Taxes and the Christian Stewardship Journey
Many Christians tend to view their money through the lens of stewardship, meaning that God is the ultimate owner of everything and we are just managing it for him. We even have two different blog posts on stewardship on this site, this one by Kaysi Gordon and this one by Chris Wells.
When we think of stewardship, we usually think of budgeting, managing debt, or even passing our wealth to the next generation. But what about taxes? When was the last time taxes came to mind when you were considering your stewardship journey?
Probably never, if you’re like most people. Yet, taxes play a major role in your financial life. There are no concrete numbers, but various studies estimate that the average American pays between 13.3% and 28.4% of their income in taxes. That’s a big portion of your finances to be ignoring as a steward!
As an individual taxpayer, there isn’t a lot that you have control over when it comes to taxes. There is some tax planning that can be done, but for the most part you just have to pay your taxes.
How can you be a good steward of something that’s outside of your control? The first, and most important, step is to simply understand how the US tax system works. We pay a lot of different taxes as Americans. Most people are familiar with income taxes and sales taxes, but we also pay Social Security taxes, Medicare taxes, estate taxes, gas taxes, property taxes, hospitality taxes, capital gains taxes, etc. The list could go on for a very long time.
In this article we’re just going to address a couple of taxes, those that have the biggest effect on your finances and apply to the greatest number of people. We will start with Medicare and Social Security taxes and then explain income taxes and how the tax bracket system works.
Social Security and Medicare Taxes
Nearly every single American with earned income pays Social Security and Medicare taxes. These taxes are automatically withdrawn from a worker’s paycheck, so they are also called payroll taxes. There are also two acronyms used for the same taxes that you may see: FICA and SECA. Basically,
Social Security & Medicare Taxes = Payroll Taxes = FICA Taxes = SECA Taxes
With these taxes, the employer pays half and the employee pays half. For Social Security, it is 6.2% of income (up to $160,200 for 2023) and for Medicare it is 1.45% (without limit). That means that traditional employees pay 7.65% of their income for these taxes and their employer pays another 7.65%. Self-employed people and 1099 independent contractors are both the employer and the employee, so they pay both halves for a total of 15.3%.
Payroll taxes are used to fund the Social Security and Medicare programs. Paying these taxes is how you earn benefits. The more taxes you pay, the higher the benefits you earn. If you don’t pay into the system, you will not be eligible for such benefits as Social Security disability and retirement benefits (unless you are eligible through your spouse’s work).
Income Taxes
The federal government and most states charge taxes based on your income. Some states have a flat percentage rate that they apply to all taxpayers, but the federal government does it differently. They have a progressive system that charges increasing rates on higher amounts of income. These are the current tax rates for 2023:
Each tax rate is called a “bracket,” and you may have heard people reference being in a specific tax bracket. For example, if you make $120,000 and you are single, you will be in the 24% tax bracket. However, that doesn’t mean that you are paying 24% in taxes on all of your income.
When calculating your taxes, you first get to deduct some of your income before applying the tax brackets. You can deduct either the standard deduction, which is a number set by the IRS, or you can itemize deductions if the total of your charitable giving, state and local taxes, and a few other things exceed the standard deduction. The standard deduction for 2023 is:
So for our single taxpayer earning $120,000, they get to subtract $13,850 and pay no taxes on it. Now, they have taxable income of $106,150. Of that, it isn’t all taxed at 24%. The first $11,000 is taxed at 10%. Then the next $33,725 is taxed at 12%. The next $50,650 is taxed at 22% and only the remaining amount above that is taxed at 24%. The following chart shows how it works.
While this taxpayer is in the 24% tax bracket, they don’t actually pay 24% in taxes. Not all of their income is taxed at 24% so they actually only pay 15.7% of their income in taxes. In this situation, we say that their marginal tax rate is 24% (the rate that will be applied to their next dollar of income) but their effective rate is 15.7% (their total taxes paid divided by their income).
Stewardship and Taxes
While a lot of people complain about paying taxes, I would encourage you to take a different perspective. If you have to pay income and payroll taxes, that means that you have an income! Having to pay these taxes is actually a sign of God’s provision and should elicit our gratitude.
That doesn’t mean that you can’t work to minimize your tax burden, though. Tax evasion and breaking the law are wrong (Romans 13:7), but strategic tax planning within the law is good stewardship. Some examples of strategic tax planning are itemizing deductions, bunching charitable giving, and taking advantage of tax credits and other opportunities.
Our Christian Financial Advisors Network members all offer tax planning as a part of their comprehensive financial planning services. If you’re interested in partnering with a professional on your stewardship journey, please do not hesitate to reach out to one of them.
