Most people are well acquainted with Tax Day, the day when everyone’s tax returns are due. But you may be less familiar with Tax Freedom Day.
Tax Freedom Day is an important milestone for both the country and individual consumers. It is a metric used to calculate how long Americans collectively need to work to pay the country’s tax bill.
This article will explain what Tax Freedom Day is, how it’s calculated, and how it affects you in your everyday life.
How Did Tax Freedom Day Begin?
The idea of Tax Freedom Day originated with Dallas Hostetler back in 1948. Hostetler coined the phrase and calculated the date every year until 1971 when he turned the task over to the Tax Foundation.
The Tax Foundation has calculated Tax Freedom Day ever since. In 1990, it began calculating Tax Freedom Day for each state as well and has continued ever since.
What is Tax Freedom Day 2019?
This year, Tax Freedom Day fell on April 16, 2019, which means it took Americans 105 days to pay the country’s tax bill. Tax Freedom Day came a few days early this year, which is largely credited to the Tax Cuts and Jobs Act, which was passed in 2017.
This year, Americans owe $3.4 trillion in federal taxes and $1.8 trillion in state and local taxes. If you included the country’s annual federal borrowing, Tax Freedom Day would fall on May 8. Americans spend more money on taxes than they do on food or housing.
The Tax Foundation includes a graph which breaks down how many days it takes for Americans to pay each type of tax. Here is an overview of those results:
- Income taxes: 42 days
- Payroll taxes: 26 days
- Sales and excise taxes: 15 days
- Property taxes: 11 days
- Corporate income taxes: 5 days
After it’s all said and done, all that’s left is an additional six days.
How is Tax Freedom Day Calculated?
Tax Freedom Day is calculated using the number of taxes paid during the previous year. Historical trends and recent economic data are also considered in these calculations. The Tax Foundation publishes its forecast every year, usually in early April.
To calculate Tax Freedom Day, you take the country’s federal, state and local taxes then divide it by the personal income of all Americans. This works out to:
$5.29 trillion / 18.24 trillion = 0.29
This figure means that Americans spend roughly one-third of their lives working to just pay their taxes. Now you’ll take that ratio and multiply it by 365.
29% x 365 = 105.85, rounded up to 106
This means it takes Americans 106 days to meet their yearly tax obligations.
Why Does Tax Freedom Day Change Every Year?
Tax Freedom Day changes every year because the country’s total taxes and personal income fluctuates every year. It’s interesting to look at how Tax Freedom Day has changed over the last decade:
- April 13, 2009
- April 9, 2010
- April 12, 2011
- April 17, 2012
- April 18, 2013
- April 21, 2014
- April 24, 2015
- April 24, 2016
- April 23, 2017
- April 19, 2018
Tax Freedom Day came earlier from 2009 until 2011 because many people were out of work due to the recession. Economic growth slowed down so there was less taxable income to collect.
Once the economy improved and more people were back in the workforce, the tax bill went back up. Thus, Tax Freedom Day has come later in the year from 2012 on.
When is My State’s Tax Freedom Day?
Every state in the U.S. has its own Tax Freedom Day. The calculation is similar to what is used to calculate the country’s Tax Freedom Day, but it does have a few slight variations.
State with higher income and higher taxes see their tax income day fall later in the year. For instance, Alaska’s Tax Freedom Day falls on March 25. Whereas residents of New York and Washington D.C. don’t get to celebrate Tax Freedom Day until May 3.
Knowing your state’s Tax Freedom Day is useful because it can help you determine your personal and business goals when it comes to your finances. The Tax Foundation has a complete breakdown of when each state reaches Tax Freedom Day.
How Does Tax Freedom Day Affect Me?
At first glance, knowing when Tax Freedom Day falls every year may not seem that useful or important to you. But it helps you understand the role taxes play in your life and finances.
You can calculate your personal Tax Freedom Day by using the calculations outlined earlier. You’ll simply add up your state and federal tax obligations and then divide that by your adjusted gross income.
Then you’ll multiply that percentage by 365 and from there you should be able to see how long it’ll take you to pay off your tax bill. If your Tax Freedom Day falls later in the year, this means taxes are having a bigger impact on your life than you realize.
And Tax Freedom Day will be particularly relevant to you if you own a small business. If you’re a small business owner, you should calculate your business’ Tax Freedom Day and compare that to when it falls for your state.
If your business’ Tax Freedom Day falls much later in the year than it does for your state, this could be a sign that you need to adjust your accounting practices accordingly.
Tax Freedom Day is a useful way to gauge how taxes are impacting your finances. Looking at the national average is helpful but you’ll get a much better picture by looking at your individual state’s Tax Freedom Day. And of course, you can calculate this for yourself and your business.
If you do the math and realize it’s taking you too long to reach your own Tax Freedom Day, you might want to consider working with a financial advisor. They can help you figure out how to improve your personal and business finances.