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Most people have already celebrated the end of tax season, having filed their tax returns for another year and working to forget their tax-preparation nightmares. Yet even though most Americans won't necessarily think much about taxes after April 15 has come and gone, many will still effectively be working for Uncle Sam and his state and local tax-collecting counterparts for at least a little while longer.
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Every year, the nonprofit Tax Foundation publishes its estimate of what it calls Tax Freedom Day. The idea is to try to drive home just how much of your work goes toward paying taxes of various types. In order to calculate the date, the Tax Foundation takes the total amount of taxes that Americans have to pay and then divide it by their total income. You can then take that percentage, multiply it by 365 days, and figure out how many days of the year you have to work before you're actually earning money for yourself rather than covering your eventual tax bills.
For 2015, Tax Freedom Day won't happen until April 24. That's more than two weeks later than it was in 2010, when April 9 marked the day on which the typical American was free of the burden of taxes. As you'll see, though, there are several factors that affect when Americans are finally free of paying off their tax burden, and while Tax Freedom Day in some states has already come and gone, others will have to wait until May to celebrate their independence.
What has made Tax Freedom Day get later?A combination of factors in recent years has pushed Tax Freedom Day further forward, making people work longer before being free from Uncle Sam. The recession of 2008 dramatically reduced tax collections as incomes suffered, and because of the progressive nature of the income tax system, the drop in income created a disproportionate drop in income taxes in many cases. The subsequent economic recovery helped to boost tax-revenue coffers again.
In addition, taxes have gone up both due to the expiration of temporary measures to stimulate the economy and because of new taxes. For a couple of years, Social Security payroll tax rates fell by two percentage points, and special tax provisions like the phaseout of personal exemptions and itemized deductions were suspended. Now, those taxes have come back in full force. Meanwhile, new taxes like the Medicare and net investment income surtaxes have raised taxes on upper-income taxpayers, as has the new 39.6% tax bracket.
Where Tax Freedom Day is latestFederal tax rules are the same for those in all states, but different state and local jurisdictions have widely different tax systems and rates. As a result, fully 35 states have Tax Freedom Days before the national day of April 24. However, only about half of those 35 states manage to get their residents free of Uncle Sam and state and local taxes on or before the April 15 tax filing deadline. The earliest day goes to Louisiana on April 2.
Moreover, some of the most populous states have Tax Freedom Days that are extremely late. Of the top 10 states in the nation, only Georgia manages to get residents free of tax by April 15, and taxpayers in California and New York have to wait well into May before they've met their tax burdens. Even Texas and Florida, which don't have state income taxes, keep their residents waiting fairly long, with April 17 and April 20 being their respective dates for tax independence. Connecticut and New Jersey share the latest Tax Freedom Day of May 13.
Make your Tax Freedom Day earlierFortunately, there are steps you can take to avoid being like the typical American. Consider the following tips that can cut your own personal tax burden:
- Take full advantage of tax deductions and credits to shelter income from tax. Contributions to retirement accounts are a great way to save for the future, and they offer tax-deferred growth on your assets as well as often giving you an upfront deduction for the amount you contribute.
- Be smart about avoiding unnecessary taxes. For example, if you own stocks in a taxable account, you never have to pay tax on the gains in their value until you actually sell your shares. That's a big part of why long-term buy-and-hold investors tend to do so well -- they minimize their tax costs and keep more of their money working longer for their own account.
- Don't wait until the last minute to do tax planning. By thinking about taxes throughout the year, you'll be better able to take advantage of tax breaks and to assess your eligibility for other favorable tax provisions.
Paying taxes is an inevitable part of being an American. Still, by staying aware of ways to reduce your burden, you can get free of the tax man as quickly as possible year in and year out.
The article Tax Season Is Over, But the Typical American Is Still Working for Uncle Sam originally appeared on Fool.com.
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