What Affects How Much We Pay in Taxes?
Everyone has to pay taxes, but how much you pay depends on a lot of factors. In this activity, explore how three factors
(your salary, the state you live in, and the cost of living) can have a big impact on how much you pay in taxes and how
much you have leftover to spend on yourself.
Part I: Your Salary
The biggest variable in the amount of taxes you pay is how much you make. Use Nerdwallet's Federal Income Tax
Calculator to compare the two individuals below and see how their tax burdens differ due to a large difference in salary.
Meet Marcel
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Meet Stephanie
Marcel is in his first job after
college, working at City Center
Bank as a teller.
He is not married, nor does he
have any dependents
He will be 23 on Jan 1 of the
current year
Marcel’s wages (regularly
taxed income) is $35,000
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Stephanie has been working
at City Center Bank for 5
years. She is now an assistant
manager.
She is not married, nor does
she have any dependents
She will be 28 on Jan 1 of the
current year
Stephanie’s wages (regularly
taxed income) is $50,000
Neither has withheld any money towards federal or state taxes, and has no unemployment income1
Neither is being claimed as a dependent by their parents or anyone else
Neither contributes to a 401(k) or IRA
Both will use the standard deduction of $12,550 (tax year 2021)
1 - Most people have money withheld from each paycheck to avoid paying a huge bill at the end of every year. We’re assuming no withholdings to
illustrate the total amount in taxes paid throughout the year.
**Note - For this portion of the activity, we are only calculating Marcel and Stephanie’s federal taxes. We will tackle state taxes in the next part.
Stephanie
Marcel
1. Using Nerdwallet Federal
Income Tax Calculator, what
is the estimate for much this
individual owes in taxes?
2496
4296
2. What is this individual’s
taxable income?
22450
37450
3. What is this individual’s
effective tax rate?
7.13
8.59
CSM 204: Introduction to Personal Financial Planning – Jurgenson
Source: NGPF
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4. Why are Marcel’s and Stephanie’s taxable incomes less than their annual salaries?
The standard deduction is taken out.
5. What is the difference in their tax burdens?
$1800
Part II: What State You Live In
Another factor that greatly affects your taxes is the state you live in. Different
states have different tax rates for a variety of taxes. In this activity, we will focus
exclusively on income tax rates.
To do this, we are going to use the State Tax Calculator. Follow these directions:
● Find the correct state and click the salary value you want to see the income
tax for. Use the default 2022 tax year figures and amounts.
● Under the “Yearly” column, find the value for “[State Name] State Income Tax”
Marcel
First, let’s assume that Marcel lives in California.
6. How much would Marcel pay in state income tax?
599.34
Stephanie
First, what if Stephanie lives in California?
10. How much would Stephanie pay in state income
tax?
1480.30
Now, what if Marcel lived in Oregon instead?
Now, what if Stephanie lived in Oregon instead?
7. How much would Marcel now pay in state income
11. How much would Stephanie now pay in state
tax?
income tax?
2282.01
8. How much more is Marcel paying if he lives in
Oregon? (Federal taxes are the same in each
state)
3470.01
12. How much more is Stephanie paying if she lives in
Oregon?
1989.71
1682.67
9. What percentage of his salary is Marcel sacrificing
if he lives in Oregon instead of California?
(State tax difference/$35,000)*100
4.81%
CSM 204: Introduction to Personal Financial Planning – Jurgenson
13. What percentage of her salary is Stephanie
sacrificing if she lives in Oregon instead of
California?
(State tax difference/$50,000)*100
3.98%
Source: NGPF
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14. Was the impact greater for Marcel or Stephanie? What does that tell you about who is affected more by states
with higher taxes, the rich or the poor?
It was greater for Marcel. This shows that higher state income tax affects the poor more than the rich.
Part III: The Cost of Living
While taxes vary by state, another factor to keep in mind is cost of living, defined as “the
amount of money needed to sustain a certain level of living.” It includes things like the
cost of housing, food, transportation, and more.
In this activity, let’s compare how costs vary between different locations using
NerdWallet's Cost of Living Calculator. To compare cost of living:
● Input one location in the “I currently live in” box
● Input the other location in the “I want to live in” box
● Enter your current income
Let’s use Marcel as our test case.
Let’s say that Marcel was trying to see the difference between living in San Francisco, CA and Portland, OR. Use the
Cost of Living Calculator to determine the price of a few items in each place and the difference in costs. Remember, he
makes $35,000/year.
Product Cost
San Francisco, CA
2-Bed Apt. Rent
Portland, OR
Difference
2679
4128
Gasoline
3.82
3.22
Dozen Eggs
3.49
2.12
Gallon of Milk
1.93
2.34
Movie ticket
15.04
11.33
15. Which city is more expensive to live in?
San Fancisco
16. At the top of the page, you see two sentences that describe the “Equivalent income in the city you are moving
CSM 204: Introduction to Personal Financial Planning – Jurgenson
Source: NGPF
3
to” and the “percentage decrease you can take in your salary to still maintain your standard of living”. What do
these two sentences mean?
The first means how much money in Portland is equivalent what you have in San Francisco to cover cost of
living. The second tells you the percentage of hoe much you can decrease your income by to live the same
quality of life.
17. If Marcel was still making $35,000 in Portland, would he be able to afford a higher standard of living? Or would
he need to lower his standard of living? How do you know?
Yes, since he can maintain his standard of living with less money in Portland, he can increase his standard of
living if he makes the same amount of money he is now in San Francisco.
18. What kind of place would you prefer to live in if you had to choose: a state with zero/low state income tax or an
area with a low cost of living? Why?
A state with low or no state income tax. I am from New Jersey and we have high cost of living and high state
income tax. When I look at a state like Texas, there is no state income tax and it is a much lower cost of living.
So it seems that low state income tax states are the same as low cost of living states. I would rather live there
since they allow you to keep more of the income you earn each year.
CSM 204: Introduction to Personal Financial Planning – Jurgenson
Source: NGPF
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