Nobody likes to pay taxes, and that's why so many people were excited at the prospects of tax reform. With lower tax rates, higher standard deductions, and expanded credits, many taxpayers hope that they'll see much lower taxes when they file their returns next April for the 2018 tax year than they had to pay on the 2017 tax returns they just filed.
The new tax laws will affect nearly every American's taxes, but not everyone will see the savings that they'd hoped for. The latest findings from a nonprofit provider of key tax policy information put the changes in tax laws into a perspective that's easier for taxpayers to understand. Unfortunately, the average American still spent more than 3 1/2 months of their year earning the money that will go toward paying various taxes.
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Happy Tax Freedom Day!
Every year, the Tax Foundation looks at all the taxes that Americans pay and uses that data to come up with what it calls Tax Freedom Day. Rather than using average dollar figures, Tax Freedom Day measures how long you spend working in order to earn enough money to pay all the taxes that you owe.
The Tax Foundation comes up with an effective tax rate by dividing the amount of tax paid by the amount of income Americans earn. If you multiply the result by the number of days in the year, then you can calculate how many days the typical American works before their taxes for the year are paid in full. For 2018, Tax Freedom Day was April 19.
This year's Tax Freedom Day reversed a trend that has prevailed throughout much of the 2010s. At the beginning of the decade, Tax Freedom Day was on April 9, yet subsequent tax increases pushed that date forward by more than two weeks. In 2017, Tax Freedom Day was on April 23, but tax reform was largely responsible for bringing the day back in 2018.
How long do I have to work to pay each of my tax burdens?
Breaking down each tax, the numbers show that Americans can expect to pay about $3.39 trillion in federal taxes and $1.80 trillion in state and local taxes. All told, about 30% of the nation's overall income goes toward taxes.
As was the case last year, income taxes put the biggest burden on the average American, taking them 44 days of wages to pay when you combine levies at the federal, state, and local level. That's down from 46 days last year. Payroll taxes were unchanged at 26 days, and sales and excise taxes still took 15 days to pay off.
Corporate income tax, which arguably gets passed through to consumers in the form of higher prices, counts for seven days, down from 10 in 2017, but property taxes picked up a day, to rise to 11 days. The remaining six days come from estate and inheritance taxes, customs duties, and other taxes.
Where you still will have to wait to be free
The Tax Foundation also looked at each individual state's Tax Freedom Day. More than three dozen states had their day come on or before the national date, but several still haven't reached tax freedom.
Four jurisdictions -- Connecticut, New Jersey, New York, and the District of Columbia -- won't be free from tax until May, with New York bringing up the rear on May 14. Louisiana, by contrast, was the first to be free, with its Tax Freedom Day on April 4.
How you can get free faster
Just because the average American has to work this long to get their taxes paid doesn't necessarily mean that you have to. There are several things you can do to make your tax burden lighter:
- Take advantage of items in the new tax reform laws, including higher standard deductions, larger child tax credits, and lower rates on income.
- Avoid doing things that cause unnecessary taxation, such as frequently trading investments and incurring substantial short-term capital gains tax, which have higher rates than longer-term investments.
- Contribute to tax-favored accounts like IRAs and 401(k)s to reduce your taxable income and save on taxes.
No matter what they do, most people can't realistically expect to bring their taxes down all the way to zero. But hopefully, knowing just how much of your hard work goes toward paying the tax man will be an inspiration to get you to pay more attention to how much money you lose to taxation -- and perhaps take steps to reduce that burden going forward.
