Many times, whenever I have had discussion with some American online, they would try to show how high their tax rates are by quoting the money they are paying as income tax by doing the calculation using the rate from the highest tax bracket.
I am not sure if people are purposely trying to be disingenuous or they don’t understand how tax calculation works.
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IME very few people understand our tax system and especially seem to fail to grasp that it’s a graduated tax
This becomes very clear at bonus time when bonuses are withhheld at marginal tax rates rather than average tax rates.
All I know is they pull out an ass load of money from my paycheck. But at one point in the year I have to pay someone to do the math and make sure the government took the correct amount. If they took too much, they pay it back but it takes months. If they didn’t take “enough” they expect you to pay it immediately and could send you to prison for not paying fast enough.
I believe so, yes. Our tax codes are fairly complicated and can be frustrating to understand. While you may be in a certain “bracket”, you may also be eligible for deductions, so things aren’t quite as simple as in other countries.
Based on my discussions with people in general, from all over the world, I think the vast majority of people in all countries are woefully ignorant about how their income tax is calculated. I guess at least here you are required to file taxes so you are likely to understand how things like standard deductions and certain tax credits work if you are a working adult.
Yes, a lot of cluelessness.
Something you often hear people say is that they don’t want to make more money (in a new job or by moving) because “the gummint would just take it all in taxes anyway.”
Yes, people generally don’t understand the concept of a progressive tax system or how tax brackets work.
Here’s a great example.
When I started working for my company in 2008 we were getting paid weekly. After a few years they changed payroll processors and it ended up being easier/cheaper to get paid every other week. Bear in mind, nobody’s income rate changed because of this. Everyone still had their same hourly rate. Before we were getting paid for 1 week’s worth of hours every week. After we were getting paid for 2 week’s worth of hours every other week.
People flipped their shit. There were several company-wide meetings for management to explain the change. Everyone was freaked out that since their paychecks would now be larger (2 weeks’ worth on 1 check rather than 1 week’s worth) it would push them into a higher tax bracket. They were all 100% certain they would be paying higher in taxes. And their “proof” came when they got their first 2 week check and the amount withheld was, surprise surprise, twice as much as on a 1 week check (duh!).
Eventually the anger died down and people moved on. Fast forward about a decade and the company changed payroll processors again. This new processor had the option for weekly paychecks, so management, remembering how upset everyone got with the 2 week paychecks, switched us over to weekly.
Again, everyone lost their freaking minds. They were again 100% certain this would result in paying higher taxes because now taxes were being taken out twice as often (every week rather than every other week). Again a series of company wide meetings to reassure everyone their income wasn’t changing. They even pulled up someone’s 2 week paystub from before the change and compared it to 2 weekly paychecks after to prove they were the same. People would not believe it.
So, the federal income tax calculation isn’t that hard to calculate. The issues I’ve come across are calculating state and city taxes. The other day, I was trying to calculate how much money I would have on each paycheck if I changed the amount of my 401k investment. I came across the Kentucky state website that supposedly had the tax brackets, but none of their calculations added up to how much I was actually paying in state taxes. I’m still lost as to how they figured how much I’m paying. By then, I didn’t even want to try to figure my local tax rates.
Edit: I will say, if you are like me, then you will always give the benefit of the doubt to the other party. By this, I mean when I calculate, I always round what I earn down and round what I have to pay up. This way, it’s harder to go over my budget. When I didn’t understand how the tax brackets worked, I would use the max brackets. At least that way, I couldn’t go over budget. But I really only started understanding the brackets once I made so many mistakes. I am now much more financially literate than your average American. No thanks to my schooling
Yes. For some reason Americans fail to realize we have a progressive income tax bracket system. You’re not taxed at a higher rate on all your income just because your total income rose into the next bracket. Only your income that falls into the higher bracket is taxed at that bracket level. Your lower income is still only taxed at the lower bracket.
Lots of people are confused, not sure the percentage.
Met an hourly worker once who insisted that his overtime paychecks resulted in less take-home pay than the regular paychecks.
You are correct in assuming most people have no idea how our (relatively simple) graduated tax brackets work.
Yeah people can be pretty dumb about it. I remember one time someone told me that their boss said they shouldn’t want a raise because it would bump them into the next tax bracket and their take home pay would actually go down. And this person believed it lol, very sad.
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Yeah, most people don’t have more than a very basic grasp of what taxes are. It would be nice if it was taught a bit more in high school, but even when it is it seems a lot of teenagers just don’t care and forget about it. To be fair j I’m can’t blame them for finding taxes boring.
Many people do not understand how marginal tax brackets work, that they don’t pay that top bracket on all income.
But they might also be quoting all taxes taken from paycheck, which also include social security, Medicare/Medicaid. And state income taxes.
But I’m sure there are also those basing their “tax bracket” based on what’s withheld from paychecks and forgetting to factor back a tax refund they get back after filing taxes.
There is a general lack of financial understanding in the USA and it is completely intentional.
yes
I’m a CPA and the more I learn about the tax system, the less it makes sense.
But yes, a lot of people don’t understand the base concept of progressive tax rates. That’s why you’ll hear occasional tales of people refusing raises because they think they’ll lose money overall by moving into the next tax bracket…
I think I had a huge misconception about taxes due to paying my child support. Since they took half of my gross income and then took the taxes for the gross out of my net half it seemed like far more was going out for taxes than actually was. Once I paid off my support I realized that the percentage taken on the gross stayed the same but my income net had doubled and I had calculated it differently so was kind of shocked.
A lot of people everywhere don’t understand how taxes work, it isn’t exclusive to Americans. Look at all the Reddit posts from Europeans talking about their *free* healthcare.
Probably. MANY are clueless about so much. Hubby’s a finance guy. Just amazing. What are they learning in school?
I wouldn’t say there’s a *general* lack of awareness but Reddit tends to skew very young and it’s likely those people you’re talking to on here have never paid income tax in their life.
It’s both. People very much don’t understand how our taxes work, and people are disingenuous when arguing their opinions online
Plenty of people know how our Federal income tax works. It’s just easier to tell someone the highest tax bracket your income falls into than to calculate your effective tax rate for them.
yes – and as a recent public high school grad (2020), this like taxes should be taught everywhere and to everyone because regardless of if you go to higher ed or into the workforce or to travel or whatever – this matters more than a math theorem about right triangles.
I’m so tired of hearing people claim that they “lost money” from working overtime. No, even if you got bumped into a higher tax bracket, it’s structured so that earning more always results in higher take home.
That said, the US has one of the most aggressively progressive income taxes in the world, and high earners ( up until you get into the “hide my money in a Swiss bank account” range) pay way more than our fair share. #TaxThePoor.
Yeah lots of morons here.
If the number of people in my life who started drilling me on how taxes work after they found out I was working on bookkeeping certification and seeking Enrolled Agent certification is any indication, then yes, many people have no idea how income taxes work. As far as I’m aware I’m the only person I know in my life who can do own their taxes without any help from TurboTax, H&R Block, etc.
Yep. I’ve heard people say they don’t want to work overtime unless it’s a significant amount because 1 hour will put them in the next tax bracket and they’ll loose their whole paycheck.
They literally do not know how it works. I have had to explain this to over 30 people and I’m only 27. My parents, coworkers (people who work at the hospital), so so many. It’s LUDICROUS.
Yes. There is definitely a huge lack of awareness, even among “educated” people. I would say most people who do not make a point to study their finances are unaware of this.
Yes, people wrongly believe ALL your income is taxed at one rate
People talking about taxes tend to only talk about income, while ignoring Medicare and social security.
When you include those the total “tax” burden is close to the federal rate for the bracket.
The income tax isn’t too tough if you just do your taxes. The tougher part of total tax estimating is all the other taxes that add up to quite a bit.
>Is there a general lack of awareness among Americans
Yes.