The date when the average taxpayer will have earned enough to cover taxes for the year is calculated and reported annually by The Tax Foundation. Their date is the one most often reported in the media. Many people consider that date a holiday of sorts, when they have finally broken free from the grip of taxes. In theory, any money earned after that day truly belongs to the worker. Your actual date may vary from the average, but the reported date gives a general indication of when you will reach it.
That date occurs when it does because that’s when the percentage of your expected working hours for the year equals your efffective tax rate. If your total tax burden, including federal, state, and local taxes is 35%, then you would expect to need 35% of your working days for the year to cover taxes. This date can be a little misleading though because if you quit your job on the day of the tax holiday, you wouldn’t owe all of the money you had earned, only a percentage of it.
In reality, you have taxes taken out of every paycheck. As a result, thinking of tax freedom on a smaller scale may be more enjoyable. I like to use the time of day that you cross the tax threshold. Using the same 35% total tax burden example again (your number will probably be different) would result in a tax free time of 2 hours and 48 minutes into an 8 hour work day. Rounding that out to 3 hours, means that if I start work at 8 am, I can have a little tax happy hour every day at 11 am. Once I hit that time, I know that the money I earn for the rest of the day will be what I’ll get after taxes.
Thinking about taxes this way is better than looking at the year as a whole because if you stop working at any point during the year, your calculated tax free time holds true, whereas the day of the year when you hit that milestone does not. It’s all theoretical anyway, so why not allow yourself a little mid-morning boost each day.
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