If someone were to ask, “What do you pay in taxes?”, most people would respond based on what tax bracket they are in. “I’m in the 24% tax bracket.” While that might be the right answer for your tax bracket, it would be the wrong answer to what you really pay in taxes.
We’re impacted by taxes every day. You wake up in the morning in a bed that you paid sales tax on then get in your car that you pay property tax on each year. You stop at the station to fill up with gas and you’ll pay a Federal and State gas tax. You get to your business and as a small business owner you’ll have payroll tax and potentially corporate taxes. You make a profit in your investment portfolio, and that is great, but you’ll now pay capital gain taxes.
If you are an employee, you’ll of course pay Federal and State tax as well as 6.2% to social security and 1.45% to Medicare. The interest that you earned in the bank, on your bonds or dividends will be taxed as ordinary income to you.
Here are some but not all of the taxes we deal with every year:
Estate Taxes: In 2020, if you die with an estate over $11.58 million, you’ll pay Federal Estate Tax. Many states have their own estate and inheritance tax which is much lower than the Federal Lifetime Exception.
Property Tax: On your home, real estate, autos, etc.
Sales Tax: As you make purchases, in most states you’ll pay a sales tax. Now there are five states that do not have a sales tax and they are Alaska, Delaware, Montana, New Hampshire and Oregon.
Excise Tax: On items such as gas, alcohol, airfare, etc. An excise tax is a tax on specific goods and services at the time of purchase.
Lodging Tax: These taxes are charged by hotels and resorts.
Taxed on your Social Security: If you make too much money in retirement, your social security can be taxed.
When I was a business owner, I used to get an inventory sheet every year by the county asking me to list computers, printers or any other asset in the office so that they could tax me on that. Didn’t I pay tax on that when I bought it?
How much do we really pay in taxes in a year? It would be very difficult to answer because we are literally getting taxed on something every day and I haven’t even covered all the taxes we pay. The taxes that you pay will vary depending on the state and the city you live in.
When someone asks you “What do you pay in taxes?” giving the answer as your tax bracket would be the simple answer. However, you’ll be greatly underestimating what you are actually paying over the course of the year.
Live free my friends,