Taxes and Revenue

The Federal Income

Where Does it Come From?
Where Do I Fit?

Though it may seem far off and generally unimpactful to your life, our federal income and spending decisions can substantially affect financial health. In this series of blogs, we’ll look at the importance of evaluating and planning centered on taxes and other risks to financial stability.

Not to insult anyone’s intelligence, but let’s begin by analyzing some of the basics and determining our place as individuals in the system.

Let’s consider two fundamental questions:

  1. Where Does the Federal Government Get Its Money?
  2. Where Do I Fit?

Where Does the Federal Government Get Its Money?

According to the Center on Budget and Policy Priorities, the bulk of our federal revenue is divided into three main categories: Individual income tax, Corporate income tax, and Payroll tax. The fourth category of Other (excise, estate, and other taxes) made up only 7% of total revenue in 2019.

As you can see from the graph, historically, the leading annual revenue producer is individual income taxes. It accounted for 50% of total revenue in 2019, with all other taxes accounting for 50%.

Regardless of your policy thoughts on this, I want to break down further the 50% that we, as individuals, are responsible for.

Where Do I Fit?

In November 2022, the IRS published its data on individual tax returns for Fiscal Year 2020. Starting with the grand totals, they reported nearly 157.5 million tax returns or 47.5% of the total population. They tallied a total adjusted gross income (AGI) of just over $12.5 Trillion and just over $1.7 Trillion in income tax revenue collected.

Diving further into the numbers, we can better understand where we fit, our responsibility toward society, and the system’s expectation of participation.

What Group Are You a Member Of?

Top 0.1% (AGI of $9M)

The 157,494 individuals in this group have an average adjusted gross income of just over $9M. This one-tenth of filers are responsible for over $376M in tax revenue. For perspective, according to the United States Census Bureau estimates, this group is the same size as the population of Murfreesboro, TN. While accounting for just 0.0005% of the U.S. total population, they are responsible for 22.06% of all individual income tax revenue collected, with an average tax rate of 26.55%.

Top 0.1%< to 1% (AGI of $960,000)

The remaining 1.4M+ (1,574,942 – 157,494) round out the top 1%. This 0.9% have an average annual income of just over $960,000. These nine-tenths of filers are responsible for $346M+ in tax revenue accounting for 20.26% of total income tax revenue. This group is similar in size to the estimated population of San Diego, CA, and has an average tax rate of 25.41%.

Together with the top 0.1%, the top 1% combined to generate over $722M in federal revenue accounting for 42.31% of total national income tax revenue.

Top 1%< to 10% (AGI of $241,100)

This 9% of filers are responsible for the largest total revenue collected in this breakdown. With an average adjusted gross income of just over $241,000, this group of nearly 14.2 million people contributes $31.36% of total income tax revenue. In a group whose members consider themselves upper-middle or professional class, their combined $535.6M at an average tax rate of 15.67% is essential to government continuity.

Experience has shown that members of this group can fall financially short in their golden years due to unexpected tax burdens. Often, participating in financial planning and investing, members discover their planning needs improvement when it comes to maintaining their accustomed lifestyle.

Top 10%< to 25% (AGI $112,800)

This 14% of tax filers is the only group responsible for a nearly equal 14.85% of total tax revenue collected. With an average adjusted income of $112,800, this group of 23.6M filers sent Uncle Sam almost $253.5M at an average tax rate of 9.51%.

This group of filers is very much the same as the previous group. Comprised of middle-class and upper-middle-class working professionals taking the time to evaluate both current and future financial needs can get lost in the everyday hustle of life.

Recap Top 25%

There is a graduated scale in tax rates moving from 9.51% to 26.55%. The combined taxes for the top 25% constitute 88.51% of all individual income tax collected. Reaching back to our initial look at the total revenue picture, we can assess that the top 25% (39,373,561) of filers or 8.4% of the U.S. population (essentially the population of California) is responsible for 44.25% of ALL the revenue generated by the Federal government.

Top 25%< to 50% (AGI of $60,815)

To round out the top 50%. This group constitutes 24% of filers and is responsible for 9.17% of income tax revenue. Combined with the other top 50% of filers, the total accumulated taxes result in 97.68% of the total revenue. The remaining 50% of filers were responsible for 2.32% of the revenue generated through individual income tax.

A big piece of financial planning is tax management.

Regardless of age, if you are in any of the top 50% groups of filers, it’s a good idea to talk with a financial professional. Effective financial planning can result in; an increase in wealth, a solid foundation today, and the knowledge you will have money throughout your retirement.

Whether you’re an individual, business owner, or fellow financial professional, Baker Wealth Strategies welcomes the opportunity to connect with you.

Please CLICK HERE for individuals who wish to get started with a no-fee/no-obligation strategy meeting.

If you’re a business owner looking to leverage and strengthen your personal and business finances, please CLICK HERE.

For the dedicated financial professional, we’ve found that partnering with tax professionals, accountants, and other financial professionals positively impacts firms and clients. Baker Wealth Strategies welcomes the opportunity to discuss, discover and build a mutually beneficial professional relationship. Please CLICK HERE.

Bonus

As a bonus, we want to provide you with the opportunity to view the 2018 documentary discussing our national debt. “The Power of Zero: The Tax Train is Coming” takes an in-depth look into the United States financial situation and examines where we might be heading if things don’t change.

CLICK HERE to receive a FREE code to watch this powerful look into our federal economics.

Next Week

We’ll take an introductory look at the debt and some macro elements of the Federal government’s spending. How they can affect us today and what they may result in, in the future.

Resources

Center on Budget and Policy Priorities

https://www.cbpp.org/sites/default/files/atoms/files/PolicyBasics_WhereDoFederalTaxRevsComeFrom_08-20-12.pdf

IRS Statistics

https://www.irs.gov/statistics/soi-tax-stats-individual-time-series-statistical-tables#_grp1

World Population Review

https://worldpopulationreview.com/states

United States Census Bureau

https://www.census.gov/data/tables/time-series/demo/popest/2020s-total-cities-and-towns.html