Most of us think we pay a lot of taxes, probably too much, but what does your total tax burden look like? Of course there is state and federal income tax, calculated and paid now at tax time, but there are other taxes paid throughout the year. When you consider your full tax bill, it might be surprising to see how much of your income pays for taxes.
In the table below, we calculate taxes for a “typical” working client of our firm. Payroll taxes, including Social Security and Medicare, take up to 35% of their taxable income. Real estate taxes paid either monthly via mortgage escrow or directly to the county tax office, plus the sales tax from daily purchases, add another 8% onto their overall tax burden.
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Income |
Taxable Income (after deductions and exemptions) $168,500 (16,500) $152,000 8,000 $160,000 (35,000) (10,500) $114,500 |
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Taxes Federal Income State Income Local Income Social Security Medicare Subtotal – Payroll taxes Real Estate Sales Gasoline Total Taxes Paid |
Taxes in Dollars $21,350 6,000 4,100 6,324 2,443 $40,217 6,130 3,100 200 $49,647 |
Taxes as % of Taxable Income 19% 5% 3% 6% 2% 35% 5% 3% 0% 43% |
Income taxes are calculated based upon your taxable income (the amount after itemized deductions and exemptions) rather than on your gross salary. Making pre-tax contributions to your retirement plan and maximizing your itemized deductions are significant ways to reduce your taxable income.
Total taxes paid, in the example above, represent 43% of taxable income and 29% of gross salary for a typical BWFA client. Your marginal income tax rate (the rate you pay on each incremental dollar of income if you’re fortunate enough to receive a raise or bonus) is even higher with rates as high as 35%.
Even this list of taxes is not complete. Most of us incur excise, amusement, use, gift, estate, occupancy and intangible taxes. Small businesses also pay federal and state unemployment taxes, worker’s compensation insurance, or an inventory tax. In short, it’s complicated. Contact BWFA for assistance in financial and tax planning to reduce your overall tax burden.