How much does the average American pay in taxes?

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There’s no doubt about it – taxes are by far the biggest expense most Americans pay each year. Even President-elect Joe Biden isn’t exempt from big tax bills, paying nearly $300,000 in federal income taxes in 2019. The jury is still out on what President Trump’s tax return really looks like – although the data from The New York Times suggests that he only paid $750 in federal income tax for 2016 and 2017.

Of course, many would like to be in Trump’s shoes. But the good thing is that the average American isn’t stuck with a six-figure tax bill. The latest data has been released and you might be surprised at the average tax bill and how you compare to others in your income bracket.

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A five-figure tax bill is not unusual

The most recent data from the IRS revealed that Americans who filed taxable returns paid an average income tax payment of $15,322 in 2018. This number was calculated based on returns of over of 153 million American households who filed during this period, including just over 100 million in taxable taxes. Return. Naturally, the average tax payment is a bit skewed considering that more than 56,000 tax returns were for people with adjusted gross income (AGI) over $5 million, which is a seven-figure tax bill. for those in the highest percentage of earners. .

Average tax payments are based on AGI, which basically refers to your total gross income minus a few specific adjustments for things like student loan interest and retirement account contributions.

To get a better idea of ​​the difference in tax payments between low, middle, and high income earners, take a look at 2018 tax payments by income level.

Adjusted gross income

Average total income tax

$1 to less than $5,000

$134

$5,000 to less than $10,000

$237

$10,000 to less than $15,000

$153

$15,000 to less than $20,000

$491

$20,000 to less than $25,000

$994

$25,000 to less than $30,000

$1,369

$30,000 to less than $40,000

$2,057

$40,000 to less than $50,000

$2,859

$50,000 to less than $75,000

$4,688

$75,000 to less than $100,000

$7,390

$100,000 to less than $200,000

$15,277

$200,000 to less than $500,000

$47,559

$500,000 to less than $1,000,000

$156,431

$1,000,000 to less than $1,500,000

$313,160

$1,500,000 to less than $2,000,000

$464,253

$2,000,000 to less than $5,000,000

$816,360

$5,000,000 to less than $10,000,000

$1,872,196

$10,000,000 or more

$7,386,572

Data source: IRS.

Your income affects your taxes

Income is a huge tax driver. In recent years, the average income of an American household has steadily increased, from $73,573 in 2017 to $78,635 in 2018 to $82,852 in 2019, according to data from the Bureau of Labor Statistics. .

The calculation of average income includes various sources of earned and unearned income such as wages and salaries, self-employment income, social security, private and government pension, interest, dividends, rental income, unemployment, workers’ compensation and veterans’ benefits, public assistance, and supplemental security income.

Not all sources of income are taxed the same. If you earn income from wages and salaries, your tax rate could reach 37% if you are at the top of the income scale. On the other hand, some dividends are taxed at long-term capital gains rates, giving you the option to unlock the 0%, 15%, or 20% tax bracket depending on your income bracket for the dividend. ‘year.

Don’t let taxes get you down

You can’t escape taxes, so the best thing you can do is learn how to manage your taxes better and understand how the tax code can work in your favor. Fortunately, the IRS has increased income limits for all tax brackets, giving you the ability to earn more income without fear of entering another tax bracket.

Since income plays an important role in your taxes, create a strategy that allows you to diversify your income. You can never go wrong when you earn extra income from the stock market, allowing you to take advantage of favorable capital gains rates if you hold your investments for a year. You may even pay no tax on your earnings if your income is below certain limits.

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