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What’s Your Largest Ongoing Living Expense? Taxes Of Course!

Updated: 03/24/2021 by Financial Samurai 55 Comments

Setting Sun

The following is a guest post by FS reader, Jamin Eberhart on your largest ongoing living expense. He received his MBA, worked in biotech and now consults for biotech companies. He is extremely focused on building his freedom fund, and struggles just like me to find the right balance between living it up and being fiscally responsible. 

The news media is always talking about how the top three costs for households are:

  1. Housing (rent or mortgage)
  2. Car (loan payments and interest)
  3. Education or Child Care (student loans or child schooling)

Your Largest Ongoing Living Expense

The truth is, they are wrong. Taxes are by far and away the largest cost that most households face. “Why is this important?” you might ask. “Aren’t taxes unavoidable?” you lament. The short answer, like many things in life, is yes and no. Will you be able to avoid paying taxes altogether? No. Can you take steps to lessen your tax bite and chip away at the single greatest expense you have? Yes! The how is for a later post. For now, let’s focus on step one… recognizing that you have a tax problem.

Let’s do some quick math. For simplicity, we will assume that our happy couple makes a combined income of $100,000 per year in the United States (married, filing jointly). Here are some of the immediate payroll taxes they face:

Taxes Are Your Largest Expense Table - Your Largest Ongoing Living Expense

Note that I did not include some biggies like state income tax, property tax, and sales tax since at this income level, most if not all of those taxes can be written off against federal tax withholdings within limits. Already our lucky couple is paying nearly one third of their money to the government before having a chance to do anything productive with it for themselves. And yes, that employee funded amount for social security, medicare, and medicaid counts since that is a very real, direct salary cost to employers which could otherwise be paid to their staff.

Unfortunately, this tax chart isn’t even close to the full picture. All of those “little” taxes add up. State tax. City tax. Property tax. Gasoline tax. Alcohol tax. Airport tax. Cigarette tax. Estate tax. Public utilities tax. Telephone tax. Vehicle registration tax.

Endless Taxes Until You Make Money Differently

The list goes on and on and the net effect can easily add another 10% in total taxes. Since I don’t have the time or inclination to write up an exacting review of the total US tax burden, I am grateful that author Jeremy Sands has already done so with his paper, The Real US Tax Burden.

The key takeaway is this: the average American household earns ~$53,600 per year and pays $24,600 in all taxes combined for a … drumroll please… 54% effective tax rate. How does it get that high? A bunch of different taxes add up quickly.

For example, in California state income tax is about 8.5%, CA sales tax can be as high as 10% (in San Francisco it’s 8.75%), FICA is 6.2%, property tax is 1.12%, etc. If your household makes more than $53.6k per year guess what… it just keeps getting worse and worse.

It’s so much better to earn investment income instead of W2 income. Investment income is taxed at a lower rate and doesn’t take work to make!

Capital gains tax rates

Your Largest Ongoing Living Expense Needs To Be Managed

Another way to think about this astounding figure is based on what this average household needs to earn in order to buy anything from a bottle of shampoo to that lovely new car. For the average person, they need to earn double what the price tag reflects to actually complete the purchase.

That morning latte at Starbucks, that’s not $4 but rather $8 of earnings down the drain. That new $35,000 luxury sedan? That will be $70,000+, not even factoring in interest and maintenance costs. Sobering, yet extremely important to recognize if you want motivation to curb spending.

Related: Follow The TITTS Ratio To Save More Money

Government Taking Your Money

Yet another way to think about this is that all forms of government in the US (federal, state, county, city/local) confiscate over half of the average household’s income every year, and yet they still cannot balance the national budget and always need more money. How much is enough when half of the productive effort of the nation is squandered just to keep up with the government’s reckless, ever expanding spending?

And to be clear, this is a discussion that neither the Democrats nor the Republicans want you to think about. None of them want you to think about your true total tax burden because they don’t want you to violently protest to their power when you learn the truth.

This is why the presidential debates always spout figures based only on the federal income tax rate versus your total tax rate… you know, the one which actually matters the most to you.

All this is from a country which was intended by its founding fathers to never impose a federal tax on its citizens and managed to thrive for 137 years without a federal income tax (the 16th amendment to the US Constitution was passed in 1913 which allowed for the previously unconstitutional act of collecting federal income tax).

How To Reduce Your Largest Ongoing Living Expense: Taxes

To be clear, I highly recommend that you pay whatever taxes which are legally required of you. Don’t be foolish and evade taxes, it isn’t worth it. That being said, however, there are a number of completely legal ways to reduce your tax burden:

  1. Max out anything that allows you to defer taxes. 401k’s. 403(b)’s. Traditional/Roth IRA’s. SEP IRA’s. This is the #1 option open to most employees who don’t own their own business.
  2. Start your own business. You’d be amazed at how many personal expenses can be legitimately paid for out of your business’ account (thus saving you from paying taxes on your income first, and then paying for the expense)
  3. Buy less stuff. Governments have a hard time taxing money which is just sitting there earning interest, hence they tend to tax events and transactions (your monthly paycheck, dividend payments, store transactions, utility payments, …). The less you buy, the less they can take out of every transaction and the more that you can keep for a rainy day.
  4. Go a bit Galt.
  5. Become an awesome employee at an awesome company that has 401k match and profit sharing, AND become a freelancer so you can potentially put away over $100,000 tax free.

ONE LAST EXPENSE TO THINK OF (Sam addition)

Although this article makes a claim that taxes are our largest ongoing expense, there could be one more expense that’s even greater and psychologically more devastating. That expense is getting a divorce!

Not only will have you have to potentially pay alimony, child support, and divvy up your assets, you may also have to pay wasteful lawyer fees! We’ll talk in more detail about the cost of marriage and divorce in future post.

Related: How To Pay Little Or No Taxes For The Rest Of Your Life

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Filed Under: Taxes

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

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Comments

  1. scott says

    June 24, 2016 at 11:45 pm

    Wow, didn’t read everyones post but there are so many ways that your hypothetical couple could reduce their tax bill that you showed. Lets start with the standard deduction of $12600 this is STANDARD for your married couple! If they have kid/s they get an even better deal. If you max both IRAs that is another $11000, and if you max both 401ks that is another $36k. This amounts to nearly $60k for just a family of 2(but maybe more). I haven’t even gone into the more creative tax credits, and Social Security doesn’t tax all income(rental property, dividends and some others). If they live in a state with not income tax and low property taxes its even better(we live in Clarksville Tenn.). Taxes on vehicles are low too average is about $66 a year each regardless of vehicles value. Property taxes on our new 2200sqft house is less than $2000 a year and there is no school tax or other BS taxes that I have heard of. There is a high sales tax in the area of 9.5% but other areas are cheaper(depends on city/county). There is no tax on (only sales tax, not property) personal trailers, just vehicles, motorcycles, and motorhomes(that I can think of). No yearly tax on boats, or motors(Missouri). Fishing and hunting is cheap. Tennessee is a great place to live!

    Reply
  2. Mali says

    March 27, 2015 at 10:42 am

    My husband is paying “child support” where a the X is using funds to pay for her Louie,Shopping, etc- that’s another story, but back to the point I’m trying to get information on: If one is paying “child support” – there is no Tax deductions for that- only for “child care”. How can one lower a tax bracket in that area to reduce “child support” (only due to the fact that the kids mom is using it 85% for her purposes & not the child). I’m trying to look at is from a taxable point of view where I don’t need legal counsel for that. thanks in advance. Mali.

    Reply
  3. Mali says

    March 26, 2015 at 1:48 pm

    have you written an article about “more detail about the cost of marriage and divorce in future post” yet? particularly child support. Thanks.

    Reply
    • Steve says

      March 26, 2015 at 2:40 pm

      Ooooo that sounds interesting, reminds me of a recent documentary I watched called Divorce Inc. It was very informative and a bit scary!

      Reply
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