What Percent of Your Income Goes to All Types of Tax?

Have you ever wondered just how much of your hard-earned income actually belongs to you after all the taxes are deducted? What percent of your income is going to taxes can be surprisingly high, and understanding this number is crucial for taking control of your financial future. Many people don’t realize how much of their income is lost to taxes, whether it’s through federal income tax, payroll taxes, or other hidden levies.

At Paradigm Life, we believe in helping individuals understand the full scope of their tax burden, as this knowledge is key to making informed decisions about wealth-building strategies like The Perpetual Wealth Strategy™. By recognizing how taxes affect your hard-earned income, you can plan smarter, reduce tax liabilities, and take charge of your financial freedom.

Breaking Down the Different Types of Taxes

Understanding how much of your income goes to taxes is essential for building a solid financial foundation. Let’s take a closer look at the different types of taxes that impact your income and how they reduce your take-home pay. By understanding these taxes, you can make smarter decisions about wealth-building strategies, including how to reduce your tax burden with tools like The Perpetual Wealth Strategy™.

Income Taxes

• What it is: Income taxes are the taxes paid on your earnings to federal, state, and local governments. These taxes are based on the amount of money you make each year and are usually deducted automatically from your paycheck.
• How it affects you: Income taxes are calculated using tax brackets. The more you earn, the higher your tax rate. For example:
  • Federal income tax ranges from 10% to 37% depending on your income level.
  • States like California may charge additional state income taxes.
  • Local income taxes can also apply in certain cities.

Payroll Taxes (FICA)

• What it is: Payroll taxes, or FICA (Federal Insurance Contributions Act), include Social Security and Medicare taxes. These taxes fund Social Security and Medicare programs, which provide benefits to retirees, the disabled, and certain survivors.
• How it affects you:
  • Social Security tax is typically 6.2% of your earnings, while Medicare tax is 1.45%.
  • These taxes are split between you and your employer, but they still reduce your take-home pay.
  • Additional Medicare tax of 0.9% applies to high earners (over $200,000 for individuals).

Sales Tax

• What it is: Sales tax is a tax on goods and services purchased at the state and local levels. Sales tax rates vary depending on where you live, with some states charging higher rates than others.
• How it affects you:
  • Sales tax can range from 0% to over 10%, depending on your state and city.
  • Even small purchases, like groceries or a coffee, can add up over time, contributing to your overall tax burden.
  • In high-tax states like California or New York, sales tax can be a significant expense for residents.

Property Tax

• What it is: Property taxes are taxes on the value of real estate and personal property, including homes, land, and sometimes vehicles or other assets.
• How it affects you:
  • Homeowners pay property taxes on the value of their property, which can be a significant annual cost.
  • Renters indirectly pay property taxes through higher rent, as landlords often pass the cost of property taxes onto tenants.
  • Property taxes can vary widely by location and can impact the affordability of housing in different areas.

Capital Gains Tax

• What it is: Capital gains tax is levied on the profits made from the sale of assets like stocks, bonds, or real estate.
• How it affects you:
  • If you sell an asset for more than you bought it (e.g., stocks, a home), you owe capital gains tax on the profit.
  • Long-term capital gains (for assets held longer than one year) are typically taxed at a lower rate (15% or 20%, depending on income).
  • Short-term capital gains (for assets held for less than one year) are taxed at your ordinary income tax rate.

Other Taxes

• What it is: There are several other types of taxes that can affect your finances, such as estate taxes, inheritance taxes, and excise taxes.
• How it affects you:
  • Estate taxes are levied on the value of your estate after your death, typically for estates worth over $11 million (federal limit).
  • Inheritance taxes are imposed on individuals who inherit assets, though not all states have them.
  • Excise taxes are applied to specific goods like gasoline, tobacco, and alcohol.

Calculating Your Total Tax Burden

When planning for your financial future, it’s essential to understand how much percent of your income is going to taxes. Many people only focus on federal income tax, but there are other taxes—like Social Security, Medicare, sales tax, and property taxes—that also affect your total tax burden. Knowing your total tax percentage helps you make better financial decisions and build wealth more effectively.

How to Estimate Your Total Tax Percentage

To get a complete picture of how much you’re really paying in taxes, you need to calculate your total tax burden. This means looking at all the taxes you pay—not just the ones taken from your paycheck.

Here’s a simple formula you can use to calculate what percent of your income is going to taxes :

Formula for Total Tax Burden:

Total Tax Percentage = ( Total Income Total / Taxes Paid)×100

Where:

• Total taxes paid is the sum of all taxes you pay in a year (including income taxes, Social Security, Medicare, state and local taxes, sales tax, and property taxes).
• Total income is the total money you earn in a year before taxes.

Example: Total Tax Burden Breakdown

Let’s walk through a realistic example to show how this formula works. Imagine a household that earns $80,000 per year. Below is a breakdown of the taxes this household might pay:

• Federal income tax:

• • Let’s say this household is in the 22% tax bracket.
  • Federal income tax: 22% of $80,000 = $17,600
    

• Social security and medicare (payroll taxes):

• • Social security tax: 6.2% of $80,000 = $4,960
  • Medicare tax: 1.45% of $80,000 = $1,160
  • Total payroll taxes: $4,960 + $1,160 = $6,120
    

• Sales tax:

• • If they spend about $40,000 a year on taxable goods and services, and they live in a state with a 7% sales tax rate, they would pay:
  • Sales tax: 7% of $40,000 = $2,800
    

• Property tax:

• • Let’s assume this household owns a home worth $300,000 and their property tax rate is 1.25%.
  • Property tax: 1.25% of $300,000 = $3,750
    

• Total taxes paid:

• • Federal income tax: $17,600
  • Payroll taxes (Social Security + Medicare): $6,120
  • Sales tax: $2,800
  • Property tax: $3,750
  • Total taxes paid: $17,600 + $6,120 + $2,800 + $3,750 = $30,270
    

• Total tax percentage calculation:

• • Total income = $80,000
  • Total taxes paid = $30,270
  • Total tax percentage: 30,27080,000×100=37.84\frac{30,270}{80,000} \times 100 = 37.84%80,00030,270​×100=37.84

So, this household’s total tax burden is 37.84% of their income.

Why Knowing Your Total Tax Burden Matters

Understanding the total percent of your income is going to taxes is crucial for your financial planning, retirement savings, and wealth-building decisions. Here’s why:

• Better financial planning: When you know how much of your income goes to taxes, you can budget more accurately and make informed decisions about spending, saving, and investing.
• Retirement savings: If you understand your tax burden, you can plan for tax-efficient retirement strategies, such as contributing to tax-advantaged accounts like IRAs or 401(k)s.
• Wealth building: The lower your tax burden, the more you can save and invest to grow your wealth. By finding ways to reduce your tax burden, like taking advantage of tax credits or deductions, you can keep more of your hard-earned money working for you.

How Taxes Impact Your Wealth-Building Strategy

When building wealth, taxes play a big role in how much you keep and how much goes to the government. By understanding how taxes affect your savings and investments, you can make smarter choices that help you grow your wealth faster. In this section, we will explore how taxes impact retirement planning, the benefits of tax-advantaged accounts, and how strategies like The Perpetual Wealth Strategy™ can help you keep more of your money.

Taxes and Retirement Planning

Taxes can have a significant effect on how much you accumulate in your retirement accounts. Many people contribute to **401(k)**s or IRAs to save for retirement, but it’s important to understand how taxes impact these savings.

Impact on 401(k) and IRAs:

• Traditional 401(k)s and IRAs allow you to contribute money before taxes, meaning you don’t pay taxes on the money you put in today. However, when you withdraw this money in retirement, you’ll pay taxes on it at your ordinary income tax rate.

• This can lead to a higher tax burden in the future when you start taking distributions, especially if your income increases over time.

While these accounts offer short-term tax savings, the tax-deferred growth can sometimes lead to a larger tax bill when you retire. This is why understanding your long-term tax picture is essential when choosing where to save for retirement.

Tax-Advantaged Accounts: The Key to Smarter Retirement Planning

To reduce the impact of taxes, many people choose tax-advantaged accounts. These accounts are designed to help you save more money by either deferring taxes or eliminating taxes altogether.

Roth IRAs:

• Roth IRAs allow you to contribute money after taxes. While you don’t get an upfront tax break, your money grows tax-free, and you can withdraw it tax-free in retirement. This can be a great option if you expect to be in a higher tax bracket in the future.

Whole life insurance:

• A Whole Life Insurance policy is another powerful tax-advantaged tool. While it’s primarily used to provide life insurance coverage, it also has a cash value component that grows tax-deferred. Additionally, you can access this cash value tax-free through loans or withdrawals, making it a useful strategy for building wealth while minimizing taxes.

Whole Life Insurance not only provides financial protection for your family but also acts as a long-term savings tool that allows you to build wealth with minimal tax exposure.

Tax-Efficient Wealth Building: The Paradigm Life Approach

The key to effective wealth-building is finding strategies that minimize taxes and maximize growth. The Perpetual Wealth Strategy™, offered by Paradigm Life, is one such strategy. It uses Whole Life Insurance as a core component to create a tax-deferred environment for growth and tax-free access to funds.

Benefits of The Perpetual Wealth Strategy™:

• Tax-deferred growth: Your money grows within the policy without being taxed, allowing your wealth to compound faster.
• Tax-free access: You can borrow against the cash value of your policy, and as long as you follow the correct procedures, you won’t pay taxes on those loans.
• Wealth transfer: The tax-free death benefit can help you leave a legacy for your heirs without them facing hefty tax burdens.

By focusing on tax-deferred growth and tax-free access, The Perpetual Wealth Strategy™ helps you retain more of your hard-earned wealth while avoiding the erosion caused by taxes.

Tax-Free Death Benefit: A Legacy of Wealth

One of the greatest advantages of Whole Life Insurance is the tax-free death benefit it provides. When you pass away, the death benefit goes directly to your beneficiaries without being taxed. This makes life insurance an excellent tool for building a legacy and ensuring that your family is financially protected.

The tax-free death benefit allows you to pass wealth to your heirs, helping them avoid the often high estate taxes that can significantly reduce the amount of wealth they inherit. This makes life insurance an essential tool for anyone looking to build a legacy and leave a lasting financial impact on future generations.

Why It Matters: Reducing Tax Exposure and Accelerating Your Wealth-Building Path

Choosing the right financial strategy is about more than just accumulating wealth; it’s about keeping more of what you earn. By reducing your tax exposure, you can retain more of your money and grow it faster. Whether you’re contributing to tax-deferred retirement accounts like 401(k)s and IRAs or using tax-advantaged tools like Roth IRAs and Whole Life Insurance, every choice you make impacts your wealth-building strategy.

By taking steps to minimize taxes, you can:

• Grow your wealth faster with tax-deferred or tax-free growth.
• Access your funds without the tax burden eating into your savings.
• Leave a legacy for your heirs that is protected from taxes.

Strategies to Reduce Your Tax Burden

Reducing your tax burden is an important part of building wealth and ensuring that more of your hard-earned money stays in your pocket. In this section, we’ll explore practical tax-saving strategies that can help lower your taxable income and provide opportunities for tax-free growth. Whether you’re saving for retirement or looking to build wealth, knowing how to minimize your tax exposure is essential for financial success.

Tax Planning: Actionable Tips to Lower Your Taxable Income

There are several ways to reduce your taxable income, which can help lower the overall amount you pay in taxes. Here are a few tax planning tips you can use to your advantage:

1. Contribute to Retirement Accounts

Contributing to retirement accounts like a 401(k) or IRA can reduce your taxable income. These accounts allow you to invest money before taxes, so you don’t pay taxes on the money you contribute until you withdraw it in retirement.

• Traditional 401(k): Contributions are tax-deductible, meaning the more you contribute, the less your taxable income will be.
• IRA contributions: Similar to a 401(k), contributions to a Traditional IRA are tax-deductible, reducing your taxable income in the current year.

2. Invest in Tax-Efficient Funds

If you’re investing outside of retirement accounts, consider tax-efficient funds. These funds are designed to minimize taxable gains, meaning they generate fewer taxes when you sell them.

• Index funds: These funds tend to have lower turnover, which means fewer taxable events.
• Tax-managed funds: These are specifically designed to minimize the taxes you pay on capital gains.

3. Take Advantage of Tax Credits

Tax credits directly reduce the amount of taxes you owe. While tax deductions lower your taxable income, tax credits reduce the amount of taxes you have to pay.

• Child tax credit: A tax credit for families with children under the age of 17.
• Education tax credits: If you’re paying for education, you may qualify for tax credits like the American opportunity credit or the lifetime learning credit.

These tax-saving strategies can help reduce your taxable income today, leaving you with more money to invest and grow your wealth.

Using Life Insurance as a Tax Strategy

One of the most effective ways to reduce your tax burden and grow wealth is by using Whole Life Insurance as a tax strategy. Life insurance can offer both tax-deferred growth and tax-free withdrawals, making it a powerful tool for tax-efficient wealth building.

Whole Life Insurance: A Tax-Deferred Growth Opportunity

Whole life insurance allows the cash value of your policy to grow tax-deferred, meaning you don’t pay taxes on the growth until you access it. This makes life insurance an excellent option for long-term wealth building.

The Perpetual Wealth Strategy™: A Tax-Efficient Tool

The Perpetual Wealth Strategy™, offered by Paradigm Life, leverages Whole Life Insurance to provide you with tax-deferred growth and tax-free access to funds. You can borrow against the cash value of your policy without incurring tax penalties, giving you the flexibility to use your wealth when you need it most.

Tax-Free Death Benefit

Another advantage of Whole Life Insurance is the tax-free death benefit. When you pass away, your beneficiaries receive the death benefit without any federal income taxes. This can be a powerful tool for leaving a legacy while minimizing tax exposure for your heirs.

Other Tax-Saving Strategies: Tax Diversification and Planning

When planning for your financial future, tax diversification is key. Having a mix of tax-deferred, tax-free, and taxable accounts can help reduce your overall tax exposure. Here’s how to approach tax diversification:

1. Tax-deferred accounts: These accounts, like 401(k)s and Traditional IRAs, allow your money to grow without being taxed until you take it out. While these accounts offer immediate tax benefits, they will be taxed when you withdraw the money in retirement.
   
   
2. Tax-free accounts: Accounts like Roth IRAs and Whole Life Insurance provide tax-free growth and withdrawals. These accounts can be powerful tools for future tax-free income, especially if you expect to be in a higher tax bracket when you retire.
   
   
3. Taxable accounts: Investments in taxable accounts, like brokerage accounts, are subject to capital gains tax when you sell them. While these accounts do not offer the same tax advantages as retirement accounts, they provide flexibility and liquidity.

By balancing these different types of accounts, you can better manage your tax exposure and take advantage of the unique benefits each one provides.

The Power of Tax-Deferred Growth

One of the most significant advantages of tax-deferred growth is that it allows your wealth to compound without the drag of taxes. When you invest in tax-deferred accounts, you don’t have to pay taxes on the interest, dividends, or capital gains you earn each year. Instead, you pay taxes only when you withdraw the money.

How Compounding Works Best When Taxes Are Minimized

• Compounding is the process where your investment gains earn more gains, creating exponential growth over time.
• The more you can delay taxes, the more your investments can grow without being eaten away by taxes each year.
• With tax-deferred accounts, your money can grow at a faster rate because there is no tax burden holding it back. This means you can accumulate wealth more efficiently, accelerating your path to financial freedom.

Reviewing Your Financial Plan Regularly

At Paradigm Life, we believe that a strong financial plan is not just a one-time effort, but an ongoing process. Regularly reviewing your financial plan is essential for ensuring it stays aligned with your goals, especially as tax laws and your personal circumstances evolve. In this section, we’ll explain why it’s so important to review your financial plan regularly and how we can help you adjust your strategy to changing conditions.

Why Regular Reviews Are Crucial

Your financial plan should be a dynamic tool that evolves with you. As life changes—whether through tax law updates or shifts in your income or goals—your plan must adapt. Here’s why we recommend reviewing your financial plan at least once a year:

Stay ahead of tax law changes

Tax laws are constantly changing, and these changes can have a significant impact on your tax burden. Adjusting your plan annually ensures you’re not caught off guard by new regulations that could affect how much you owe in taxes.

• Annual review: We help you stay informed about tax changes and adjust your strategy accordingly, ensuring you take advantage of new tax breaks and opportunities.
• Tax planning: By reviewing your plan regularly, we can help you reduce your tax exposure and explore tax-saving strategies that fit your evolving financial situation.
  

Align with your changing goals

As your life and goals evolve, so should your financial plan. Whether you’re nearing retirement, buying a home, or starting a family, a regular review ensures that your strategy stays aligned with your current objectives.

• Regular check-ins allow us to make adjustments to your retirement savings or investment strategies, ensuring they match your short- and long-term goals.

Adapting Your Strategy to Changing Circumstances

Life’s circumstances are always shifting, and your financial strategy should shift with them. Whether your income changes, you move into a different tax bracket, or your goals evolve, adapting your plan is key to minimizing taxes and maximizing growth. Here’s how we help you stay flexible:

• Changes in income

As your income grows, you may move into a higher tax bracket, which can increase your tax burden. But with the right adjustments, you can minimize the impact and keep your wealth-building plan on track.

• • We help you explore options like increasing contributions to tax-deferred accounts (401(k), IRA) or exploring tax-efficient investment funds to lower your taxable income.
    

• Changes in tax bracket

Your tax bracket can shift based on your income level, and this could lead to higher taxes in the future. By reviewing your plan regularly, we can help you adjust your savings strategy to reduce your tax liabilities and keep more of your money working for you.

• • Together, we can explore ways to shift some of your investments into tax-advantaged accounts, such as Whole Life Insurance or Roth IRAs, to help reduce your taxes today and in the future.
    

• Evolving financial goals

As your life and financial priorities change, your goals might shift as well. For example, you may want to focus more on retirement savings as you get closer to retirement, or perhaps you’re planning to leave a legacy for your children.

• • We help you adapt your financial strategy to reflect these changes, ensuring that your wealth-building efforts align with your goals. Whether you’re saving for retirement or planning for the future, we’re here to adjust your strategy as needed.

Paradigm Life’s Role in Your Financial Journey

At Paradigm Life, we guide individuals and families through the complexities of financial planning, helping you adjust your strategy as life changes. With strategies like The Perpetual Wealth Strategy™, we help you minimize tax exposure and build wealth efficiently.

How We Help You:

• Tailored strategies: We create personalized financial plans that consider your unique situation, goals, and challenges. Our solutions are designed to reduce tax liabilities while maximizing wealth-building opportunities, ensuring that your plan works for the long term rather than relying on temporary tax benefits that might not align with your goals.
• Tax-advantaged tools: We use strategies like Whole Life Insurance to provide tax-deferred growth and tax-free access to funds. These tools are central to helping you minimize your tax burden and grow your wealth faster, without relying on short-term tax breaks that could disappear as tax laws change.
• Ongoing support: Your financial journey doesn’t stop once your plan is in place. We provide ongoing support and regular reviews to ensure your strategy remains aligned with your evolving needs and goals.

Regularly reviewing and adapting your financial plan is the key to achieving long-term wealth. At Paradigm Life, we help you navigate these changes and ensure your strategy remains effective, regardless of life’s challenges. 

Whether you’re looking to reduce your tax exposure, boost your retirement savings, or leave a lasting legacy for your family, we’re here to guide you every step of the way with strategies like The Perpetual Wealth Strategy™. Let us help you stay on track to achieve your financial freedom.

Taking Control of Your Financial Future

Understanding what percent of your income is going to taxes is essential for effective financial planning. By calculating your total tax burden and knowing where your money goes, you can make more informed decisions that help you build wealth and reduce unnecessary tax liabilities. Whether you’re planning for retirement or looking to protect your family’s future, the strategies you use today will impact your financial freedom tomorrow.

At Paradigm Life, we specialize in helping you minimize taxes and maximize wealth through The Perpetual Wealth Strategy™. This tax-efficient approach ensures tax-deferred growth and tax-free access to funds, helping you keep more of your hard-earned money.

Ready to take control of your financial future? Schedule a consultation with one of our Wealth Strategists today to learn how you can implement these strategies and secure a tax-efficient future for you and your family. and we’ll help you implement a strategy that will provide permanent tax savings.