Taxes and Living Expenses in the US

After spending more than a decade in the corporate world, I was given the opportunity to build something of my own—a small accounting firm. During my first year of running the business, I learned many valuable lessons. One observation, however, surprised me more than anything else: despite the significant cost of taxation in the United States and its importance to society, many of my clients knew very little about taxes.

Most simply trusted their accountants to do the right thing for them. To be fair, I also trust engineers to build safe cars for me to drive and doctors to act in my best interests when it comes to my health. We all rely on professionals in areas outside our expertise. Nevertheless, having a basic understanding of how taxes work can be extremely beneficial.

So why is taxation so important in the United States?

In 2025, the U.S. federal government collected approximately $5.23 trillion in tax revenue. The breakdown was as follows:

• Individual Income Taxes: $2.66 trillion (51%)

• Payroll Taxes: $1.75 trillion (33%)

• Corporate Income Taxes: $452 billion (9%)

• Customs Duties and Tariffs: $194.9 billion (4%)

• Other Revenue (Excise Taxes, Estate and Gift Taxes, and Miscellaneous Sources): $173.1 billion (3%)

This was the highest level of tax revenue ever recorded in U.S. history. Yet it was still not enough to cover federal spending, which reached approximately $7.01 trillion in 2025, resulting in a budget deficit of $1.78 trillion.

Before debating who should be blamed for the deficit, it is worth remembering that the last time the federal government recorded a budget surplus was from 1998 to 2001 during President Clinton's administration. Since then, the United States has operated at a deficit every year, regardless of which political party controlled the government.

Viewed from this perspective, individual taxpayers and households are the primary source of government funding. Combined, Individual Income Taxes and Payroll Taxes accounted for more than 84% of all federal tax revenue. Without these contributions, the federal government—and the public services it provides—could not function.

These numbers are unimaginably large. But what do they mean for ordinary Americans like you and me?

There are approximately 341 million people living in roughly 134 million households across the United States. Of those households, about 113 million—or 84.1%—earn less than $200,000 per year. Although the median household income is approximately $83,730, nearly 45% of households earn less than $75,000 annually.

At the same time, the average American household spends about $6,545 per month, or approximately $78,535 per year, on living expenses as breakdown below:

Expense Category	Average Monthly Cost	% of Total Budget
Housing	$2,189	33.4%
Transportation	$1,110	17.0%
Food	$847	12.9%
Personal Insurance & Pensions	$818	12.5%
Healthcare	$517	7.9%
Entertainment	$301	4.6%
Cash Contributions & Charity	$190	2.9%
Apparel & Services	$163	2.5%
Education	$131	2.0%
Other / Miscellaneous	275	4.3%

Living in the United States is expensive! When nearly half of all households earn less than $75,000 per year while average living expenses approach $78,535, it is no surprise that many families live paycheck to paycheck. For a significant portion of Americans, saving for retirement feels more like a luxury than a realistic financial goal.

The financial burden does not stop there. A household earning the median income of $83,730 may pay approximately 14.5% in federal income taxes, 6.2% in Social Security taxes, and 1.45% in Medicare taxes, in addition to state income taxes, property taxes, sales taxes, and other indirect taxes. When all direct and indirect taxes are considered, the average household may pay between $17,000 and $20,000 annually in taxes—roughly 20% to 22% of total household income.

In many cases, taxes represent the second-largest household expense after housing.

Taken together, a typical family may need to earn at least $95,000 annually to maintain a reasonable standard of living. While this may seem like a substantial income by global standards, it is often only enough to cover basic expenses in the United States. To make matters more challenging, many middle-class households earning between approximately $56,000 and $169,000 do not qualify for most forms of direct federal assistance. As a result, they often feel that they contribute significantly through taxes while receiving relatively few immediate benefits in return. For many, the most visible return on those contributions will not come until retirement through programs such as Social Security.

The United States has maintained a relatively strong labor market, with unemployment remaining below 5% for most of the past decade. However, an important question remains: do these jobs pay enough to support a comfortable standard of living?

Many Americans feel that middle-class incomes are no longer keeping pace with the rising costs of housing, healthcare, education, childcare, and everyday necessities. As a result, there is a growing perception that the traditional American middle-class lifestyle is becoming increasingly difficult to attain and maintain.

Understanding taxes is not simply about filing returns or complying with government regulations. Taxes affect nearly every aspect of our financial lives—from how much we take home from each paycheck to how much we can save, invest, and pass on to future generations. Given their impact, a basic understanding of taxation is not merely useful; it is essential.

By: Vien Vo, CPA

June 17, 2026