I had an interesting conversation with a friend a couple of days ago on this subject. We were talking about taxes and some of the new tax laws when I asked, “How much do you pay in taxes?” His response was “oh, I get a refund every year.” I laughed. No, I mean how much do you really pay in taxes each year. He just started at me with a blank face.
This got me curious so I started to ask other friends (a very unscientific study) the same question and the vast majority couldn’t tell me what they paid in taxes (18 of 20). That meant that 18 fairly intelligent people had no idea what they paid in taxes with many of them not even getting the basic concept of how taxes work.
There were a few people that plain and simply didn’t understand how taxes really work while most chose just ignore it. Thus I assume that most people really have no idea what they pay in taxes. Try asking some of your friends. I think the answers will surprise you.
When you explain that a tax refund is merely money that you overpaid in taxes during the tax year either through your company withholding taxes from your paycheck, most people can grasp this concept. You are simply getting back your own money that you paid in excess of what you owed in taxes.
But for some reason there seems to be a huge mental block of actually knowing (or wanting to know) what that amount is that they are actually paying unlike the amount that they take home each month (which is on the same pay stub statement) which everyone knew. I don’t know why there is this aversion (could make an interesting sociological study), but it does have consequences on personal finances.
Taxes are one of the biggest outflows of the money you make over your lifetime. While there are a lot of legitimate ways to reduce the amount of taxes you pay, you are probably missing out on more than a few if you don’t even know what you are paying in taxes. If you happened to not know what you paid in taxes this past year, be sure to take a closer look on your next pay stub and see if you can begin making moves that will help reduce them.