With the tax proposal put in by the Trump administration to lower the tax rates for everyone many discussions about taxes have been taking place recently. The Trump administration wants to reduce the seven tax brackets that we currently have to only three. The three tax bracket rates proposed are 10, 25 and 35 being the highest tax rate.
What most Americans don’t realize is that at one point in our history the highest tax rate was 91%. During 1953 to 1961 the top marginal tax rate was 91% and the economy still grew. As of 2017 the highest tax rate was 39.6%. Prior to 1913 the U.S. didn’t even have a Federal Income Tax and no one even heard of the IRS back then.
Another fact that most people don’t realize is that most people pay at least anywhere between 40 to 50% if not more of their income on taxes. In this article I will give you the breakdown in order for you to understand where your money is going and how much of it the government is actually taking away from you.
Given the many different types of taxes we pay in the U.S. it is very easy to give the government half of our paycheck. Some of these taxes are:
The Federal Income Tax which ranges as of 2016 rates between 10 % and 39.6%
State and local income tax this can vary anywhere between 3% and 11% depending on which state you live in. If you live in New York City then you will also have to pay a local income tax which is an addition to the state income tax. The good news is that there are not that many place in the country which also charge you a local income tax like New York City. There are some states that don’t have any state income tax. These zero state income tax states are:
4. South Dakota
Below is an example of the Marginal Tax Rate for someone who is filing married living in New York City and has $100,000 in taxable income.
Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 25.00% 16.48% $16,478
FICA 7.65% 7.65% $7,650
State 6.65% 5.07% $5,071
Local 3.65% 2.94% $2,938
Total Income Taxes $31,067
Income After Taxes $68,933
If you look at the example above you have paid $31,067 in taxes which is about 31% of your income. If you included real estate taxes, sales tax and fuel tax you could easily be paying at least 40% or more of your income in order to pay all of these taxes. Some states are also have zero sales tax. These states are:
4. New Hampshire
Let me explain to you what the difference between the marginal tax rate and effective tax rate is.
The marginal tax rates for 2017 for Married Filing Jointly can be seen below.
$0 to $18,650 10% of taxable income
$18,650 to $75,900 $1,865 plus 15% of the excess over $18,650
$75,900 to $153,100 $10,452.50 plus 25% of the excess over $75,900
What this means is that if you are married filing jointly and make $100,000 in taxable income the first $18,650 of income will be taxed at 10%. The excess of $18,650 up to $75,900 will be taxed at 15% and the remainder from 75,900 till $100,000 will be taxed at 25%. This is called Progressive Income Tax which means the more money you make then the higher tax bracket you will be in. This of course results in paying more taxes.
From the $100,000 in taxable income example $18,650 of income will be taxed at 10% which is $1,865. 57,250 (75,900 minus 18,650) will be taxed at 15% which is 8,587.50. 24,100 at 25% which is (100,000 minus 75,900) is $6,025 giving. Total taxes here will be $1,865 plus $$8,587.50 plus $6,025 totaling $16,477.50. To compute the effective tax rate you take the tax owed divided by the taxable income. In this example it will be $16,477.50/100,000 equaling an effective tax rate of 16.48%
Fica is 7.65% which is the Social Security tax which is composed of 6.2% for Social Security and 1.45% for Medicare. As of 2017 the social security limit is $127,200. This means that only $127,200 of your income will be taxed for social security and no one will pay more than $7,886.40 (6.2% x $127,200) in taxes for social security. The 1.45% which goes for Medicare has no limit. If you are single and earn more than $200,000 a year the excess wages over $200,000 are also taxed an additional 0.9% as well as married people making in excess of $250,000 a year.
They say that their are only two guarantees in life which are death and taxes. What you must realize is that taxes including sales, real estate and gasoline can take anywhere from 40 to 50% of your paycheck. Please plan accordingly and take that into consideration the next time you review your finances.
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