Taxes are one of the largest annual expenses for most taxpayers, yet many of us file our returns without a clear understanding of what that money goes towards.
The average American household spends more on taxes than on groceries, clothing, or healthcare. On average, 11% of our income goes directly to personal income taxes—and that figure doesn’t even include sales tax, property tax, or Social Security and Medicare contributions. So, what do our taxes actually pay for?1
Let’s break down the $6.8 trillion federal spending budget for 2024 to see exactly where those funds were allocated.
Pieces of the Federal Pie
Federal spending is often divided into several major categories. In 2024, Social Security was the largest, accounting for 22% of the overall budget. Other significant categories included Medicare, national defense, and interest paid on the national debt, which each represented 13% of total spending.
- Social Security (22%): The largest portion of the federal budget, these funds help provide retirement, disability, and survivor benefits for millions of Americans.
- Nondefense Discretionary Spending (14%): This category covers funding for government programs that are controlled by lawmakers through appropriation acts, including transportation, education, employment, and social services.
- National Defense (13%): This helps covers the costs associated with funding the U.S. military and defense-related activities, including service member salaries, equipment maintenance, and research and development for new technologies.
- Net Interest (13%): These funds go toward paying down the interest that has accumulated on the national debt held by the public.
- Medicare (13%): This program helps provide health insurance benefits for Americans aged 65 and older, as well as some younger individuals with disabilities.
- Medicaid (9%): A joint federal and state-funded program, these funds are granted to states to help provide health coverage to millions of low-income Americans, including children, pregnant women, and adults.
- Income Security (5%): These funds help support programs that assist individuals and families in need, including unemployment benefits, housing aid, food assistance and nutrition, and family support.
- Other (11%): This category includes funding for some veterans’ benefits, military retirement benefits, and other mandatory programs.
Review Your Tax Strategy
Understanding where your tax dollars go can provide valuable context, but it also highlights the importance of managing your tax situation effectively. Since personal income taxes are often a significant financial outlay, be sure to consult with your financial advisor and tax professional to help ensure you’re not paying more than necessary.
Don’t wait until tax season comes around to start thinking about your strategy. Proactive planning now can help mitigate the amount you owe, maximize potential deductions and credits, and keep your tax strategy aligned with your long-term financial goals.
1ValuePenguin.com, January 10, 2024.
2Figures represent total outlays for the 2024 fiscal year, as reported by the Congressional Budget Office.