What Do Your Taxes Pay For?

Fun fact for all you numbers nerds out there: The IRS collected around $4.9 trillion in federal taxes in 2022.¹ 

That’s trillion—with a T!

Take a minute. Remember to breathe and pick your jaw off the ground.

Recovered? Good. If you’re like most folks, the first question that pops into your head when you see a number like that is, What exactly is the government doing with my tax dollars, anyway?

That’s a great question . . . and while you may not have much skin in the game with how Uncle Sam divvies up your tax dollars, you should know where they’re being spent.

What Do Your Federal Taxes Pay For?

Alright, folks. It’s time to pull back the curtain and find out where your tax money goes.

Here’s how Uncle Sam spends that $4.9 trillion in federal taxes.

1. Interest on Government Debt

Let’s just say Uncle Sam isn’t exactly working the Baby Steps (that might be the understatement of the century).

The U.S. government is currently more than $33 trillion in debt—and counting—with a small percentage of your tax dollars going toward paying the interest on that debt.² How did they rack up that much debt? Well, Uncle Sam isn’t swiping a supersized credit card to pay for stuff. Instead, he borrows money by issuing bonds.

The interest on the national debt, which must be paid by the federal government each year, changes based on two factors—the size of the debt itself and rising and falling interest rates. And since both the national debt and the interest rates on that debt are expected to increase over the next decade, so will the size of our nation’s interest payments—which means more of our taxpayer dollars will be used to make those payments.³

Maybe it’s time to finally get Washington on the debt snowball . . .

2. Mandatory Spending

Mandatory spending includes entitlements like Social Security, Medicare, Medicaid, and Veterans Affairs benefits and services. They’re called entitlements because the government takes money out of your paycheck to fund them, so you’re entitled to these benefits once you meet certain conditions.

Some of the mandatory spending programs your tax dollars go toward include:

• Social Security: Social Security was created to provide income for retired workers over the age of 65 and accounts for a large chunk of mandatory spending. It’s designed to supplement your income when you retire or become disabled. If you were to die before you become eligible, your dependents would receive benefits.⁴

Social Security taxes and benefits are tied to inflation, which means they go up as your cost of living goes up. But even with those adjustments, those monthly payments from the government aren’t enough for most people to live on. So if you’re banking on Social Security to fund your retirement dreams, you’re going to want to rethink that plan!     

That’s why it’s so important to save at least 15% of your income for retirement. If you have questions about saving for retirement, contact a SmartVestor Pro and start making a plan.

• Health care: There’s no way around the fact that health care is expensive—especially when you’re in your retirement years and for Americans who are struggling to get by. That’s where Medicare and Medicaid come in.

Medicare is a taxpayer-funded federal health insurance program that provides coverage for several groups of people, but mainly folks over age 65. American taxpayers fund Medicare through a 1.45% payroll tax on all of their earnings and an additional 0.9% tax on earned income over $200,000 ($250,000 for married couples).^5,6

Medicaid is another government-sponsored insurance program that provides health coverage for low-income adults, children, pregnant women, the elderly and people with disabilities.⁷ The federal government splits the cost of Medicaid with state governments, and the states get the better deal—in some cases, Uncle Sam pays 78% of their Medicaid costs.⁸

• Veterans benefits: Mandatory veterans benefits that are taxpayer-funded include disability compensation, burial benefits, pensions, education, job training and rehabilitation, insurance, and housing programs.⁹

These are the big programs that are funded by mandatory spending. While some of the money for these programs (Social Security and Medicare) comes out of your check automatically, some (including money for veterans benefits) comes from taxes on your earned income and things like capital gains.

Taxes don’t have to overwhelm you. See what’s best for your situation—and services you can trust.

Plus, more of these benefits for our veterans are covered under discretionary spending. Speaking of which . . .

3. Discretionary Spending

Discretionary spending is the last piece of the puzzle when it comes to how your tax money is spent. Every year, Congress dukes it out over who gets how much money when they debate spending bills. In other words, these programs are subject to Congress’ discretion, meaning they can decide to increase or decrease funding for certain programs as they see fit.

Let’s take a look at some of the major categories covered under discretionary spending.

• National defense: Defense spending, which funds the Department of Defense and all of its operations, usually accounts for about half of all discretionary spending.

• Transportation: This pays for roads and bridges, air traffic control and the Department of Transportation. We have to get around in our planes, trains and automobiles somehow!

• Education: These funds mainly go through the Department of Education and cover everything from paying teachers’ salaries to funding grants to pay for college. Unfortunately, this also includes funding for federal student loans. Womp womp.

• Veterans benefits: While some veterans benefits are mandatory expenditures, almost half of the Veterans Administration (VA) budget comes from discretionary funds set aside by Congress.¹⁰ This covers things like medical care, construction of VA facilities, and IT services at those facilities.

• Health: Some discretionary spending goes to fund agencies like the Centers for Disease Control (CDC), the Food and Drug Administration (FDA), and the National Institute of Health (NIH). These agencies research diseases and new drug therapies, oversee food safety, and fund medical research.

And there you have it, folks! An overview of how Uncle Sam puts your tax dollars to work.

Let’s face it—you may have little control over how the government spends your taxes, but there are a few things you can control, like how prepared you are for tax season and how stressful filing your taxes has to be.

Filing Your Taxes

We get it, taxes are complicated—but that doesn’t mean they have to be stressful.

Whether you need help from a RamseyTrusted tax professional or your tax situation is simple enough that you can file your taxes with a tax prep software like Ramsey SmartTax, we can help you take the stress out of tax season.

File your taxes with a tax service you can trust!