How much does the average American pay in taxes? [2024]

Taxes are an unavoidable part of life in the U.S. Whether you're a seasoned earner or just starting out, understanding how much you pay in taxes allows you to budget accurately, plan for future expenses, and potentially identify opportunities to optimize your tax situation. 

But with various tax types and shifting regulations, grasping the true cost of being an American taxpayer can be confusing. So, let's shed some light on this not-so-scary subject and explore just how much the average American pays in taxes to Uncle Sam.

Average annual income tax

According to IRS data gathered by The Tax Foundation, Americans paid an average of $14,279 in federal income taxes in 2021 (the most recent year with published data). 

The IRS calculates this average by dividing the total amount of federal income tax collected by the number of tax returns filed. 

The chart above reveals the tax brackets for 2024, meaning what you will pay in 2025, as well as the income thresholds for each one. The IRS uses these tax brackets to determine your tax rate, with different guidelines for single tax filers and married individuals filing joint returns. 

For reference, Americans faced an average effective tax rate of 14.9% in 2021. Remember that this figure doesn't necessarily reflect what any one individual pays, as tax rates are tiered and change over time. The U.S. tax system uses a progressive tax structure, meaning tax rates increase as taxable income rises. 

Taxes are applied in tiers, so as your income increases, you'll pay a different tax rate on the portion of your salary that's in each new tax bracket. For example, a single filer  with a $48,000 salary would owe: 

• 10% on the first $11,600
• 12% on $11,601 - $47,150
• 22% on $47,151 - $48,000

Average income tax rates by state

While the federal government sets the income tax framework, many states have their own income tax on top of it. This means the total tax burden you face can vary significantly depending on where you live. 

Let’s look closer at some state highlights:

• Seven states have no income tax — Alaska, Florida, Nevada, New Hampshire (though they tax interest and dividends), South Dakota, Tennessee, Texas, Washington (taxes capital gains only), and Wyoming.
• Several states keep things simple with low tax rates averaging in the 2-5% range, such as North Dakota, Arizona, Indiana, and Pennsylvania.
• On the other end of the spectrum, states like California, Hawaii, New York, and Oregon have average income tax rates exceeding 7%.
• Some states use a progressive tax system like our federal system. Others have a flat tax, which is simpler to implement and tends to be more beneficial for higher earners.

The table below shows the average income tax rate for each state. Keep in mind that some states have progressive tax systems with multiple brackets. For more precise tax planning, consult a professional familiar with your state's tax code.

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How much does the average American pay in taxes over a lifetime?

The average American will pay an estimated $524,625 in taxes throughout their lifetime. That's a significant amount, representing roughly 34.7% of all their estimated lifetime earnings.

While we typically think of taxes as just the annual deductions from our income, the concept of lifetime taxes takes a broader view. This considers all the various taxes you'll pay throughout your life, not just federal income tax.

Here's a breakdown of some of the taxes this calculation includes:

• Federal Income Tax: This is the tax you pay on your wages each year.
• State Income Tax: Many states have their own income tax on top of federal taxes.
• Sales Tax: You pay sales tax on most purchases you make, though it varies by state.
• Property Tax: This is a tax levied on the value of your property — typically your home — that can vary significantly by state.

Since many of these taxes differ from state to state, where you live can significantly impact your lifetime tax burden. The study from Self cited above reveals a wide range, with New Jersey residents paying the most at an estimated $987,117 and West Virginia residents paying the least at $358,407.

Understanding your income tax bill

Understanding your tax bill can feel overwhelming, but it doesn't have to be! Several factors determine how much each of us owes in taxes:

• Income Level: In states with progressive tax brackets, the more you earn, the higher your federal tax liability. In flat tax states, higher earners pay less.
• Filing Status: Are you single, married filing jointly, or head of household? Your filing status significantly impacts your tax bill.
• Deductions and Credits: These tax breaks can reduce your taxable income or the amount of tax you owe. Understanding available deductions and credits is key to reducing your taxable income.
• State and Local Variations: Knowing your state's income tax rate, sales tax rate, and property tax rate is crucial for understanding your overall tax liability.

The amount withheld from your paycheck for taxes depends on your income and filing status. It can be helpful to review your W-4 form to understand your current withholding settings.

With a bit of planning, you can take several important steps to reduce your tax bill:

• Maximize deductions and credits: Research deductions you may qualify for, such as mortgage interest or charitable contributions. Explore tax credits, such as the Earned Income Tax Credit, that can directly reduce your tax liability.
• Plan for retirement contributions: Contributing to a retirement account like a 401(k) or IRA can lower your taxable income for the year. Look into tax deferred and tax exempt options to save even more.
• Consider itemizing vs. standard deduction: Depending on your situation, itemizing deductions might save you more money than taking the standard deduction.
• Monitor changes to tax laws: Changes in tax laws could affect your tax brackets, deductions, and credits. For instance, a new tax law might increase the standard deduction, which could lower your taxable income and reduce your tax bill.
• Work with a tax professional: A tax professional or certain types of financial advisors can help you navigate the complexities of the tax code and identify strategies to optimize your tax situation.

The Playbook take: Don't panic, plan! Slash your tax bill now

Avoid the tax time scramble! Knowing the average American's tax burden is a great first step, but why not take charge of your own financial future?  With a little planning today, you can save a big chunk of change come tax season.

Consider consulting a tax professional or using a financial planning tool like Playbook to develop a personalized strategy that maximizes your tax advantages. Tax planning is crucial to ensure you're taking advantage of all the benefits available to you.