Come tax season, many find themselves wondering, “Where do taxes go?” Federal taxes are primarily used to find programs like Medicare, Medicaid, Social Security, and national defense. They also go towards safety net programs that protect vulnerable populations. Learn more about where your taxes go in this article.
NEW TAX LAW CHANGES
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
The country’s budget
The tax system attempts to ensure that everyone contributes their fair share to the working of the government and national economy.
The federal taxes you pay are used by the government to invest in the country and to provide goods and services for the benefit of the American people.
The three biggest categories of expenditures are:
- major health programs, such as Medicare and Medicaid
- Social Security
- defense and security
Interest on the national debt and various safety net programs such as low-income assistance comprise a sizable chunk of national expenditures, while other categories such as transportation and infrastructure spending round out the government budget.
Defense and security
Defense and security typically constitutes a significant portion of government expenditures, although the amounts change annually along with the rest of the budget.
Defense and security spending is considered a discretionary portion of the federal budget. Spending in this category includes Department of Defense and Homeland Security Agency expenses.
For the 2023 budget, defense spending equaled about $891 billion, or approximately 9 percent of the federal budget.
Social Security
Payments for the Social Security system constituted about 21 percent of the federal budget in 2023, with expenditures of about $1.3 trillion. The Social Security system provides retirement and survivors’ benefits along with disability payments and is categorized as a mandatory portion of the federal budget.
Major health programs
The major health programs in the federal budget are Medicare, Medicaid and the Children’s Health Insurance Program (CHIP).
About two-thirds of the federal health program budget goes to Medicare, as Medicaid and the CHIP require matching payments from individual states. For the 2023 budget year, about 25 percent of the federal budget goes towards these health programs.
Safety net programs
Safety net programs typically constitute about 11 percent of the federal budget. This category includes all aid programs for low- and mid-income families that are not a part of Social Security or the major health programs.
Examples include:
- unemployment insurance
- food stamps
- low-income housing assistance
- programs for abused and neglected children
Interest on the national debt
Interest on the national debt will total about $640 billion according to the 2023 federal budget, or about 7 percent of total expenditures.
Other expenditures
Approximately 23 percent of the federal budget goes into other categories of spending. The largest of these sub-categories, at about 7 percent of the budget, is spending on benefits for federal retirees and veterans.
Remaining expenses include scientific and medical research, transportation and infrastructure spending, education, non-security international spending and all other categories.
According to the budget breakdown, the three largest federal spending categories are major health programs like Medicare and Medicaid (25%), Social Security (21%), and other spending areas like veterans’ benefits and infrastructure (23%).
Mandatory spending includes legally mandated entitlement programs like Social Security and Medicare, which do not rely on annual appropriations. Discretionary spending, such as Defense and Security (~9%), requires annual budget approval by Congress.
Under recent tax legislation updates (“One Big Beautiful Bill”), the cap on the amount of state and local income, sales, and property taxes (SALT) that taxpayers can deduct on their federal returns has been increased.
Interest on the national debt accounts for approximately 7% of total federal expenditures, which equaled roughly $640 billion in the 2023 budget year.
Safety net programs make up about 11% of the budget and include low- and middle-income assistance initiatives outside of Social Security and health programs, such as food stamps (SNAP), unemployment insurance, child welfare assistance, and housing aid.
Manoj Sharma is a Senior Writer on the banking team at Tax Assistant. He provides information on budgeting, bank accounts, the banking industry, and other related topics. Using original data and methodologies, he helps you identify the best financial institutions, accounts, and products tailored to your needs. Manoj holds a degree in Journalism and Political Science from Syracuse University.
