How much do you really pay in taxes?

How much do you really pay in taxes?

Sometimes investors may feel a tad overtaxed.

With a tax system that includes seven marginal tax rates, additional surtaxes, an alternative minimum tax (AMT), and an exhaustive list of credits, exemptions, and deductions, determining just how much taxpayers are paying each year to the federal government can be extremely complicated.

For example, while the highest marginal tax rate for ordinary income is currently 39.6% (absent the 3.8% surtax on net investment income), the effective tax rate on ordinary income for higher income taxpayers will likely be less when you consider preference items in the tax code.

A recent report issued by the Congressional Budget Office (CBO) sheds some light on this question.

Here are some highlights:

  • The average tax bill per household is roughly $20,000, or 20% of before tax income
  • Federal taxes vary widely across income groups. For example, the average effective tax rate for the top 1% of earners is approximately 35%
  • Despite tax increases beginning in 2013, the average federal tax bill of 20% now is slightly lower than the 35-year average of 21%
  • Over that timeframe, the average tax bill peaked in 2000 at almost 23%

 Overall, the report demonstrates to the progressive nature of the federal tax system. In addition to taxes, the CBO also analyzed trends in income distribution over the past 35 years based on different income sources (wages, investment income, etc.) and different income groups.

Wherever a taxpayer falls along the spectrum of taxes, tax-smart financial strategies may be helpful in trying to mitigate the tax bill. A first step for investors is understanding their income tax bracket. There is still time to implement tax-smart strategies to try to ensure investment plans are the most efficient. Explore these strategies in Putnam’s article, “10 income and estate tax planning strategies for 2016.”



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