Most of us don’t consider that some of the taxes we pay – like sales taxes, fuel taxes, property taxes, and others – are paid from our after-tax income, meaning that we are being taxed on our money that has already been taxed! Sales tax rates vary by jurisdiction, and it is important to know what your sales tax is when purchasing items, especially large purchases that may have applicable sales tax like new cars and houses. It is strange to me that we pay these taxes from our post-tax income, but it is the way it works. You should be conscious of the fact that the sales tax rate you are familiar with is lower than the true sales tax you are paying for items. As an example, if your average income tax rate is 20% and your local sales tax rate is 8%, that means that the actual tax paid for the items is 10% when you factor in the income tax already deducted from the money you are using to pay the tax owed (calculation = 8%/(1-20%) = 10%).

Another consideration is the gross income needed to purchase the item you want. Let’s say that you are purchasing an item advertised for $1,000, and we will use the same sales tax and income tax rates from above (8% and 20%, respectively). The item including sales tax would be $1,080. To net $1,080 after income tax, you need to earn $1,350 in gross income. So although your income tax rate is 20%, your effective tax rate (income tax & sales tax) to purchase items is 26% (Calculation = 1-[$1,000/$1,350])!