Image source: Flickr user Ryan Ritchie. 

Tax time is perhaps the only time of the year Americans can be simultaneously thrilled like a kid in the candy store and utterly irritated at the same time.

Preparing our taxes can often require a deep delve into our personal finances from the previous year. Poring through receipts, bills, and W-2s isn't exactly fun for most American taxpayers. According to the National Taxpayers Union, in 2009 individual taxpayers spent a ridiculous 3.8 billion hours complying with federal income tax laws, which on paper are approaching 4 million words.

However, many will be rewarded in the end. In a typical year, around four in five federal income tax filers will wind up receiving a refund. This is where the aforementioned excitement comes into play. For some Americans, this refund goes right into savings or investment portfolio, while for others it means a vacation or that new toy they've held off buying.

Image source: Pixabay.

Here's what the average American pays in federal taxes
But what you could wind up paying in taxes could differ greatly from the person sitting or standing next to you. Progressive federal income tax brackets, of which there are currently seven ranging from a low of 10% to a high of 39.6%, payroll taxes, and deductions/credits can vastly alter what a taxpayer ultimately pays in federal income taxes.

With this tax diversity in mind, the Tax Policy Center (TPC) released data last summer on exactly how much the average American taxpayer forks over in federal income taxes. The results might surprise you a bit.

Based on the TPC's findings, the average American will owe 19.8% of their income in federal taxes (based on 2015 filings). From this figure, TPC broke out five specific components:

  • Individual income taxes: 9.5%
  • Payroll taxes: 6.9%
  • Corporate income taxes: 2.4%
  • Excise taxes: 0.8%
  • Estate taxes: 0.1%

Points to keep in mind
A few quick things to note from the above data. First, the data doesn't add to 19.8% due to rounding. But, more importantly, state and local taxes aren't included in the TPC's estimates, and for those of you living in states like California or New York, as an example, you know full-well how state income taxes and local taxes can affect your effective tax rate.

As you'll note from the above, individual income taxes, which take into account your effective federal income tax rate following deductions and credits, and payroll taxes, which include taxes taken out to pay for Social Security and Medicare, account for 83% of what the average American will owe in 2015. If there's any solace here to the above figures, it's that an individual income tax rate of 9.5% implies that deductions and credits are substantially lowering most taxpayers' effective tax rate.

For instance, it's important to recognize that your peak marginal tax rate isn't what you'll owe on all the money you make. Instead, you pay progressive taxes based on the figures shown below, which were culled from the IRS' 2016 tax schedule.

Ordinary IncomeCapital Gains and DividendsSingle FilersMarried FilersHeads of Household
10% 0% $0-$9,275 $0-$18,550 $0-$13,250
15% 0% $9,275-$37,650 $18,550-$75,300 $13,250-$50,400
25% 15% $37,650-$91,150 $75,300-$151,900 $50,400-$130,150
28% 15% $91,150-$190,150  $151,900-$231,450 $130,150-$210,800
33% 15% $190,150-$413,350 $231,450-$413,350 $210,800-$413,350
35% 15% $413,350-$415,050 $413,350-$466,950 $413,350-$441,000
39.6% 20% $415,050+ $466,950+ $441,000+

Table by author. Data from IRS 2016 tax schedule. 

Thus, an individual making $40,000 a year may be in the 25% marginal tax bracket, but only income earned between $37,651 and $40,000 would be taxed at the 25% rate. All income generated prior to $37,651 would be taxed at a rate of 10% and 15% based on the income ranges shown above. Tack on standard deductions and other income-lowering deductions and credits, and many Americans wind up paying reasonably low levels of individual income tax.

We can also see where high-income individuals can skew the results. Wealthier individuals are responsible for the average corporate income tax rate of 2.4%, as well as the estate taxes of 0.1%. In contrast, lower-income households skew the results higher for excise taxes since they're more likely to spend their money on goods and services that may be subject to excise taxes.

Ultimately, what you owe for your effective tax rate is probably going to be less than the 19.8% reported by the TPC since the TPC's data is skewed so dramatically by upper-income earners. When broken down as a percentage by income, here's what the average American taxpayer can expect to owe.

Chart by author. Data source: Tax Policy Center. 

Keys to lowering your effective tax rate
Your taxes might seem complicated, but, thankfully, there are things you can do to lower your effective tax rate with ease. Here's a small sampling of the moves you can consider to lower your federal income tax liability.

First consider donating to your favorite charity. Charitable donations are deductible at a rate commensurate with your peak marginal tax rate. This means that if you're in the 25% marginal tax bracket, you'll receive a deduction of $0.25 for every $1 donated. Giving money to charity not only allows us to support causes we strongly believe in, but it also can allow us to pay less of our income back to the federal government. Just one word of caution: make sure you have donation receipts handy, and always ensure that the organization you're donating to will qualify you for a tax deduction.

Image source: Pixabay.

Secondly, make an effort to hang on to your investments a little longer. Buying and holding stocks takes absolutely no additional effort whatsoever, and the rewards can be huge. Other than the fact that time and compounding work in favor of the long-term investor, capital gains taxes associated with holding an investment for at least a year and a day are substantially lower than short-term capital gains taxes, which are taxed the same as ordinary income. With long-term capital gains tax rates of 0% and 15% for the vast majority of Americans, and 20% for the wealthiest individuals, holding on to your investments for the long-term is typically a smart move.

Finally, Americans looking to lower their tax liability may want to consider contributing to a retirement account. For example, contributions to a 401(k) are taken pretax, which means it can lower your tax liability. Reducing your tax liability come retirement may also be a smart move here. A contribution to a Roth IRA affords no immediate tax benefits, but money in your Roth IRA is allowed to grow completely free of taxation for life as long as you make no unauthorized withdrawals.

The tools to lowering your tax rate are at your disposal, so ensure that you're doing your part to reduce how much of your hard-earned income is given back to the federal government.