How much are you REALLY taxed throughout the year?

If I had asked you, what percent of your annual income do you pay in total taxes, what would your answer be?

10%? 15%? 20%?

Don’t be surprised if you’re totally off by the time you finish reading this.

This topic came about as I once purchased a brand new luxury car that was equivalent in purchase price to my gross salary at the time. I was (and still am) such a car fanatic that I figured spending my entire year’s compensation on a vehicle I would love was worth it. What I didn’t consider, however, is that consumer goods are purchased using my net income, not gross income.

What I mean exactly is that my $45k gross income was not an apples-to-apples comparison to my $45k vehicle, as the vehicle would be purchased with my net income (closer to $35K or so after taxes), and so it turned out my justification to be able to afford it with a year’s pay was a mere illusion.

This sparked a new question in my head.

How much do we pay in taxes?

The truth is, we pay taxes throughout the year without even realizing it in some cases. Here are a few examples:

Income Tax

Your annual income is likely taxed at a federal, state and local level in most cases. This is typically deducted from your gross income, per pay period, and adjusted when you do your annual taxes. Additional types of taxes under this bucket would be Capital gains taxes and Estate taxes (i.e. stock and real estate profit realization, inheritance, gifts, etc).

Property Tax

If you own a home, you likely pay a recurring tax on a monthly, quarterly or annual basis to your local government. The taxes due are based on a set percentage of the value of your home. These taxes may also be applicable to automobiles and recreational vehicles such as boats and airplanes.

Goods and Services Tax

At the retail level, sales taxes are almost always imposed by state and local governments to grow revenue. You will find yourself paying sales taxes for gas, groceries, misc. consumer goods, dining, entertainment, services and installations, etc. In most cases, these taxes are imposed based on the value of the good or service, while in some cases, such as purchasing gasoline, it is based on the number of gallons rather than the dollar value of gallons.

Sin and Luxury Goods Tax

Purchase of items such as alcohol, cigarettes, jewelry and exotic vehicles are subject to their own taxation guidelines.

Usage Charges & Fees

Without even realizing it, many of you may now acknowledge that the use of many services are subject to a tax/fee/service-charge as well, such as those for financial transactions, utilities (i.e. cell phones), licensing, hotel rooms, airline tickets, rental vehicles, toll roads etc. Take a good look at your prior or next bill for any of these services and you will quickly find these additional forms of taxes that are billed to you.

After compiling all these forms of taxes, and tallying-up your income taxes against your consumer spending taxes, you’ll quickly find yourself having paid a significantly higher percentage of your gross income in taxes than you thought. Not to mention, you will have to adjust/convert the spent taxes to account for pre-tax funds. In other words, if you paid $7 (or 7%) in taxes for a $100 good/service, be mindful of the fact that the $7 you paid was from your net income, and is likely closer to $9 (pre-tax or gross income) if you are comparing it to gross income.

I am hopeful that this write-up encourages you to train yourself to understand all the taxes imposed when it comes to incoming cashflows or when making purchases.

Hopefully you’ve found reading this write-up more valuable rather than…taxing.