Why Are Tax Rates So Different—And What Can I Do About Mine?

Your tax rate can feel personal, like the system picked favorites, until you see the mechanics underneath it. We sit down with Jason Taylor, certified financial planner and creator of MyPocketFP, to unpack why two people with similar incomes can pay very different taxes and what to do if you suspect you are overpaying. The first move is not a fancy deduction, it is clarity: we walk through how to find your effective tax rate and why it matters more than the bracket number you hear thrown around.

From there, we map the real drivers of tax outcomes: dependents and child-related benefits, pre-tax retirement contributions, business income and business losses, and the often-overlooked impact of where you live and pay state income tax. We also clear up a common misconception about home renovations and taxes, then get practical about what people forget to report that can change everything, like moving, having a baby, or starting a “small” side business that still has IRS rules worth using correctly. 

We close with tax planning tools you can actually act on, including Health Savings Accounts (HSAs), workplace dependent care benefits, education credits, and the decision between paying taxes now with a Roth IRA versus lowering taxes today with pre-tax accounts. If you want less stress at filing time, we share a simple habit: review your return right after it is prepared and adjust early while you can still influence the year. Subscribe, share this with a friend who hates taxes, and leave a review with your biggest tax question so we can tackle it next.

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Transcript

Welcome To My Pocket FP

SPEAKER_01 0:03

Welcome to My Pocket FP, the podcast where your wallet finally meets its financial planner and they actually get along. Join your host Jason Taylor, certified financial planner, money sensei, and your guide to financial freedom. Whether you're planning for retirement or just trying to figure out where all your money went last weekend, we've got you covered. Get ready to take control of your financial life with smart tips, surprising insights, and yes, an app that fits right in your pocket. This is My Pocket FP, because your future deserves more than guesswork.

Why Tax Rates Feel Uneven

SPEAKER_00 0:46

Tax rates can feel random and unfair until you understand the system behind them. Today we unpack why your neighbor, coworker, or business partner might pay a completely different rate than you and what you can do to legally and strategically lower your own. Welcome. I'm Julie Schwenzer with Jason Taylor, the awesome certified financial planner and creator of My Pocket FP. So, Jason, today's topic is why are tax rates so different and what can I do about mine? Can you start us with the basics?

SPEAKER_02 1:18

Yes, thank you, Julie. The first thing you need to do is really understand your current taxes. Just with with you know everything else, with the budget, anything else, you start by learning the foundation where you are now. It's always hard. You don't want to compare yourself to your neighbors, to your friends, to your siblings, because everyone is in a lot of different situations. So I would suggest either talking to your tax preparer or looking at the you know tax summary that uh different tax software is push out to find out what you actually are paying in taxes. I think that's a great first step.

SPEAKER_00 1:51

And can you talk about some of the main points that make a difference for people's tax rates? Like other than income, what else do we need to look at?

What Actually Changes Your Taxes

SPEAKER_02 2:00

You know, income is the is a big part of it. Another big part is you know how many kids you have. That can really help. People always like when I give them that tax advice to go have more kids. Always gets a good laugh out of people. How much you put into retirement, you know, um, into your pre-tax retirement account uh can really change your taxes as well. Um having business losses, you know, adjust your taxes. Um yeah, there's a lot of different things that can go into the tax rate you pay compared to other people.

SPEAKER_00 2:28

What about big purchases or like home improvements? Because that seems to be a tricky one where sometimes it it makes no difference and you're hopeful I renovated this, but there's no difference.

SPEAKER_02 2:40

Yes. There is no tax break for home renovations um unless it's on a rental or a business. On personal residence, there is no you know, tax benefit for home renovations, especially now that they got rid of solar and different types of the green energy benefits they had.

SPEAKER_00 2:57

Yes, that was a surprising one, I thought, at that time. And then what about where you live? Location.

SPEAKER_02 3:05

You know, location, um, it can change. You know, you know, for instance, you know, like Wyoming has no income tax, and California has a 10% income tax. Uh, so yes, that can make a big difference on the taxes you pay.

SPEAKER_00 3:18

Yeah, that's really interesting, too, is that I find, and I was speaking to you about this before we pressed record, is that people really don't know, you know, their tax rate, or they forget the exact percentage and then they go back and check and they're really surprised. So does that mean that rates are fluctuating like with each administration, or like how often do things change and what should we be looking for?

SPEAKER_02 3:41

They haven't really changed that much. Um, you know, since Trump changed them in his first presidency, they haven't really changed since then. There's been some tax benefits, they've added more to the standard deduction, which has changed a lot for people, to where you know home interest is not as helpful as it used to be, and people counted on that. I think it was a big surprise six years ago when they added that.

SPEAKER_00 4:03

And then I was curious

Deductions People Miss Most

SPEAKER_00 4:05

too, what do you find that clients may miss when it comes to deductions or credits or filing a status change?

SPEAKER_02 4:16

It's funny what people forget. They forget to tell us they moved, is one thing. They forget to tell us they have babies, which is a big thing. Another thing that people forget is if they have a or they started a business, um, because they think it's so small that doesn't matter. But the IRS gives you three years worth of losses uh on a business that you're trying to start. So those first couple of years, it's important to record those. It's uh usually those first couple of years you are putting a lot of money out in advertising and supplies and things like that to try to get the business going.

SPEAKER_00 4:49

And mistakes. And mistakes, yes. What surprises people the most, other than what they miss, is like, do you ever have positive surprises? They're like, oh, I can actually file something I didn't think about before.

SPEAKER_02 5:05

The positive surprise, I think, you know, there's not a lot of them. I think losses on investments, being able to take $3,000 reduction surprises people either positively or negatively. They thought they could take more, or they're surprised they could take any of it. There's not a lot of surprises on the positive side. Um, I guess you know, if you make you know very little of the earned income credit, is something that surprises a lot of people in the positive way. If people are, you know, have really low incomes.

SPEAKER_00 5:32

When we think of the tax brackets, what generally should we be looking at? Like what's the income level and the percentages right now?

SPEAKER_02 5:41

Since it's a graduating tax system, I don't really focus on the actual tax brackets with people outside of you know the capital gains tax bracket, because that one makes a difference. But the actual income tax bracket, I have them focus on their effective

Effective Tax Rate Versus Brackets

SPEAKER_02 5:55

tax rate, which is basically their income taxes divided by their taxable income. And that's the number they should go by. And it's usually lower than their tax bracket number they look at.

SPEAKER_00 6:06

Yeah, that's for sure. Because you know, they have to take into account everything else, especially the difference between a family and an individual. And that actually is another question I have for you. If you have clients that are divorced and now they're not married, I mean, does that change a lot of things for them for their their taxes like the following year?

SPEAKER_02 6:27

It could. It depends on the assets they have and the businesses they have, and um, you know, who claims what kids. So that can that's a whole other topic on its own.

SPEAKER_00 6:38

Yeah, that that maybe we should talk about that. How do you plan after? Because that's yes, with the rates they are now, they're so divorce rates are so high. Um, yeah, no, that that's interesting too. I mean, everybody feels like they're probably paying too much at some point, but what are the first steps that somebody could take to

Retirement And HSA Tax Moves

SPEAKER_00 6:55

give themselves a reality check and evaluate their situation?

SPEAKER_02 7:01

Once again, you know, like I said, it's starting by just understanding where you are now. And then from there you can look at different ways to possibly save on your taxes, uh, you know, by putting into your retirement account, putting into an HSA, putting into a child care, um, you know, dependent care uh thing at work. There's a lot of benefits at work that can help you decrease your taxes for things you're already paying for.

SPEAKER_00 7:24

And could you explain what a HSA is?

SPEAKER_02 7:28

Oh, yeah, it's a a health savings account. So you can have a high deductible health insurance plan and have a savings account at the same time and you know, save up all and get a tax deduction on your health insurance costs with a savings account. And then let that build until you have a big event. Sure.

SPEAKER_00 7:49

And actually, now that you mentioned that too, I always think about education and medical expenses too. Is that something do you think people are properly reporting on what they have paid in education and um also medical bills?

SPEAKER_02 8:04

Education, yeah. Education can be more beneficial than medical insurance because medical insurance is capped um you know on your on your schedule A based on your income. Where education expenses, whatever you you know, with a lifetime credit and the hope credit that you can get a lot of deduction off educational expenses as far as higher education.

SPEAKER_00 8:26

And then how would you say tax advantage account help reduce someone's overall tax burden?

SPEAKER_02 8:33

Yeah, yeah, that is a loaded question because there's present tax and there's future tax. That's where it's not a straightforward answer. That's why it's you know each individual needs to kind of look into this their own, you know, hire professional to help them. Because sometimes it makes more sense to pay tax now and like put money into a Roth IRA and then when you need it at retirement, it's tax-free. In some cases, if you have a high tax rate, and that's why that's really the starting point to figure out your effective tax rate. Is if it's really high, you might not want to be paying taxes on things now and push it down the road until you have a lower tax rate.

SPEAKER_00 9:14

Yeah, that's a good point. And then yeah, you've gone over this in definitely different episodes, but maybe you could remind us ongoing habits to help people stay ahead of tax issues. What should we do to stay in good shape and know what's going on?

Yearly Tax Checkup And Next Steps

SPEAKER_02 9:32

Well, you know, the best time to look at it is right after you have your taxes prepared. So May, June, take a look at it, see if there's any adjustments that need made. Also, you know, you can ask for help from your tax preparer or a tax planner. The key is to really know where you are now.

unknown 9:49

Okay.

SPEAKER_00 9:50

Well, Jason, thank you again for breaking that down so clearly. Taxes feel less intimidating now. So we appreciate you.

SPEAKER_02 9:58

Thanks, Julie.

SPEAKER_01 10:04

Thanks for tuning in to My Pocket FP, where we believe small monthly changes can make big positive changes in your financial end game. If you're ready to level up your money game, head over to mypocketfp.com and download the app today. Your financial planner is now officially pocket sized and doesn't charge by the hour. Until next time, keep your goals high, your debt low, and your pockets smart.