This week is the deadline for citizens and tax payers in the United States to file their tax forms. Anyone can get an automatic extension by asking for it should they need more time to do their calculations. We thought this might be a nice time to review income tax rates for the typical person as this effects the return on investment that investors achive. Futhermore, income taxes are one of the major expenses many of us bear in addition to housing, food, medical, education and transportations expenses. The following table show that historical marginal income tax rates a family of four would face if they had one earner who made the median income.
Remember when you think about your income tax burden, one must also pay Social Security and Medicare taxes in addition to income taxes which are based on income as well. Futhermore, there is the hidden Social Security and Medicare tax as well. This is the amount the employer pays on your behalf without you knowing about it. For a typical single earner, making the median income, they face a marginal tax rate of about 30%. This mean that for every dollar they earn above and beyond $75,845 they pay $0.30 in additional taxes. These rates hit their highs in the 1980s. The reduciton in tax rates in the Reagon years, brought the rate down, but not below the levels up until then. It seems the inflation of the 1970s and early 1980s pushed the median earner into higher tax brackets.
The story is similar for a family of four where both parents work. The two working adult families typically face a higher marginal tax rate. This is not surprising as the income tax schedule in the US is progressive. That is, the more you make, the higher the tax rate you face. Let us not forget income taxes at the state level. 43 states also charge their residence an income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming are the only states without an income tax. So when you think of marginal tax rates, the typical taxpayers faces a marginal tax rate that is about 5% higher than the rates reflected in the charts above. In some states like California, it is even more.
