The vast majority of middle-aged workers pay federal income and payroll taxes. By contrast, billionaires and millionaires pay lower tax rates than the average American. And if you are unemployed, you have no tax liability. So what are your options? Here are some tips. Read on to learn more about how to pay less. And keep in mind that there is no one-size-fits-all answer to the question, “Why do americans pay taxes“
96 percent of middle-aged workers pay federal income or payroll taxes
In the base-case worker, the rate of payroll taxes is 14 percent. At age 55, it falls to 14 percent. At age 60, it jumps to 22 percent. By age 65, it climbs to 24 percent and by age 70, it hits 50 percent. These higher rates reflect the increased value of Social Security, the gains from the group health insurance market, and the decline in Medicare coverage after age 65.
Federal income and payroll taxes cover the costs of Medicare and Social Security, which are the two main parts of the federal government’s budget. Workers pay 6.2 percent of their income to Social Security, while employers pay 1.45 percent of their wages to Medicare. Workers also pay a Medicare tax. A worker’s payroll tax bill can reach a staggering $1.2 trillion in 2019.
Millionaires and billionaires pay lower tax rates than middle class workers
In the U.S., millionaires and billionaires pay a lower percentage of their income in taxes than middle-class workers. According to a recent study by the Office of Management and Budget and the Center for Economic and Policy Research, the wealthiest 400 families paid 8.2 percent of their income in taxes. The bottom half of American households pay twenty-four percent in taxes. Despite the lower tax rates for the wealthy, the differences between the two groups are enormous.
The reason for this gap is the fact that the income of the wealthy is treated differently under the tax code. While middle-class Americans make the majority of their money from wages, billionaires earn most of their money through investments, which are taxed at a lower rate than wages. The top tax rate for investments is 20 percent, which is much lower than the highest rate for ordinary income. And unlike middle-class workers, wealthy investors can pass on assets such as stocks or real estate to their heirs with stepped-up basis, which is taxed at a lower rate than the wages of middle-class workers.
One reason why the tax bills of the wealthy are so low is that their wealth continues to rise. Their tax bills are incredibly low compared to their soaring wealth, and they don’t pay tax on the money they earn until they cash it out. According to Forbes magazine, the wealth of the top 25 Americans increased by $401 billion from 2014 to 2018, while they paid just $13.6 billion in federal income taxes. This is just 3.4% of the increase in their wealth from the previous year.
Unemployed workers without incomes don’t face tax liabilities
Many unemployed workers believe that they do not face tax liabilities because the government withholds 10% of their unemployment checks. In reality, the withholding is not enough to cover the full amount of tax liability. An effective way to manage the tax liability and avoid receiving a huge tax bill in April is to make estimated quarterly payments. In order to calculate your estimated tax payment, you can use the IRS Form 1040-ES worksheet.
The CARES Act and the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act have helped to expand unemployment benefits. These benefits are a financial crutch for many people, but they are now taxable income. In addition to CARES Act benefits, some states have not offered this option. In such cases, it may be best to file taxes on any income that you do earn.
Unemployment benefits are not income, so you may be receiving additional tax on them. If you are relying on these benefits, it is a good idea to plan ahead for them, so you don’t get a surprise tax bill in April. Unemployment benefits are subject to federal taxes, but the tax liability varies by state. States such as Alabama, California, Montana, New Jersey, and Vermont do not consider jobless benefits to be taxable income.