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How Much Does an Average American Pay in Taxes
The 2016 tax filing season is over, and most taxpayers are finished with their annual tax duty. Those that have obtained an extension to file have until October 17, 2016, to file their returns and pay any balance due. The Motley Fool shares how much an average American family pays in federal taxes, including income tax, payroll tax, and excise taxes on goods like gasoline and cigarettes:
The average rate was 21% in 2014. Income tax brackets in the U.S. range from 10% to 39.6%, but due to the Earned Income Tax Credit, some low-income Americans actually pay less than zero in federal income taxes. However, lower-income Americans also pay more as a percentage of their incomes in payroll taxes (for Social Security) than higher-income Americans, because employees only pay the 7.65% FICA tax on incomes of up to $118,000. Notably, Americans in each tax bracket up to $200,000 pay more in payroll taxes than they do in federal income taxes. Due to
deductions and credits, the average effective federal income tax rate is less than 10% for all brackets below $200,000.
The $100,000-$200,000 segment has both the biggest share of returns at 15.2% and contributes the most income, making up 27.5% of total contributions. The chart below shows the average tax rate for each income bracket.
| Income Category | Income Tax Rate | Payroll Tax Rate | Total, (Including Excise Taxes) |
|---|---|---|---|
| Less than $10,000 | -7.1% | 10.2% | 10.6% |
| $10,000-$20,000 | -11% | 8.7% | 0.4% |
| $20,000-$30,000 | -5.4% | 7.3% | 4.1% |
| $30,000-$40,000 | -1.9% | 7.9% | 8.5% |
| $40,000-$50,000 | 0.7% | 8.4% | 11.7% |
| $50,000-$75,000 | 3.8% | 8.6% | 15.2% |
| $75,000-$100,000 | 6% | 8.7% | 17.7% |
| $100,000-$200,000 | 8.8% | 9.5% | 21.6% |
| $200,000-$500,000 | 15.2% | 7.9% | 26.8% |
| $500,000-$1,000,000 | 22.6% | 4.5% | 31.5% |
| More than $1,000,000 | 27.4% | 1.8% | 33.1% |
| Total | 10.1% | 7.5% | 21% |
How to Lower Your Tax Rate
If you’re paying taxes at a higher rate than the average for your income bracket, you may want to think about strategies for lowering your tax bill. One easy way to do that is by contributing to a tax-advantaged retirement account such as a 401(k) or a Traditional IRA. Not only will those contributions help lower your tax bills today, but they also make saving for your golden years easier. Contributions to a Roth IRA, on the other hand, don’t give you tax deductions now, but your investments and gains can be withdrawn tax-free after you retire.
One of the most popular tax deductions in the country is the mortgage interest deduction. It was claimed by 24% of filers in 2012, at an estimated total value of $405 billion, or about $1,200 for every individual American. If you’re currently renting your home and your rent is similar to a monthly mortgage payment for an equivalent place, you may want to consider purchasing a home, depending on other factors such as whether you can afford a down payment, how much time you plan to stay in that area, and your job situation. In 2012, the average mortgage interest deduction was nearly $10,000, meaning switching from renting to owning could save you several thousand dollars on your tax bill.
Depending on your individual situation, there are several types of deductions and credits you will want to look into. Students should be sure to take advantage of the $2,000 education tax credit, while self-employed Americans or small business owners should claims deductions such as for a home office or for use of a vehicle. If there’s a cause or nonprofit organization you’d like to support, making a charitable donation is also an easy way to cut your tax bill.