COMMENTARY | I've been hearing a lot lately about how much rich people pay in taxes. From Mitt Romney to Warren Buffett, people are comparing tax rates and in some cases discussing how little is supposedly paid in taxes by the wealthy.
In an effort to get a better hold on what our family will be paying this year in taxes, I've worked ahead a little bit. I do this every year so that there are no surprises when tax season roles around. This year however -- for reasons I'll discuss shortly -- it's looking like our federal income tax rate will be a tad lower than usual. However, this doesn't necessarily mean we aren't paying a lot in taxes. There are plenty of other taxes that factor in to our overall tax rate each year.
Since our recent relocation, my wife only worked half the year, and with my lowered self-employment income while I watch the kids (we just had a second child), our federal taxable income is at its lowest point since we were fresh college graduates.
With a second child being born this year, which adds another exemption to our income taxes, and after our deductions are factored in, our federal tax rate appears that it will come in at somewhere around 14 percent. This might sound like a great thing, but there's more to consider in our tax life than the federal side of things.
The state of Illinois recently raised their income tax rate. In fact, we moved back from the west coast just in time to feel the effect of this rate as it went from 3 to 5 percent. Added to our federal rate (after our state deductions) and we're up to about 18 percent of total income…but we're not done yet.
As a self-employed individual, I pay both sides of the employment tax (Social Security and Medicare). This means that my income is taxed at 13.3 percent while my wife shares this cost with her employer; therefore, our combined rate for this amount falls somewhere in the estimated 8 percent of total income range. This addition brings our total taxes paid to around 26 percent of total income.
And of course we can't forgot property taxes, which here in the Chicagoland area can play a significant role in just how much we pay in taxes each year. In fact, our property tax total will equate to about 7.5 percent of our annual income, moving our estimated taxes paid amount to just over 33 percent of total income.
Local Taxes and Extras
Then there are all those extra taxes we encounter on an everyday basis. We pay 2.25 percent local taxes on food purchases, around 9.25 on non-necessary purchases (depending upon which county we shop in) at the store. There are taxes on utilities, gas tax at about 39 cents per gallon -- or at current prices now about 9 percent -- and similar items. While it's tough to provide an exact number, since these purchases vary from month to month, I'd average it out to about a 4 percent tax rate on around 25 percent of our income (what we spend on these expenses each year) or another 1 percent tax on total income, pushing our total taxes paid to around 34 to 35 percent of our total income.
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