Massachusetts is one of a handful of states with a flat income tax rate. For tax year 2022, people who are required to file a Massachusetts tax return will see the entirety of their taxable income charged at a flat 5% rate. Certain types of income in the Bay State, however, are subject to a different tax rate.
The 2022 tax-filing deadline in Massachusetts was April 18, 2023. If you met certain criteria and paid 80% of your total tax bill before this date, a six-month extension to Oct. 16, 2023, was automatically provided.
Starting with income earned in 2023, an additional 4% tax on income over $1 million will be levied, making the highest tax rate in the state 9%.
Massachusetts state income tax rates and tax brackets
For tax year 2022, Massachusetts’s state income tax rate is 5% on annual gross income over $8,000.
Gross income in Massachusetts includes both earned income, such as salaries, wages, tips and commissions, and unearned income, such as interest, dividends and capital gains. The exceptions to Massachusetts’ 5% tax rate are certain types of capital gains, such as short-term capital gains and gains on collectibles, which are taxed at 12%
.
Do I have to pay Massachusetts state income tax?
Anyone earning over $8,000 in Massachusetts annual gross income is required to file a state tax return.
Those earning less than this amount do not need to file a return, but they can still file a return to claim refundable tax credits.
This $8,000 income threshold is on a per-person basis, giving married couples the option to file jointly or separately.
Track your finances
A NerdWallet account is the smartest way to track your savings, credit cards, and investments together in one place.
Am I a resident for Massachusetts state income tax purposes?
Resident status rules
There are two ways to be considered a full-time resident of Massachusetts. The first is to live in Massachusetts for the entire tax year, while the second is to maintain a home in Massachusetts and spend at least 184 days of the tax year in the state.
Part-year resident status rules
Part-year residents refer to individuals who either moved to the state and became residents or moved out of the state and ended their residencies within the tax year.
Nonresident status rules
If neither of the above applies, then an individual is considered a nonresident of Massachusetts. A state tax return is still required if your Massachusetts annual gross income exceeds $8,000 or the prorated personal exemption, whichever is less
.
What is Massachusetts’ standard deduction?
Unlike other states, Massachusetts does not have a state standard deduction. Instead, state taxpayers can determine if they qualify for certain tax exemptions to reduce the amount of tax owed.
Anyone who files a Massachusetts state tax return is given a personal exemption amount based on their tax-filing status. Taxpayers may also be eligible for additional exemptions, such as those for having qualifying dependents or for having paid certain types of medical or dental costs throughout the tax year. Mass.gov has the full details.
Tax-filing status
Personal exemption amount
Married filing separately.
Head of household.
Married filing jointly.
What’s the filing deadline for my Massachusetts state income tax bill?
The filing deadline for 2022 Massachusetts state income tax returns was April 18, 2023.
To have qualified for a six-month extension, you must have paid at least 80% of the total amount of tax owed by that mid-April deadline. If you didn’t owe any taxes and didn’t file by the deadline, an extension to October was automatically granted.
The state extension deadline follows the federal extension deadline set by the IRS, which for the 2022 tax year is October 16, 2023.
Those who have been affected by a federally declared disaster automatically receive an extension for filing tax returns, paying their tax bill and filing a Massachusetts tax extension
.
4 things to know about Massachusetts state tax
Free tax-filing is available to eligible Massachusetts full-time and part-time residents through MassTaxConnect.
The Massachusetts Department of Revenue encourages taxpayers to file and pay their tax returns online. Filing can be done through a tax vendor or MassTaxConnect. Paper filing options are also available.
Massachusetts offers payment plans for people who can’t afford their tax bills. If you owe $5,000 or less, you can sign up for a plan online. People with higher tax bills should reach out to DOR collections for more information
Check the status of your Massachusetts state tax return online or by phone at 617-887-6367 Monday through Friday, 9 a.m. to 4 p.m. Eastern time.
A family trust is a trust that benefits the children, grandchildren, siblings, spouse or other family members of the person establishing the trust (grantor). Family trusts are common in estate planning to ensure certain beneficiaries receive assets when the grantor dies. They can be revocable or irrevocable.
What is the main purpose of a family trust?
The main purpose of a family trust is to ensure that certain assets pass from one family member to another
American Bar Association. Family trust. Accessed Jul 10, 2023.
. Family trusts (and trusts in general) also typically avoid the probate court process, which can be expensive, public and time-consuming. Using a family trust to avoid probate can thus help ensure that beneficiaries receive their inheritances faster and with more privacy.
Family trusts can be revocable or irrevocable.
A revocable trust allows the grantor (also known as the settlor) to make changes to the trust during his or her lifetime, such as adding funds, changing which assets are in the trust or changing beneficiaries.
Family trusts, like most trusts, have three major players:
The grantor or settlor, who creates the trust and transfers assets into it.
The trustee (or trustees), who manage(s) the trust for the beneficiary. If the trust is revocable, the grantor can also be the trustee and appoint a successor trustee in case he or she becomes unable to handle trustee responsibilities in the future.
The beneficiary (or beneficiaries), who will inherit assets or gain financially from the trust.
Best for: Ease of use. Cost: One-time fee of $159 per individual or $259 for couples. $19 annual membership fee thereafter.
Best for: Users who want an all-inclusive experience. Cost: $99 per year for Starter plan. $139 per year for Plus plan. $209 per year for All Access plan.
Best for: State-specific legal advice. Cost: $89 for Basic will plan. $99 for Comprehensive will plan. $249 for Estate Plan Bundle.
Family trust vs. living trust
The main difference between a family trust and a regular living trust is that in a family trust, all the beneficiaries are family members of the person who created the trust.
How to set up a family trust
Although some particulars vary depending on your state’s laws, setting up a family trust typically involves three steps:
Draft the family trust document. Your trust document will need to contain the names of your family beneficiaries and what each will inherit, as well as a list of the assets in the trust and the name(s) of your trustee(s).
Incorporate state rules. You can hire an estate planning attorney or use an online will maker to set up a trust. Whichever method you choose, be absolutely sure you’ve met all your state’s requirements and have the required signatures to create a valid family trust; even small errors or omissions could cause big headaches.
Fund the family trust. The grantor transfers assets — such as bank accounts, investment accounts and real estate — to the trust by retitling the assets in the name of the trust. Once transferred, these assets become the trust’s assets. Assets transferred to an irrevocable trust remove the assets from the grantor’s control in the eyes of the IRS, which could reduce estate taxes — although most estates aren’t large enough to be subject to estate tax. The federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over $12.06 million in 2022 or $12.92 million in 2023.
If you’re planning to create a family trust, you have a number of different trust types to choose from, such as:
Spendthrift trust: A spendthrift trust limits a beneficiary’s access to the trust assets according to specific terms the grantor sets. Spendthrift trusts help ensure that beneficiaries can’t squander their inheritance; they also protect trust assets from creditors
Cornell Law School Legal Information Institute. Spendthrift trust. Accessed Jul 11, 2023.
.
Testamentary trust: A testamentary trust is a trust created by the terms of your will and only funded upon your death. Beneficiaries can only access the assets at a predetermined time. Testamentary trusts can be used to give a surviving spouse an income or provide children funds once they’ve reached a certain age.
Bypass trust: A bypass trust transfers a spouse’s share of the estate to a trust at death. The surviving spouse may get income from and use the trust assets; however, the trust’s beneficiaries inherit the assets when the surviving spouse dies.
Pros and cons of family trusts
Advantages of a family trust
Including a family trust in your estate plan offers many advantages.
Avoid probate: Unlike wills, trusts typically don’t have to go through probate, and your assets transfer to beneficiaries quickly and smoothly, without the time and expense that probate involves.
Avoid a conservatorship: If you choose a successor trustee or co-trustee to manage your trust, you might be able to avoid conservatorship if you become incapacitated.
Privacy: Because you avoid probate, which is public record, what your family inherits from you via a family trust remains private.
Less vulnerability to a court challenge: Because they avoid probate, trusts tend to be more difficult to contest than wills, and because trusts are private, fewer people will know about your estate.
Flexibility: A family trust lets you decide who gets what and when. You can also help ensure that family members with functional needs don’t lose access to government benefits because of their inheritance. Additionally, if your trust is revocable, you can add or remove assets or change your beneficiaries as you see fit.
Tax planning vehicle: Certain types of family trusts can help reduce estate taxes, though most estates fall below the threshold for estate taxes. However, income over $600 generated by trust assets may be taxable
.
Disadvantages of a family trust
Family trusts also have a few disadvantages to be aware of.
Cost: Hiring an estate planning attorney to set up a family trust can be expensive. Additionally, you may have to pay court fees and compensation to your trustee.
Paperwork and complexity: Creating a trust and transferring assets can require complex paperwork and recordkeeping.
Higher tax rate: Trusts have their own tax brackets, and the threshold for the highest bracket is lower than for individuals. This means trusts might pay higher taxes on the income their assets generate.
Navigating income taxes during retirement can be complex and your golden years are a time to relax and enjoy your hard-earned cash. Your IRAs, pensions, taxable accounts and Social Security distributions create various tax implications. So, it’s vital to understand them and implement strategies to reduce your tax liability and maximize your retirement funds. You may want to speak with a financial advisor to get a more personal look at how your income will be taxed in retirement.
Federal Tax Rates for Different Types of Retirement Income
Federal tax rates vary by income type and level. It’s important to evaluate what each type of income you expect is going to look like so that you can plan for retirement. Here’s a breakdown of the most common taxes during retirement:
IRAs and 401(k)s
Traditional IRAs and 401(k)s offer tax-deferred growth, meaning you don’t pay taxes on the contributions or investment earnings until you withdraw the funds in retirement. Withdrawals from these accounts are generally taxable income. The tax rate depends on your total income, filing status and the federal income tax brackets in effect during the year of withdrawal.
On the other hand, you fund Roth IRAs and Roth 401(k)s with after-tax contributions, meaning you pay taxes on the money before it goes into the account. Qualified withdrawals from Roth accounts, including both contributions and earnings, are tax free.
Taxable Accounts
Taxable accounts, such as brokerage and savings accounts, use after-tax money. Therefore, you’ll pay taxes on any interest, dividends or capital gains earned from investments in these accounts. Specifically, interest income incurs regular income tax rates, while dividends and capital gains receive different rates depending on how long you hold the investments before selling (short-term vs. long-term).
Selling assets after holding them for less than a year creates short-term capital gains taxes, which the government treats as regular income. On the other hand, selling assets after holding them for a year or more creates long-term capital gains taxes, as seen below:
Pension Income
Monthly payments from your employer’s pension program or a private annuity will incur standard income taxes. In addition, if you opt for a one-time lump sum payment that empties your pension, you’ll owe income taxes for the entire amount.
Remember, employer pension payments come to you after having a specific amount of taxes subtracted. This feature means a large tax bill won’t wallop you when you file (provided you haven’t had an unexpected infusion of income from elsewhere that year).
Earned Income
Earned income receives standard tax rates, like many other types of income listed. However, wages from an employer or self-employment are subject to Social Security and Medicare taxes, also known as FICA. FICA taxes incur an additional 7.65% rate on income from a part-time job and 15.3% from self-employment income (you’ll receive half of that back when you file taxes).
Remember, earned income can run up against Social Security benefits if you make too much. Specifically, for 2023, earning more than $21,240 results in a $1 reduction for every $2 earned after the threshold if you’re under what the government considers full retirement age. Once you reach full retirement age, the limit changes to $56,520 and the penalty is a $1 reduction in benefits for every $3 earned.
Social Security
Social Security also receives taxation based on your income level and filing status. The Social Security Administration adds your adjusted gross income with nontaxable interest income and half of your Social Security benefits when calculating income thresholds for taxes. Then, the government charges federal income tax rates on 50% or 85% of your Social Security check.
The chart below outlines the different possible circumstances and tax rates:
Single Filers
Income
Percentage of Social Security Income Taxed
$0 – $24,999
0%
$25,000 – $34,000
50%
$34,001+
85%
Married Filing Jointly
Income
Percentage of Social Security Income Taxed
$0 – $31,999
0%
$32,000 – $44,000
50%
$44,001+
85%
Keep in mind, if you are married and choose to file a separate tax return, it is likely that you will be required to pay taxes on your benefits.
How to Minimize Your Tax Liability in Retirement
Most people have the very similar goal of trying to reduce the potential tax liability during retirement. While the income you bring in and where you live are going to play a huge role in the taxes you pay, there are some things you can do to improve your situation. In fact, the tips below can help reduce your tax burden during retirement.
1. Remember To Withdraw Your Money From Your Retirement Accounts
Once you reach the age of 73 (or 70½ if you were born before July 1, 1949), you must begin taking required minimum distributions (RMDs) from most retirement accounts, such as traditional IRAs and 401(k)s. Failing to withdraw the RMD amount results in a 25% penalty on the neglected sum plus the income tax it would have incurred.
However, if you have multiple retirement accounts, you have some flexibility in choosing which account(s) to withdraw from. By strategically planning your withdrawals, you can control the timing and amount of taxable income and optimize your tax situation.
2. Understand Your Tax Bracket
Understanding your tax bracket is crucial for retirement planning. You can minimize your tax liability by managing your taxable income to stay within a lower tax bracket. So, it’s best to use the tables above and the federal income tax brackets for the year to calculate a comfortable amount of income without exposing your money to higher rates.
3. Make Withdrawals Before You Need To
You can plan your withdrawals strategically if you have a mix of taxable and tax-advantaged accounts, such as a 401(k) and a Roth IRA. Making withdrawals from taxable accounts or tax-free accounts like Roth IRAs before you need the funds can help reduce your future RMDs and potentially lower your overall tax burden in retirement.
4. Invest in Tax-Free Bonds
Tax-free bonds, such as municipal bonds, can be an attractive investment option for retirees seeking tax efficiency. Interest income from municipal bonds is usually exempt from federal income tax and sometimes from state and local taxes.
5. Invest for the Long-Term, Not the Short-Term
Holding investments for the long term, particularly in taxable accounts, can be advantageous from a tax perspective. Specifically, when you sell investments held for more than one year, you qualify for long-term capital gains tax rates, which are typically lower than ordinary income tax rates. By avoiding frequent buying and selling, you can minimize the realization of short-term capital gains, which receive the standard federal income tax rates.
For example, say you’re a single filer with a $44,000 income. Part of that income is from capital gains. However, if the capital gains are short-term, your marginal tax bracket is 12%, while your long-term capital gains bracket is 0%.
6. Move to a Tax-Friendly State
Some states have lower or no state income taxes, which can significantly impact your overall tax burden in retirement. If feasible, consider relocating to a tax-friendly state. However, before making such a decision, it’s essential to assess various factors like cost of living, healthcare and personal preferences. Remember, the states that don’t charge personal income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
The Bottom Line
The type of income that you receive in retirement could change the way that it is taxed. Many can avoid some of this by moving to a tax-friendly state, but most people can’t avoid it entirely. It’s important to understand what your personal tax liability could potentially become and to plan accordingly so that you’re prepared for retirement when it comes.
Tips for Being More Tax-Efficient
The road to financial stability in retirement looks different for everyone. Your investment account types, medical conditions and desired lifestyle can present unique challenges but a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
For many of us, the idea of making $60,000 a year is nothing short of a dream. But what does that really mean? How much is that an hour before taxes? And after taxes? What kind of lifestyle could you afford with this income?
These are all questions we’ll explore in this article as we take a look at the average hourly wage and how it affects your annual income and after-tax income. We’ll also make necessary calculations to figure out how much you can expect to make after taxes each year, along with strategies for budgeting and saving to make the most out of your money. So if you’re curious about how far $60,000 can stretch in today’s economy, keep reading.
Table of Contents
$60000 a Year Is How Much an Hour?
Assuming you’re working a standard 40-hour week, you’d be raking in a cool $28.80 per hour.
When working 40 hours per week for 52 weeks a year, you’ll clock in 2,080 hours of work.
Divide that $60,000 salary by the 2,080 hours, and there’s your savvy $28.80 per hour rate.
That’s quite the step up from the federal minimum wage, isn’t it? Of course, your exact hourly rate could vary based on your work hours, but one thing’s for sure, you’ll be making a pretty penny.
But what if you work more or less than the standard work week?
Well, the lowest you could go while still making $60,000 a year is $6.8 per hour—albeit by working every waking (and non-waking) hour of the year, which is, let’s face it, impossible.
On the flip side, working less could bump your hourly wage up to a whopping $57.6. To earn this average wage, you would need to work 20 hours a week, which adds up to a total of 1,040 hours. However, this depends on your work schedule and other factors, such as other obligations you may have.
Earnings Disclaimer
It’s important to note that your earnings will remain constant even if you work fewer hours. Therefore, it’s essential to maximize your productivity during your designated work hours.
How Does 60K a Year Compare?
Let’s get down to the nitty-gritty of your $60,000 salary and see how it measures up. In 2023, the United States national median income is $80,893 – a sweet 3.4% jump from 2022. So, with your $60,000 paycheck, you’re actually earning 25% less than the average Joe. Fear not, though! Remember that median household income represents families, not solo earners.
If your household has more than one income earner and rakes in a collective $80,000, congrats! Your clan is pretty close to the median income party in the good ol’ US of A.
Is $28.80 a Good Hourly Rate?
Now, let’s shift gears and approach this with a more analytical lens. Earning $28.80 per hour results in an after-tax income of approximately $46,000 annually, placing an individual or a small family above the 2023 federal poverty threshold.
However, it is crucial to acknowledge that one’s location and the cost of living therein play a significant role in defining a viable salary. For urban dwellers, particularly in places like New York City, the cost of living tends to be higher than the national average.
Consequently, researching the regional costs and evaluating whether a $60,000 salary truly qualifies as a “livable wage” becomes a necessary and prudent step to take.
Is $60K a Year Worth Your Time?
While it might not make you a millionaire in NYC, this annual income can comfortably provide for a solid life in cities like Sioux Falls. All it takes is a knack for smart budgeting and cost-effective living arrangements to thrive on a 60K salary truly.
For singles enjoying solo living, $60,000 can be quite a generous budget.
However, if you have a family to provide for, you might place a higher importance on your time since you have to make sure your family’s needs are met. In the end, it is your decision whether earning $60,000 annually is worth the time you put in.
The key to thriving on this income is a spoonful of discipline in handling finances, carefully saving for retirement, and investing in experiences that enrich your life.
Remember: time is a finite resource – every hour spent on the job is an hour you won’t get back.
So find joy in what you do and make each moment count. Whether you’re a wide-eyed student trading monetary gains for the experience or a devoted family person, always remember that the optimal balance involves valuing both time and money.
How to Make More While Working Less?
Who wouldn’t want to make more money while cutting down on working hours? Guess what – it’s entirely achievable! To unlock this seemingly elusive treasure, you need to utilize your time efficiently and tap into your skills to their maximum potential. Ready to work smarter, not harder? Let’s dive in.
Obtain a High-Paying Position
As there is always room for growth, consider seeking a position offering an increased annual salary. The key to locating these jobs lies in networking within your industry and researching online job postings. An alternative approach is to employ the services of a career coach in discovering opportunities that provide better rewards for your efforts.
All of this can be improved if you focus on achieving high income skills . This includes mastering a particular trade, obtaining a higher degree of education, or investing in yourself so that your salary is more than what you currently make.
Boost Your Earnings with Passive Income
One clever way to maximize your earnings is by reinvesting a part of your salary (from that median wage of $60,000 a year) into opportunities that create passive income. This way, you can watch your bank account grow as you snooze or enjoy that long-awaited vacation without the nagging worry of federal tax.
Excited yet? Take a look at these passive income generators:
Rental properties for a steady income stream
Peer-to-peer lending, becoming the bank and collecting interest
Dividend stocks, reaping the rewards of business growth
Climb Corporate Ladder
Efficient and diligent work within your current job may open the doors for a promotion, increasing your annual earnings beyond median pay and widening your professional responsibilities.
Before taking any major steps, consult with your supervisor to gain insight into the available growth options within the company that may ultimately enhance your yearly salary.
Make Bank with Freelancing
Want more control over your schedule and your finances? Try freelancing! This side hustle lets you make some extra moolah while flexing your skills and giving you the freedom to manage your own hours. Trust us; your work-life balance will thank you.
Intrigued? Check out these freelancing side hustle gigs:
Editing, polishing ideas to perfection
Web design, making the virtual world your oyster
Graphic design, letting your creativity rake in the bucks
Bookkeeping, because everyone needs a numbers wizard
Writing, because the content is king
Remember, nearly anything you do at your 9-to-5 can also be turned into a lucrative freelance service. So go ahead, give it a shot, and earn more on your own terms.
How Does a $60,000 Annual Salary Break Down?
Biweekly Pay Breakdown
Crunching the numbers for a $ 60,000-a-year salary reveals some exciting insights about your earnings every two weeks. Picture yourself working a full-time job, clocking in 40 hours each week with no overtime. Divide that annual salary of $60,000 by the 26 bi-weekly pay periods, and you’re looking at a cool $2,307.7 in your paycheck.
But hold your horses.
Remember the saying, “Nothing’s certain but death and taxes?”
Well, your take-home pay usually ends up lesser than your biweekly paycheck, all thanks to taxes and other deductions such as income taxes, pre-tax deductions (retirement accounts, health savings bank accounts, etc.), FICA (Social Security and Medicare) taxes, state and local taxes, other miscellaneous deductions required by your employer, and health insurance premiums.
Monthly Pay
Now, what if you’re paid monthly? The anticipation of receiving your paycheck might be a tad longer, but imagine the thrill of seeing higher numbers! On a $60,000 annual salary, you’ll bag a monthly paycheck of a whopping $5,000 before taxes and deductions.
You may get paid time off and federal government holidays, depending on your company. For the average person, this means you’re effectively making more money per hour than your hourly rate implies.
How Much is $28.80 an Hour Annually?
Picture this: you make $28.80 an hour, which translates to roughly $59,904 annually. Not only are you ahead of the curve, but you’ll also be earning more than the national average of $58,563 per year, or $28.16 hourly, according to ZipRecruiter.
However, this number can fluctuate based on the total number of hours you work weekly. For instance, working 50 hours a week would increase your annual earnings to $74,880, while a 60-hour workweek would result in an impressive $89,856.
On the other hand, if you work less than 40 hours a week, your salary tapers off accordingly. A 30-hour workweek corresponds to $44,928 a year, while 20 hours of weekly commitment amounts to $29,952 per annum. Thus, it’s crucial to understand the expected work hours when considering a job that pays $28.8 an hour.
At the end of the day, it’s up to you to make the most out of your earnings and work smarter to increase your salary. Whether it’s freelancing, negotiating a higher wage, or taking on more responsibilities, there are numerous ways to increase your annual salary and take charge.
How Does Vacation Impact My Annual Salary?
Vacation offers necessary respite and rejuvenation, but it may come at the cost of impacting one’s annual salary. It is crucial to examine the effects of taking time off on one’s finances.
Paid vacation days are part of most employment contracts and would not result in a salary reduction. Conversely, for employees who must take unpaid vacation days, their annual salary may be affected.
For instance, an individual earning $60,000 annually would receive $2,307.60 bi-weekly. Should they opt for two weeks of unpaid vacation, it would reduce their annual earnings by the same amount. Furthermore, being absent from work may result in missed opportunities for raises or promotions.
Therefore, the importance of considering how vacation impacts one’s annual salary cannot be understated. A balance between taking time off and focusing on career growth should be achieved to ensure financial stability.
Notice
Please note that the salary examples provided are only meant to give you a general idea. Your actual salary will depend on your additional skills, experience, qualifications, and the number of hours you plan to work.
How Much Is $60 000 a Year After Taxes?
Tax implications on a $60,000 salary should be considered thoughtfully, and the actual take-home pay depends on various factors, including your residence. Here, we provide general calculations for residents of tax-free states (for, e.g., Florida) and states with taxes (for, e.g., New York).
For an individual living in Florida, the tax breakdown is as follows:
Annual pre-tax income:
$60,000
Deductions:
$5,968 federal income tax $3,300 FICA taxes
After-tax take-home income:
$50,732
On the other hand, a New York resident’s tax obligations would be:
Annual pre-tax income:
$60,000
Deductions:
$5,968 federal income tax, $3,300 FICA taxes $2,864 New York state tax
After-tax take-home income:
$47,868
Notice the significant difference in after-tax income due to state taxes. It’s essential to bear this in mind when calculating the final earnings from your annual salary.
State By State $60,000 a Year Salary After Taxes in 2023
Just like the federal government, each state and territory has its own tax brackets that are calculated in a similar way.
However, since each state or territory can establish its own marginal tax rates and laws regarding taxable items, the amount of taxes you pay on a $60,000 salary may differ depending on where you live. The following table shows your after-tax salary for the 2023 tax year on a $60,000 salary:
State
Average Income
Alabama
$46,607.00
Alaska
$49,442.00
Arizona
$48,061.71
Arkansas
$46,263.80
California
$47,483.87
Colorado
$47,301.23
Connecticut
$46,592.00
Delaware
$46,678.88
District of Columbia
$46,783.75
Florida
$50,732.00
Georgia
$46,429.00
Hawaii
$45,419.90
Idaho
$46,841.29
Illinois
$46,472.00
Indiana
$47,504.00
Iowa
$46,378.56
Kansas
$46,679.00
Kentucky
$46,580.50
Louisiana
$47,473.25
Maine
$46,484.63
Maryland
$46,756.13
Massachusetts
$46,442.00
Michigan
$46,892.00
Minnesota
$46,646.36
Mississippi
$46,857.00
Missouri
$47,090.06
Montana
$46,289.03
Nebraska
$46,792.90
Nevada
$49,442.00
New Hampshire
$49,442.00
New Jersey
$47,619.50
New Mexico
$47,416.05
New York
$47,868.09
North Carolina
$47,084.23
North Dakota
$48,863.12
Ohio
$48,401.64
Oklahoma
$47,082.13
Oregon
$44,660.75
Pennsylvania
$47,600.00
Rhode Island
$47,540.75
South Carolina
$46,693.40
South Dakota
$49,442.00
Tennessee
$49,442.00
Texas
$49,442.00
Utah
$46,510.46
Vermont
$47,231.98
Virginia
$46,508.25
Washington
$49,442.00
West Virginia
$46,667.00
Wisconsin
$47,194.39
Wyoming
$49,442.00
Source: Worlds Salaries
What Types of Jobs Pay $60,000 Per Year?
There are a variety of jobs that pay $60,000 per Year. Here are some examples:
Cargo pilot
Makeup artist
Real estate agent
Dental hygienist
Instrument technician
Insurance agent
Power plant operator
HVAC supervisor
Yoga Instructor
Nuclear medicine technologist
Railroad conductor
Web developer
Sales representative
Claims adjuster
Electrical foreman
Truck driver
Boilermaker
Occupational therapy assistant
MRI technician
Solar installer
Aircraft Mechanic
Physical therapist assistant
Radiation therapist
Nuclear technician
Owner-operator driver
There are numerous job opportunities available that offer an annual salary of $60,000, as shown in the provided list. You have several options to choose from if you desire a salary of this amount. However, note that the list is not exhaustive but gives a fair indication of the job positions that provide this salary.
How To Budget $60,000 a Year?
Cut Unnecessary Monthly Expenses
Regardless of an individual’s yearly income, living within one’s means should be a priority. Analyzing and adjusting budgets is an effective way to achieve this goal. Identifying and eliminating non-essential expenses can help allocate funds toward debt reduction or savings.
Potential areas for adjustments include:
Gym memberships
Entertainment expenses
Subscription services (magazines, music, etc.)
Frequency of dining out
Cable TV subscriptions
Clothing purchases
Travel expenditures
There could be more that can be reduced or eliminated to ensure proper budgeting of $60,000 a year.
Save for Retirement Early
The earliest you start saving for retirement, the better. Consider starting an IRA or contributing to a 401(k), especially while your income is still relatively high and you can benefit from the employer match. If your employer offers a 401(k) plan, setting aside just 10% of your annual salary (or $6,000 if you make $60,000 a year) can go a long way toward reaching retirement goals.
Avoid High Car Payments
Owning a set of wheels doesn’t have to equate to draining your wallet. Did you know the average monthly loan payment for a new car in the U.S. is almost $600, which represents more than 10% of a $60,000 annual income?
Keep in mind this figure doesn’t even include insurance, fuel, or maintenance costs. Try out these savvy strategies to stay car payment-free:
Opt for a pre-owned vehicle
Select a smaller, more economical car
Purchase a used car with cash
Avoid Credit Card Debt
Using credit cards to fund your lifestyle is a common mistake that can easily lead to debt. A way to avoid credit card debt is by limiting your credit card usage to expenses that you can pay off fully every month. If you can’t afford to pay your credit card bill each month fully, it’s crucial to reassess your spending habits.
Sample Budget For Individuals Earning $60,000 Per Year
If you want to understand better living on a $60,000 salary, consider comparing it to your monthly expenses. As an example, here’s a budget for someone earning $60k per year, which may be helpful.
Category
Monthly Amount
House Rent
$2,200
Utilities (electricity, water, etc.)
$200
Internet/Cable
$100
Transportation
$300
Insurance (car, health, etc.)
$400
Groceries
$400
Dining Out
$200
Entertainment
$100
Clothing
$200
Personal Care
$200
Emergency Fund
$200
Retirement Savings
$500
Total
$5,000
Note: This budget prioritizes basic expenses and avoids debt.
Final Thoughts on a 60K a Year Salary
Yearly salaries can be quite the conversation starter. They’re different everywhere you go, and they’re unique to each individual and profession. A 60K salary might be considered modest in certain corners of the world, while in other places, it’s a pretty sweet deal.
Just imagine living in the bustling metropolis of New York City – you’d need almost twice that amount to make ends meet! But set foot in rural Mississippi, and you’ll find that life on a 60K income can be quite lavish. To live your best life on a $60,000 salary, you only need a bit of financial savvy:
Live beneath your means.
Keep an eye on your expenditures.
Always invest in yourself and your future.
So, what do you think – could you make it on 60K a year? Share your thoughts in the comments below.
Inside: Are you confused about how gross pay and net pay are calculated? This guide will clear everything up. Learn about the different deductions that are taken from your paycheck, as well as the tax rates that apply to your gross pay.
This is one of the most confusing questions for many people.
So, if you are wondering what the difference between gross pay and net pay, you are in the right place.
In order to become financially stable, you need to have a tiny amount of financial literacy.
If you’re like most people, you probably think of your “gross pay” as the amount of money you make before taxes are taken out. But in reality, gross pay is your total compensation from your employer before any deductions are made.
So what is “net pay,” then? Net pay is the amount of money that actually goes into your bank account or paycheck after all of those deductions are made.
Now you want to which one is more important between gross pay and net pay.
The answer is: it depends! If you’re trying to save money or make a budget, then net pay is probably more important to you. But if you’re trying to figure out how much taxes you’ll owe at the
We will dive into all of the details, you will not ever be confused again.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
What is gross pay?
Gross pay is the total amount of money earned by an employee before any taxes or deductions are taken out. It’s important to know your gross pay as it determines your overall income and can impact your taxes and benefits.
This is the total amount paid by your employer.
Knowing your gross pay is crucial for financial planning and paying taxes.
How can I calculate my gross pay?
To calculate gross pay, you need to know your hourly wage or salary, any overtime pay, bonuses, and additional reimbursements for work-related expenses.
For hourly workers, multiply the hourly wage by the number of regular hours worked within a pay period and include the overtime pay rate for any extra hours.
For salaried workers, multiply the gross monthly income by 12 to find the annual gross salary.
To calculate a paycheck, start with the annual salary amount and divide it by the number of pay periods in the year.
Find out 5000 a month is how much a year.
What deductions are taken out of gross pay?
Gross pay refers to the total amount of money an employee earns before any deductions are taken out.
As such, there are no deductions.
Learn what is annual income.
How are taxes calculated on gross pay?
Gross pay is the amount an employee earns before taxes and deductions are taken out by their employer.
Understanding taxes on gross pay is essential, as it affects an employee’s take-home pay and tax liability.
Taxes that are deducted from gross pay include FICA payroll taxes, federal and state income tax withholding, along with any state-mandated programs like this Colorado Paid Sick Leave.
To calculate taxes on gross pay, an employer uses a formula that subtracts all taxes and deductions from the gross pay amount. Learn how much you should withhold on your taxes.
Common issues that may arise during tax calculation include incorrect tax withholding and not considering voluntary pre-tax deductions. Understand why do I owe taxes this year.
Wealth Building and Tax Reduction Secrets from an IRS Insider
The ninth edition shows you how to save thousands of dollars―legally and ethically!―during tax time.
It offers proven methods for taking advantage of the tax system to get a yearly subsidy of $5,000 or more back from the IRS―and bulletproof your records forever.
How to Build Massive Wealth by Permanently Lowering Your Taxes
For U.S. taxpayers, you will find helpful tips in this new edition to help you apply the new tax incentives to your situation.
Tax breaks are not only for the rich. It is for everybody! You just have to take time and learn it.
What is net pay?
Net pay refers to the amount of money an employee takes home after all deductions and taxes have been taken out of their gross pay.
This is the money left over that you can spend, save, and invest.
Thus, you will be able to budget by paycheck like a pro!
How to calculate net pay?
Calculating net pay is crucial for accurate and compliant payroll management.
Here is a step-by-step guide on how to calculate net pay:
Determine the gross pay based on hours worked or salary divided by the number of pay periods in the year.
Subtract mandatory deductions, including health insurance premiums, federal, state, and local income taxes, payroll taxes, and court-ordered wage attachments.
Subtract voluntary deductions, such as employee contributions to a 401(k) or other retirement plan as well as any flexible spending account.
The resulting amount is the employee’s net pay.
Learn about annual net income.
What deductions are taken out of net pay?
Net pay refers to the amount of money an individual receives after taxes and other necessary deductions have been subtracted from their gross pay.
It is a crucial factor in determining an individual’s income, as it represents the actual amount of money they take home.
There are various deductions that are commonly taken out of net pay, including mandatory and voluntary deductions.
Mandatory deductions are made in accordance with the law, while voluntary deductions are ones that employees have the freedom to opt out of.
The mandatory deductions include:
Federal, state, and local income taxes
Social security taxes
Medicare taxes
Local state or municipal taxes
Other common voluntary deductions from gross pay include:
Health insurance premiums (if signed up on a company plan)
Retirement contributions
Health savings account contributions
Flexible spending account contributions
Dependent Care FSA
Is gross before or after taxes?
Gross pay is BEFORE taxes.
Gross pay is the amount earned before taxes and other deductions are taken out. Taxes are then calculated based on the gross pay amount and deducted to arrive at the net pay. This means that gross pay is always before taxes.
Understanding the difference between gross pay and net pay is important to effectively manage finances.
Gross pay may seem like a large amount, but it is important to consider the impact of taxes and other deductions on the final amount received.
What is the difference between gross pay and net pay?
Gross pay and net pay are two important terms that employers and employees should understand.
Gross pay refers to an employee’s total earnings before any deductions are taken out, while net pay is the amount an employee takes home after deductions such as taxes, benefits, and garnishments have been subtracted.
Here are some key differences between gross pay and net pay:
Gross pay includes all earnings, such as wages, salary, reimbursements, commissions, and bonuses, while net pay is the actual amount of the paycheck after deductions.
Employers are responsible for deducting necessary expenses from an employee’s paycheck and making payments to the appropriate accounts before issuing the check or depositing the net pay into the employee’s bank account.
Gross income determines an individual’s federal income tax bracket and borrowing capacity, while net pay presents disposable income.
When budgeting for the year, starting with gross wages requires subtracting the total of taxes and other deductions to compute the actual amount left to spend from each paycheck.
Understanding the difference between gross pay and net pay is crucial for effective budgeting and financial planning.
Employers must ensure proper employee taxes are collected and paid to the government, while employees need to know their take-home pay to manage their expenses.
How do gross pay and net pay work?
Gross pay and net pay are two important terms in the payroll world that employees should understand to manage their finances effectively.
Gross pay is the total amount of pay while net pay is the amount of money you have to spend each month.
Understanding the difference between gross and net pay can help employees and employers avoid confusion and manage their finances better.
What is better gross pay or net pay?
One term is not “better” than the other as they each have different meanings.
When you increase your gross pay, your net pay will rise as well.
Here is how to use gross pay to your advantage:
Provides a clear understanding of the employee’s total compensation
Helps employees plan for future expenses
Can be used as a basis for negotiating salary increases
Figure out the amount of taxes you are required to pay.
Here is how to use net pay to your advantage:
Reflects the employee’s actual take-home pay
Helps employees budget for their expenses
Provides a clear understanding of the impact of deductions on their pay
Can be difficult to compare with other job offers that list gross pay
Overall, net pay is better for employees as it reflects their actual take-home pay and helps them budget for their expenses.
However, it’s important for employees to understand both gross pay and net pay to make informed decisions about their compensation.
Why do you receive more gross pay than net pay in your paycheck?
Employees receive more gross pay than net pay in their paychecks because gross pay is the total amount of money an employee earns before any deductions are taken out.
This includes an employee’s salary, wages, commissions, and bonuses.
On the other hand, net pay is the actual amount of money an employee takes home after taxes, benefits, and other mandatory deductions have been subtracted from their gross pay. These deductions can include federal and state taxes, Social Security contributions, health insurance premiums, and retirement plan contributions.
Therefore, employees receive more gross pay than net pay.
Learn is social security disability income taxable.
FAQs
Overtime wages are included in gross pay when an employee works more than their regular hours and earns additional compensation for the extra hours worked.
This is the case for nonexempt employees who are entitled to overtime pay under federal or state law.
Net income is the take-home pay or the money that you earn on payday, which is why it may be best to focus on that number when creating a budget.
This number helps you determine how much you have to spend, save, or invest.
By tracking your expenses and using budgeting techniques like budgeting with percentages or the 50/30/20 rule, you can manage your finances effectively and make the most out of your net income.
Remember, creating a budget is about being realistic and disciplined with your spending habits, so make sure to adjust your budget accordingly as your income or expenses change.
The tax rates for gross pay depend on the specific taxes being withheld, such as federal income tax, Social Security tax, and Medicare tax.
Federal income tax rates vary depending on the employee’s income level and filing status, with higher earners generally paying a higher percentage of their gross pay in taxes. Click here for the latest federal income tax brackets.
Social Security tax is a flat rate of 6.2% for the employee on the first $$160,200 of gross pay earned. Your employer must match the same contribution. (source)
Medicare tax is a flat rate of 1.45% on all gross pay with the employer matching the same percentage, with an additional 0.9% tax for high earners. (source)
Employees need to understand their tax liability based on their gross pay to accurately calculate their net pay and avoid any surprises come tax time.
Now, you Know the Difference between Gross and Net Pay
Understanding deductions and their impact on net pay is crucial for employees to accurately budget and plan their finances.
Since you know the difference between gross and net pay, you can make sure that you are getting the right amount of money in your paycheck.
Be sure to check your pay stubs carefully to make sure that all of the deductions are correct. If you have any questions, be sure to ask your human resources department.
Know someone else that needs this, too? Then, please share!!
Pretax money is invested before any taxes have been deducted, while after-tax money is invested after taxes have been deducted. Investments in tax-deferred retirement accounts such as IRAs and 401(k)s are made pretax, which means there is a larger sum of money to invest. While applying taxes reduces the amount of money available to invest, sometimes after-tax investment vehicles such as Roth IRAs can produce better overall returns because, unlike pretax accounts, withdrawals from these after-tax accounts can be made without owing taxes. A financial advisor can help you evaluate after-tax and pretax investment options.
Pretax vs. After-Tax Basics
The terms “pretax” and “after-tax” when applied to income, expenses or contributions tell you whether taxes have been applied to the amount. Wages, for example, are normally after-tax, because the employer withholds taxes before handing out paychecks. Contributions to Roth-type retirement accounts and regular brokerage and bank accounts are also made after tax.
Many people save for retirement pretax by contributing money to IRAs and similar tax-advantaged accounts. These funds can be placed in a retirement account before any income taxes are levied. When you are preparing your tax return, any money you put into an IRA, for instance, is deducted from your total taxable earnings, which generally reduces your total tax liability.
Comparing Pretax and After-Tax
Investing money before taxes have been levied means you’ll be investing more than you would if you did it after paying taxes. And, all else equal, investing a larger sum means earning more from your investment. This simple rule of thumb underlies much of the popularity of saving for retirement pretax using IRAs and similar tax-advantaged accounts. If people could only save after-tax dollars in ordinary bank or brokerage accounts, there would be less incentive to sock away money in these accounts.
However, pretax is not always the best. Sums invested pretax in IRAs and similar retirement don’t completely evade taxation. Taxes on contributions as well as any earnings from investments in the account are only deferred. Savers will owe taxes later, at their then-current rate of taxation, when they withdraw funds from the account.
If the individual’s tax rate is lower in retirement, pretax investing can be advantageous. However, if you earn a lot of income over your career and have a large retirement nest egg, your required minimum distributions and other sources of income could mean your income and tax bracket are higher after you’ve retired than when you put money away pretax.
If an individual’s tax rate will be higher in retirement than it is at the time the investment was made, it can be better to invest after-tax in a Roth-type retirement account. This can work well for younger people just starting their careers before their earnings increase enough to put them in higher income-tax brackets. After paying taxes a relatively low rate when contributing, funds in these accounts grow tax-free and can be withdrawn later without owing any taxes.
Choosing Pretax or After-Tax
Deciding whether to invest pretax or after-tax requires considering your individual situation. Examine the following factors:
Account for investment returns: Start by looking at the expected rate of return on your investments.
Understand how taxes are applied: Capital gains on stocks held more than a year generally are taxed at a lower rate than ordinary income such as interest on bonds. Considering tax treatment of different types of income can help you decide on an after-tax or pretax investment.
Calculate returns after all taxes are applied: Roth IRA or Roth 401(k) withdrawals won’t incur taxes as long as the investor is age 59.5 or older and has had the account for at least five years. For pretax investments, it’s necessary to apply taxes to any sums withdrawn from the accounts before you can estimate the actual return. For instance, if you withdraw $10,000 from a pretax investment and are in a 25% tax rate in retirement, the amount left after taxes would be 75% of $10,000 or $7,500. Money invested in a regular brokerage account with no tax advantages has to pay any taxes due on the money before it’s invested as well as on earnings but as they are earned. However, withdrawing money from a regular account doesn’t usually trigger any additional taxes.
Compare post-tax and after-tax: For example, if you want to invest $10,000 in an after-tax account and you are in a 25% tax bracket, you’ll have to earn approximately $13,333 and pay $3,333 in taxes in order to have $10,000 available to invest. If that $10,000 earns 5% annually for 10 years, it will be worth $16,289. You can withdraw all of it without owing taxes after age 59.5 if the account is at least five years old.
Say instead you invest $13,333 in a pretax account, also 5%. After 10 years, you’ll have $21,718. If you withdraw the full amount and your rate is still 25%, you’ll owe $5,429 in taxes and be left with the same $16,289 as you got with the after-tax investment.
If, however, during the interim you have retired and your tax rate has dropped to 15%, you’ll only owe about $3,258 on emptying the pretax account. This will leave about $18,641. In this case, the pretax investment produces a larger return net of taxes.
If you are in the 15% bracket when you fund an after-tax investment and are in the 25% percent bracket when you retire, the situation is reversed. In that case, you’d need about $11,765 to have $10,000 to invest after tax. Again, you’d wind up with $16,289, which you can withdraw tax-free.
Investing $11,765 pretax at 5% gives you $19,164 after 10 years. a sizable increase. If you withdraw that amount when you are in the 25% bracket, however, your nominal tax liability will be $4,791, leaving you just $14,373. In this case, the after-tax investment generates a better overall result by about $1,916, which is the difference between $14,373 from the pretax method and $16,289 using an after-tax approach.
The Bottom Line
You can invest pretax before taxes are levied or after-tax after taxes have been applied. Pretax investing and after-tax investing both have advantages and drawbacks. Whether it is advisable to invest pretax or after-tax depends on individual circumstances, including whether you expect to be in a higher or lower tax bracket when you withdraw funds.
Investment Tips
Deciding whether to invest pretax or after-tax requires you to understand your tax situation and financial goals. A financial advisor is well-equipped to help you do just that. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s Investment & Return Calculator can make it much simpler to compare the relative advantages of after-tax and pretax investing.
Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
Most income taxes in the United States are paid by the people with the most income. That is in keeping with the generally progressive nature of the individual federal income tax, the primary source of government revenues, which applies higher tax rates to higher incomes. However, some taxes fall more heavily on people with less income, while the most affluent of all can sometimes pay little or no income tax. A financial advisor can help you plan to manage your taxes.
The Biggest Taxpayers
The biggest source of tax revenue in the United States is the federal individual income tax and the biggest source of individual income tax revenues consists of the nation’s highest earners. In 2023, according to an estimate of the Tax Policy Center, 67% of all federal income tax collected will come from the top 20% of earnings, who were bringing home more than $189,200 annually. The situation where a small minority of high earners pay most of the individual income taxes has remained steady for many years.
Beyond that, figuring out who pays the most total taxes in the United States is complicated by the fact that there are many types of taxes. Federal individual income taxes levied on earnings from working and investing is just one variety, albeit the most important.
Payroll taxes supporting Social Security, Medicare and unemployment benefits are the second-largest source of federal tax revenues. Employers deduct these Federal Insurance Contributions Act (FICA) taxes from workers’ paychecks.
Other taxes include corporate income taxes, estate taxes, gift taxes and customs duties. Excise taxes are assessed on gasoline, alcohol, gambling and some other products and services. These taxes land more or less heavily on different taxpayers. For example, lower-income workers pay a larger percentage of their incomes in payroll taxes than higher-income workers thanks to the cap on income subject to Social Security taxes.
The capital gains tax is a special tax imposed on certain types of investment income that is in lieu of and generally lower than the individual income tax rates. Capital gains taxes are mostly paid by people who have more assets, while people with few assets may pay little or no capital gains tax. Similarly, property taxes, which are the major source of revenue for state and local governments, are only levied on the owners of property such as real estate.
Factors Influencing Who Pays the Most Taxes
A number of factors determine how much someone pays in federal income tax. The interplay between these factors and taxpayers’ efforts to save on taxes while conforming to the tax law, is largely responsible for the complexity of tax planning and preparing tax returns. Here are some of the major considerations.
Taxable income: As your income rises, you move into a higher tax bracket, which means more of your income goes to taxes.
Filing status: Tax rates vary depending on whether you are filing as a single individual, a married couple filing jointly, a married couple filings separately or as a head of household.
Adjustments to income. Retirement plan contributions, student loan interest payments and some other outlays can reduce your taxable income and your taxes.
Exemptions: Taxpayers can further reduce income by claiming exemptions, including dependency exemptions for their children.
Deductions: Yet another way to reduce taxable income is by claiming deductions. In addition to the standard deduction, you may be able to claim deductions for medical expenses, charitable contributions, home mortgage interest and other costs.
Tax credits: Credits for education and energy conservation, among other categories, can not only reduce your taxes but result in the government sending you a check.
Managing your tax liability consists largely of working with these factors. For example, if you have an unusual amount of income in one year, you may be able to use averaging to spread the income among different taxable years, keeping you from moving into a higher tax bracket.
Using the capital gains tax to reduce income taxes is also important. If you have assets that have appreciated in value, you could be subject to a large capital gains tax bill when you sell them. On the other hand, if you never sell them, you may be able to pass them on to your heirs without ever paying any income tax on your increased wealth. Very affluent taxpayers can pay their bills while avoiding income and other taxes by a number of other means, including pledging their assets as collateral for loans, the proceeds of which are not taxable.
The Bottom Line
The people with the highest incomes generally pay the highest taxes in the United States, thanks to the generally progressive individual income tax system used by the federal government. There are some exceptions to this type of policy, as very wealthy individuals can find ways to reduce their taxes – sometimes paying none at all – by making the most of so-called loopholes in the tax code. However, as a rule, the top 20% of earners pay more income taxes than the rest of the tax-paying population put together.
Tax Tips
Managing and reducing the amount of taxes you pay can benefit from the assistance of a financial advisor. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s Federal Income Tax Calculator can help you break down your tax obligations including the total tax as well as the type of tax and your marginal and effective tax rates.
Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
Ultimately, retirement planning is like a math equation — you input several variables and estimate whether what you’ll have will pay for what you will need in retirement. The challenge is that many of the variables are future values that are unknowable today.
But that doesn’t mean you can’t make some educated guesses. So let’s examine the “what you’ll need” part of the equation — that is, how much the retired life will cost you each year — to see if we make the murky crystal ball any clearer.
How much do retirees need?
The standard rule of thumb is that retirees need 70 to 80 percent of their pre-retirement income. Fortunately, we can examine how spending changes as we age by looking at the Consumer Expenditure Survey that is produced every year by the U.S. Bureau of Labor Statistics. That can help us figure out if this 70-to-80-percent estimate has any basis in reality.
The following table highlights average income and expenditures of households led by people in different age groups. (I selected particular categories from the much larger Consumer Expenditure Survey.)
EXPENSE ITEMS
AGE 25-34
AGE 35-44
AGE 45-54
AGE 55-64
AGE 65-74
AGE 75+
Income before taxes
$59,613
$76,128
$79,589
$68,906
$49,711
$31,782
Avg. number of persons per household
2.9
3.3
2.8
2.2
1.9
1.6
Average annual expenditures
$46,617
$55,946
$57,788
$50,900
$41,434
$31,529
Food at home
$3,338
$4,255
$4,369
$3,681
$3,213
$2,643
Food away from home
$2,753
$3,227
$2,861
$2,387
$1,935
$1,230
Housing
$16,845
$20,041
$18,900
$16,673
$14,420
$11,421
Apparel and services
$2,087
$2,040
$1,966
$1,571
$1,186
$708
Transportation
$8,231
$8,763
$9,255
$8,111
$6,086
$4,288
Health care
$1,800
$2,583
$3,261
$3,859
$4,922
$4,754
Entertainment
$2,251
$3,058
$3,088
$2,683
$2,341
$1,374
Reading
$61
$80
$104
$126
$147
$135
Education
$839
$963
$2,094
$917
$240
$140
Pensions and Social Security
$5,151
$6,664
$7,227
$5,932
$2,261
$763
Personal taxes
$1,055
$1,992
$3,323
$2,295
$1,116
$144
Factors that reduce living expenses among retirees
As you study the table, you notice that expenditures peak somewhere between age 45 and 54 — then they gradually decline. Here are some of the reasons that drive the trend:
Fewer people under the roof. Eventually, kids leave the house and you wind up spending less money on food, utilities, education, and Febreze. Also — and this is the sad part — a spouse will pass away. When a two-person household goes down to a one-person household, expenses drop by approximately 30 percent.
We eat less as we age. As our metabolisms slow down, so does our need for calories. Another unfortunate reason some older people eat less is that they find it more difficult to go shopping and to cook meals.
The mortgage eventually gets paid off. Roughly 55 percent of households in the 45-to-54 age group have a mortgage, whereas just 13% of the 75-and-older group still have that monthly payment.
We just slow down. As we age, we spend less on entertainment, clothes, travel, and other semi-discretionary expenses. As a writer and former English teacher who is married to a writer, I was heartened to see that expenditures on reading generally increase as we age, with just a slight dip after age 75.
We don’t save for retirement forever. Once you retire, you’ll stop paying the 7.65 percent FICA tax that pays for Social Security and Medicare (15.3 percent if you’re self-employed) and you’ll stop contributing to your 401(k)s, IRAs, and other savings vehicles. This alone could shave 15 percent to 25 percent off your pre-retirement expenses.
Uncle Sam likes older people. Senior citizens pay much less in taxes, for several reasons: They receive a higher standard deduction, most Social Security is not taxed, and other sources of income — such as qualified dividends, municipal bond interest, and long-term capital gains — are taxed at lower rates than ordinary income. Plus, as you can see from the first row in the table above, income declines as we age, which puts most older people in the bottom two tax brackets.
Not every expense decreases as we age — notably, health care costs increase. Also, there’s a legitimate question about whether senior spending declines out of choice or necessity — i.e., retirees would spend more if they had more. However, for many of the categories, the spending declines are the logical result of getting older and not working anymore. Thus, on the whole, the evidence indicates that the old rule of thumb that you’ll need 70 percent to 80 percent of your pre-retirement income in retirement has its foundation in reality.
How to translate statistics to your retirement plans
However, while the average retiree spends less than the average 50-year-old, this is not the case for every retiree. Many spend quite a bit more, especially in the first few years of retirement, as they fill their newfound free time with travel, hobbies, classes, and other forms of recreation. Others see their income needs drop to half of their pre-retirement income. So when it comes to your own financial planning, especially once you’re within a decade of retirement, it’s important to look at and refine your budget, estimating how much you’ll actually need after you kiss the working world good-bye.
By Mike Piper8 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 10, 2014.
People often ask me to point them to a decent online retirement planning calculator. I never do.
You see, I don’t trust such calculators.
It’s not that their math is wrong. (At least, not usually.) The problem is that their calculations are often based on shoddy assumptions and unknowable variables.
You Know What They Say about Assuming…
For example, what rate of return does the calculator assume for your portfolio? Is it reasonable? Or, perhaps, was the calculator programmed to assume that future returns will equal past returns (thereby ignoring the possibility that the U.S. economy won’t have the same explosive growth over the next century that it did over the last)?
And what assumptions does the calculator make about future tax rates? From what I’ve seen, most calculators assume that either:
All income will be taxed at a flat rate (usually 25% or 28%), or
Tax brackets will continue to look the same as the 2013 tax brackets all the way into the future.
While I certainly don’t know what tax rates will look like three decades from now, I doubt that either of one of those assumptions will turn out to be correct.
And does the calculator account for sequence of returns risk? A portfolio averaging a 5% annual return is very different from earning a 5% return every year. If the calculator doesn’t account for that fact, it’s going to significantly underestimate the amount of money you’ll need to retire safely.
What’s Better than an Online Calculator?
If you’ve taken the time to educate yourself about investing, then you probably don’t need an online calculator. A simple excel spreadsheet will function at least as well. (And you get to choose your own assumptions!)
Alternatively, if you haven’t taken the time to learn about investing, there’s no way for you to judge whether the assumptions that went into the calculator’s projections are reasonable.
In other words, there are two routes you can take:
If you want to be a do-it-yourself investor, super. But rather than rely on online calculators, you’ll need a deeper level of understanding if you want to be successful.
If you don’t want to go it alone, that’s fine too. But in that case, an online calculator isn’t what you need. What you need is a qualified financial advisor.
In my opinion, such calculators are only useful for young investors who are so far away from retirement that none of the relevant variables are known yet. In other words, a completely blind guess from a calculator is almost as good as one from an advisor.
About the Author: Mike Piper writes at Oblivious Investor, where he provides plain-English explanations of topics like Roth IRA rules and 401k rollovers.
Government officials can’t predict exactly when inflation will go down, but representatives of the International Monetary Fund expect the U.S. inflation rate to reach its 2 percent target by the end of 2023.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Consumers around the world are currently grappling with rising costs, making many people wonder how long this high rate of inflation is going to last. Although the U.S. inflation rate has nearly quadrupled since 2020, inflation is even worse in other countries. In Israel, for example, the inflation rate has increased by 25 times in the last two years.
When inflation is high, consumers have less purchasing power, making it more difficult to afford housing, food, utilities and other necessities. Some consumers have even changed their spending habits to account for rising costs. So, how long will inflation last? No one knows for sure, but it’s possible to make an educated guess based on what the Federal Reserve is currently doing to reduce spending.
What is inflation, and how does it work?
The Federal Reserve defines inflation as an increase in the overall price level of an economy’s products and services. This refers to a general increase in prices, not an increase in a single product or service category. For example, it’s possible for the cost of dairy products to increase without the rate of inflation increasing.
When inflation is high, many consumers have less purchasing power. This is because their income doesn’t buy as many products and services as it did when inflation was low. Inflation also has a negative impact on banks that loan money at fixed interest rates. If a bank makes a loan at 6 percent interest, an inflation rate of 7 percent would reduce its real income, or the amount of money it earns after taking inflation into account.
In the United States, the Consumer Price Index (CPI) helps estimate inflation by tracking the average change of prices over time. This index doesn’t include the price of every good or service. Instead, it uses a market basket of goods and services typically purchased by consumers in urban and metropolitan areas. In July 2022, the U.S. Bureau of Labor Statistics reported that the CPI rose by 1.3 percent in June, bringing the total increase for the last 12 months to 9.1 percent.
Why is inflation so high right now?
Although many Americans are feeling the pinch of higher prices, inflation is a global problem. In response to the COVID-19 pandemic, government officials around the world implemented mandatory lockdowns to prevent the spread of the disease. With so many businesses closed, the demand for goods and services declined.
Once businesses started reopening, demand soared. With the unemployment rate falling to 3.5 percent in July 2022, job seekers have more bargaining power, driving up wages and giving many consumers more money to spend on goods and services. Consumers also saved more money than usual in 2021 due to concerns over how the ongoing pandemic would affect their finances.
Although demand has increased, many companies are unable to fill orders due to manufacturing and shipping backlogs associated with the pandemic. When demand exceeds supply, firms increase their prices, contributing to higher rates of inflation.
Finally, many consumers are spending more on services than goods, increasing demand in the service sector. As a result, it now costs more to rent an apartment, dine at a restaurant or hire someone to perform housekeeping or landscaping services.
The government’s response to inflation
The Federal Reserve is currently implementing contractionary monetary policy to reduce demand and give the economy a chance to cool off. This involves raising interest rates to decrease consumer spending and business-related investment spending.
The Biden-Harris administration is also focused on lowering costs for low-income and middle-class families. President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022, and this act aims to reduce energy costs and make healthcare more affordable for Americans.
Because the current inflation rate is associated with high levels of demand, there isn’t much more the federal government can do to bring prices down. The plan is to continue raising rates until the inflation rate returns to 2 percent.
When will inflation go down?
Government officials can’t predict exactly when inflation will go down, but representatives of the International Monetary Fund expect the U.S. inflation rate to reach its 2 percent target by the end of 2023. To reach this target, analysts believe the Federal Reserve will need to raise rates by another 2 to 2.5 percent before then.
Are we in a recession?
Although government officials, consumers and business owners are concerned about the prospect of a recession, the United States hasn’t entered a true recession yet. A recession is characterized by rising levels of unemployment, lower retail sales and negative growth of the gross domestic product (GDP), among other factors.
In July 2022, the Bureau of Economic Analysis reported that the U.S. GDP declined by 1.6 percent in the first quarter of the year and 0.9 percent in the second quarter. Although GDP declined, retail sales increased by 1 percent between May and June 2022. The unemployment rate also fell from 5.4 percent in July 2021 to 3.5 percent in 2022. Therefore, the United States doesn’t yet meet all the criteria for an economic recession.
Where is inflation the worst in the United States?
In the United States, cities tend to have higher inflation rates than suburbs and rural areas, due in part to their higher housing costs. On July 13, 2022, Bloomberg reported that several American cities had crossed the 10 percent mark. Urban Alaska is at 12.4 percent, the Phoenix-Mesa-Scottsdale metro area in Arizona is at 12.3 percent and the Atlanta-Sandy Springs-Roswell metro area in Georgia is at 11.5 percent. Baltimore, Seattle, Houston and Miami also have inflation rates above 10 percent.
Inflation isn’t quite as bad in the New York-Newark-Jersey City metropolitan area, which had a 6.7 percent inflation rate in June 2022. Overall, inflation tends to be higher in the South and Midwest regions than it is in the Northeast region of the United States.
How will inflation affect my 2022 and 2023 taxes?
Take a look at the top ways your upcoming taxes might be affected by inflation.
Taxable income
Federal tax brackets are adjusted for inflation, which means you may drop to a lower tax bracket in 2022 even if your income doesn’t decrease. If high rates of inflation persist, you may get the same tax benefit when you file your 2023 return.
The standard deduction is also adjusted for inflation, so high inflation rates may help you reduce your taxable income even more than in previous years. In 2021, the standard deduction for a single filer was $12,550; for the 2022 tax year, it’s $12,950. If the economy doesn’t cool down quickly, the standard deduction may be even higher in 2023.
Health savings accounts
The annual HSA contribution limit is adjusted for inflation, so high rates of inflation allow you to put aside more money for medical expenses each year. The limits have already been increased for 2022, allowing individuals to contribute $3,650 per year and families to contribute $7,300 per year. In 2023, the limits will increase even more, to $3,850 for individuals and $7,750 for families.
HSA contributions are deducted on a pre-tax basis, so higher contribution limits may leave you with less taxable income, reducing your tax burden.
Retirement contributions
High levels of inflation can even help you save a little more money for your retirement. The contribution limits for 401(k) accounts and individual retirement arrangements (IRAs) are adjusted for inflation, so you can typically save more when inflation is high. For 2022, the 401(k) contribution limit is $20,500, an increase from the $19,500 limit for 2021. The IRA contribution limit didn’t increase for 2022, but it may go up in 2023 if the inflation rate continues to be high.
Although you can’t save more in your IRA this year, the income limit for 2022 was increased to keep up with inflation. As a result, you can now participate in a Roth IRA if your income doesn’t exceed $144,000 ($214,000 for married couples filing jointly).
Social Security
If you have combined income of more than $25,000 in a year as a single filer, your Social Security benefits are subject to federal income taxes; the limit increases to $32,000 for married couples filing jointly. Combined income includes half your Social Security benefits, your adjusted gross income and your tax-exempt interest income. These income limits aren’t adjusted for inflation, but Social Security benefits are.
For 2022, the federal government implemented a 5.9 percent cost-of-living increase for Social Security beneficiaries, and the 2023 adjustment could be as high as 10 percent, or even slightly more—we’ll know for sure in October 2022. This increase could push your combined income above the $25,000/$32,000 limit, making your Social Security benefits taxable for the first time.
Capital gains taxes
When you sell certain assets, you must pay capital gains tax on your profit. If you sell when inflation is high, you could end up with a profit on paper even if the sale results in a real loss. This typically happens when high rates of inflation erode your purchasing power over time.
If you made a $100,000 investment in 1980 and sold it for $200,000 today, it would look like you made a profit of $100,000. The truth is that $100,000 in 1980 dollars is equivalent to about $359,600 today. Although you made a profit on paper, you really lost a significant amount of purchasing power. Unless you qualified for some type of exemption, you’d have to pay capital gains tax since the purchase price of assets isn’t adjusted for inflation.
How can I save money while inflation is high?
You can’t control the national economy, but there are a few things you can do to strengthen your financial position while inflation is high.
Eat more meatless meals. Meat, poultry and eggs are among the food products with the highest price increases in 2022. To lessen the effects of rising costs on your budget, try adding a few meatless meals to your weekly menu.
Track your spending. If you don’t keep track of your spending, it’s easy to spend much more than you realize. Keep a record of how much you spend on necessities as well as extras like streaming subscriptions and movie tickets.
Start meal planning. If you spot a good deal at the grocery store, you can take advantage by planning several meals around that ingredient. For example, if a store is advertising chicken for $2.49 per pound, you may want to plan on eating chicken salad sandwiches for lunch each day that week.
Cancel unused subscriptions: In June 2022, Sarah O’Brien of CNBC reported that more than 40 percent of consumers were paying for at least one subscription they didn’t use. Unused subscriptions leave you with less money in your pocket, so canceling them can help you weather this period of high inflation.
Maintain a high credit score. When you have good credit, you typically qualify for lower interest rates and other favorable loan terms. If you have to borrow money while inflation is high, maintaining a healthy score can help you save money.
Keep the faith
Inflation makes it a little tougher to meet your financial goals, but that doesn’t mean you should give up on managing your finances responsibly. You can save money by tracking your spending, canceling unused subscriptions and planning your meals according to what foods are on sale each week.
Maintaining good credit can help you save money in the long run if you have to take out a loan or otherwise buy on credit. If your credit is lower than you’d like it to be, work with the credit repair consultants at Lexington Law to identify inaccurate negative items on your credit reports and make sure outdated information isn’t being held against you.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.