As April draws near, the familiar dread of tax season sets in for millions of Americans. Each year, it’s the same question: “How much of my hard-earned money is going to IRS, and how much does the average person pay in taxes?”
In 2023, the federal government raked in a jaw-dropping $4.4 trillion in taxes. This enormous sum fuels everything from education to national security, but how exactly is this money divvied up?
To better understand how much you owe, know how does federal income tax work and how it affects your overall tax bill. This is an additional aspect that SWAT Advisors can help you with, ensuring you fully grasp how federal income tax impacts your finances and what you can do to manage it effectively.
For the average taxpayer, understanding where your money goes can feel like deciphering a complex puzzle. Yet, it’s a puzzle worth solving, especially when it comes to knowing how much of your income is being funneled into various government programs. So, let’s break down the numbers and take a closer look at how your tax dollars are being spent, what it means for you, and why it matters.
The Breakdown of Federal Income
When thinking about how much the average American pays in taxes annually, it’s important to consider that in 2023, Americans paid about $6.5 trillion in taxes across all levels of government—federal, state, and local. The federal government alone collected two-thirds of this revenue, or $4.4 trillion. The largest portion of this came from personal income taxes, which accounted for 49% of federal revenue.
However, for most Americans (except the top 10% of earners), payroll taxes were a bigger burden than income taxes, making up 36% of federal revenue. The remaining revenue came from corporate income taxes (9%) and other sources such as tariffs, excise taxes, and estate taxes (5%).
The Progressive Tax System
The U.S. tax system is highly progressive, meaning that higher-income individuals pay a larger share of taxes. But how much taxes does the average American pay per year? The top 10% of income earners contribute more than 60% of all federal taxes and a staggering 76% of income taxes. The top 1% alone paid 45.8% of all income taxes in 2023. Over time, this progressive nature has intensified, with the wealthiest Americans shouldering an increasing tax burden.
For those in the lowest 20% of income earners, tax rates are minimal, often negative, due to refundable tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). On the other end of the spectrum, the wealthiest 0.1% of earners face an average tax rate of 33.5%.
However, regardless of where you fall on the income scale, there are ways to manage your tax liability. Understanding how to reduce taxable income through various deductions and credits can help you lower your overall tax bill and manage your finances more effectively.
How Much do Americans Pay in Taxes?
As we step into 2024, the federal income tax brackets and rates have been updated to keep up with inflation. These changes impact how much of your income falls into each tax bracket, potentially lowering your overall tax bill if your income has stayed the same.
The U.S. tax system uses marginal tax rates, which means different portions of your income are taxed at different rates, affecting your total tax liability. Here’s a quick breakdown of what’s new:
- Seven Tax Rates: The tax rates for 2024 range from 10% to 37%.
- Bracket Increases: Each tax bracket has increased by 5.4% compared to 2023.
- Potential Savings: If your income hasn’t changed, more of it might now be taxed at a lower rate.
Tax brackets 2024(taxes due April 2025)
Tax brackets 2024(taxes due April 2025)The 2024 Tax brackets apply to income earned this year, which is reported on tax returns filed in 2025.
| Tax Rate | Single | Married Filling Jointly | Married Filling Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $11,600 | $0 to $16,650 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $381,900 | $100,526 to $191,950 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $381,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 | $243,701 to $609,350 |
| 37% | $609,351 or more | $731,201 or more | $365,601 or more | $609,350 or more |
SWAT Advisors can help you understand how these changes impact you and show you ways to reduce your tax burden. Additionally, for those looking to minimize their tax burden, advanced tax planning strategies can be crucial in ensuring you make the most of these changes.
How Do U.S. Taxes Compare Globally?
Despite the high tax rates for top earners, the United States remains a relatively low-tax country compared to other developed nations. Among the Organization for Economic Cooperation and Development (OECD) countries, the U.S. has the fifth-lowest tax burden, with only Turkey, Chile, Ireland, and Mexico taxing their citizens less.
This lower tax burden has several benefits, including fostering innovation, higher living standards, and job creation.
However, it also presents challenges. Without significant spending reforms, the U.S. may struggle to maintain its current fiscal balance. The Congressional Budget Office (CBO) projects that by 2031, mandatory spending on programs like Social Security and Medicare, along with interest on the national debt, will exceed federal revenues. This could force the government to either raise taxes or cut spending significantly.
Breakdown of Where Tax Dollars Go
In 2023, the U.S. federal government spent $6.1 trillion, about 22.7% of the nation’s GDP. When considering how much does the government take in taxes, it’s clear that a significant portion goes toward funding vital federal programs. Here’s a breakdown of where that money went:
- Healthcare (24%): Programs like Medicare, Medicaid, CHIP, and ACA subsidies used $1.6 trillion. Medicare, serving seniors and those with disabilities, was the biggest part of this spending.
- Social Security (21%): $1.4 trillion went to Social Security, providing retirement benefits and support to millions of Americans.
- Defense (13%): Defense spending was $820 billion, covering military operations, personnel, and equipment.
- Economic Security (8%): Programs like unemployment benefits and food assistance used $545 billion to help people in need.
- Veterans and Retirees (7%): $481 billion supported veterans’ benefits and pensions for retired federal workers.
- Other Programs: The remaining funds went to education, transportation, science, law enforcement, and international activities.
- Interest on Debt (10%): $658 billion was used to pay interest on the national debt, which had grown to $23.7 trillion.
The Future of U.S. Fiscal Policy
The current trajectory of US fiscal policy is unsustainable. While the progressive tax system ensures that the wealthy pay a large share of taxes, this alone may not be enough to support the country’s spending levels. As mandatory spending continues to rise, especially on entitlement programs, the pressure to increase taxes or reduce government services will likely grow. Either way, tTo understand how much does the average american pay in taxes annually, you need an endless understanding of the policies.
In conclusion!
Understanding how much does the average american pay in taxes is just the beginning. While U.S. taxes are relatively low compared to other developed nations, the big question is whether this can continue. The 2024 tax bracket adjustments may offer some short-term relief, but they also highlight the ongoing challenges in maintaining this model.
As taxpayers, you need to stay informed about where your money goes and how it’s being used. The choices made by policymakers today will impact not only your tax bills but also the broader economic future of the country. Staying engaged in these discussions is key to ensuring a fair and balanced approach to U.S. tax policy and government spending.
If you’re wondering how these changes might affect you or need help planning your taxes, SWAT Advisors, a tax planning advisor and a leading firm in the U.S., is here to assist. We can help you understand your tax situation and make informed decisions for the future.
They can also provide insights into various tax-related topics, including how to lower property taxes and information on which U.S. states don’t have property taxes, helping you make informed decisions about your financial future. So, don’t wait – get in touch now!
