by Susan Lyon
Update: This year’s Tax Freedom Day will fall on April 18 2013 – five days later than it fell in 2012. The Tax Foundation officially defines this day as “the day when the nation as a whole has earned enough money to pay off its total tax bill for the year.”
Many predicted that this year’s Tax Freedom Day will occur later in the year – and they were right – due to the impending expiration of tax cuts and the 2% jump in social security taxes. The Tax Foundation will make its prediction at the end of March, so we’ll just have to wait and see.
Note: Tax Freedom Day is not to be confused with Tax Day, or April 15th 2013: the date by which you must file your federal taxes. This date will not change! For investors looking for help filing their 2012 tax returns, NerdWallet conducted tax prep cost comparison study, providing insights into the best software to use this year:
- H&R Block packages are significantly less expensive for investors.
- TurboTax packages provide overall better user experience for investors and receive higher customer ratings.
What does Tax Freedom Day mean for working Americans, and why does it matter?
Have you ever wondered how many workdays it takes you to pay off all of your taxes (state, federal, sales, etc.) for the year? Or rather, how many days – theoretically – you need to work in order to start earning money that is entirely your own? The answer might surprise you. On average, you typically spend three to four months working to pay off all of your tax burdens. And if placed concurrently in the calendar year, the day your taxes are paid off and you start working burden-free would most likely arrive somewhere in the month of April. Though unfortunately not a work holiday, this precise day is calculated each year and is appropriately named Tax Freedom Day.
How is Tax Freedom Day Calculated?
In the United States, Tax Freedom Day is calculated by the D.C.-based research organization, the Tax Foundation. Their approximation takes into consideration the tax burdens of the country as a whole, calculating every dollar on both the state and federal level that can be counted as a tax (reported by the Bureau of Economic Analysis), including Medicare and excise taxes. These tax collection totals are divided by every dollar considered income in the United States, and the remaining percentage is applied to the calendar. Assuming the average workday is eight hours long, a date can be determined in which the total tax debts are paid off.
How has Tax Freedom Day Changed Over Time?
Each year, Tax Freedom Day differs according to the current federal and state tax rates. The 2012 date, for example, occurred five days later than the 2011 date due primarily to a 1.5% overall tax increase (from 27.7% to 29.2%). The national percentage of tax burden has changed dramatically over time (from 5.9% in 1900 to 29.2% in 2012) but has not been entirely on the rise. For instance, 1980, 1990, 2000 and 2006 all saw a higher tax burden than 2012. The calculation of Tax Freedom Day is an effective way to gauge the average impact that taxes will have on American citizens each year, in terms of the length of time it will take the average person to pay off their taxes.
What’s the Point of Tax Freedom Day?
Tax Freedom Day has also been used as an analytical tool for observing and understanding the effectiveness of funding regional governmental programs. The Tax Foundation also reports a state-by-state Tax Freedom Day map, as well (not yet released for 2013). This allows for the breakdown of how much of state citizens’ income goes towards local governmental programs, allowing states to make decisions based on how taxes burden the lives of their citizens.
The day acts as a user-friendly metric to analyze the value of current taxation, as well as a reminder – for better or for worse – to Americans of just how much of their hard earned money is being taxed every year.
Additional Tax Day Resources: