some of those transit taxes I have to pay. As I said earlier, “too much” is the pat answer for how much taxes we pay.
This has been the worst year for us in taxes. We did not have enoughitems to go for itemized taxes and had to settle for standard dedcutions. We are going to be more proactive going forward and take advantage of preferred tax vehicle for investments
I’m with The Money Mail. This tax year isn’t so hot for me either. I also had to settle for standard deductions, which ultimately hurt my bottom line. I hope next year will be better.
I don’t follow this logic. Certainly, if you can go out and get a deduction for something you already spend your money on (e.g. a house), then by all means. But to go out and spend money on something (or more money) so you can have a bigger deduction seems backwards to me. If you’re happy with your life and how you spend your money, your bottom line is probably better off than spending money to get a deduction.
One common flawed example of what you suggest is not paying off a mortgage so you can keep the tax deduction. If a bigger tax deduction is what you desire, why not refinance at a higher interest rate to get a bigger deduction?
Next year is going to be tough for me, as I know I’ll be jumping into a higher tax bracket and will be needing a lot of deductions to save me from the higher rate. My husband – the law enforcement officer – is all for legalizing marijuana so it can be taxed, and give the rest of us a break.
It’s not fair to say you are in the 25% tax bracket and assume you pay 25% on ALL your income. It is a marginal tax bracket. It is the tax on your next dollar earned. The first dollar is taxed the same (before deductions) across the board. I was in the 28% tax bracket last year, but my effective tax rate was ~15.5% due to deductions (and fully understanding how the feds calculate income tax).
The best way to do it is to add up all tax paid in a year and divide by gross income. This will vary from person to person not only because of differences in local taxes, but because some of us choose to do different things (e.g. international flight to Europe, buy a yacht etc). So to some degree, some taxation is discretionary.
You are correct. That is why I used the second example which takes into account my effective tax bracket which is 10%. Even with that adjustment, I still pay 44% in tax.
WOW… This is depressing. Maybe I will remain overseas……forever.
I’m with Stoic. Well, not technically…as I’m not overseas, but I’m slightly depressed by your tax breakdown. Good point on the lowered tax jargon we’re fed. Talking points really work, don’t they?