Taxes

[Jack Jones]

Hi, Welcome to the United States of America. You're free here, but you'll need some money. Go get a job. ...Two weeks go by. Here's your pay, but you only get half of it because you gotta do your part. (I thought I just did my part?)

Okay, you're ready to use some of your hard earned money to buy something. You approach the cash register but the item costs more than the sticker. Taxes. Gotta do your part again. (I thought I already paid taxes to earn this money?)

At the end of the week you have a little money left over. I'll save this for when I get older, you think. You put some in the bank, but the government continues printing money which reduces the value of your savings. At least you get paid some interest by the bank, but this is taxed too, so overall you're worse off by saving in this way.

You hear that nobody saves money in the bank anymore. The stock market is the way to go. You invest conservatively, and you start to see your money growing! However, the money printing continues and it turns out, your money has barely kept up with inflation. That's a win, you think, but then you get another tax bill because the dollar value of your investments rose, even though you are no wealthier.

Somehow, through all this, you manage to build a little wealth. You hope to leave some of the fruits of your labor to your heirs, so they can lead a slightly more noble life. As you pass away, there's a knock on the door. Tax man. Estate Tax. Gotta do your part.

Seems like we're cattle being farmed while under the impression that we're free ranging. When born under such conditions, it seems like non-participation and retreating to the frontier is the best you can do.

[Hal]

Reminds me of this talk by Stefan Molyneux....
https://archive.org/details/StefanMolyn ... nslavement

[ArthurPooh]

When born under such conditions, it seems like non-participation and retreating to the frontier is the best you can do.

And yet people still roll their eyes when I talk about colonizing Antarctica...

[Pointedstick]

Hi, Welcome to the United States of America. You're free here, but you'll need some money. Go get a job. ...Two weeks go by. Here's your pay, but you only get half of it because you gotta do your part.

The highest federal marginal income tax bracket is 37% for incomes over $578k/yr--and due to the way marginal tax brackets work, you're paying a lower rate for all your income under that amount. The only mathematically possible way to ever have an effective 50% tax rate such that you're literally forking over half the money in each individual paycheck to the government is if you're in a crazy situation like earning millions of dollars per year in New York City, which is the location with the very highest state and local income taxes in the entire USA. According to https://smartasset.com/taxes/new-york-t ... P9FakWkldy, the lowest amount I could find that gives you a 50% effective tax rate is 2.45 million dollars per year, and that's if you're in the implausibly bad tax situation of being single, earning the money as income rather than as a business (really?), and having zero deductions or retirement savings (really??????). Your take-home pay is still 1.25 million bucks a year, and even in New York City, this is enough to live like a king. Cry me a river, fatcat snowflake.

In reality, most people are paying an effective tax rate vastly lower. Plug in the average US household income of $78,000, change the marriage status to married filing jointly, and add in a modest and realistic $6,000 of 401k savings, and the effective tax rate goes down to 17.42%. This is not exactly crushing the American dream here, folks.

If that family wants to be exceptional and retire well in 30 years (this is still an investment forum, right?), then they can increase the retirement contributions to $30k/yr (one 401k at $18k/yr and two IRAs as $6k/yr). They will still take home $39k per year, or $3,250/mo, with an effective tax rate of a hair under 12%. And all the while, they'll sock away $30k/yr tax free, with the principal being almost a million bucks by age 65, and the actual figure likely being much higher due to investment growth; FIRECALC says that starting from zero savings at age 35 (also implausible) the sum at 65 will be about $2.5m for a fairly aggressive 70/30 portfolio or $1.5m for an ultra-conservative PP (as Harry said, most of your money comes from your job--but only if you're in the PP! ). That's also assuming no income growth over 30 years, which is even more implausible. No matter how you slice it, this couple will be millionaires at retirement. That's also not even considering their likely Social Security income--which could vanish and they'd still be fine. Really, who cares how much in taxes they paid along the way? We live in a society that pays for tons of shit on our behalf that we like to forget about when it's inconvenient.

Let's take another, perhaps more common scenario: a 16 year-old working his first job at McDonalds. He gets $10/hr for three months of full-time work over summer vacation, taking home about $5000, with an effective tax rate of... drumroll... wait for it... 7.66%.

If he decides to be extra industrious and keep the job part-time when he goes back to school in the fall, then he'll end up with a tidy $13,000 for the whole year, not too bad for a teenager! His effective tax rate on this princely sum amounts to 9.19%. Oh the humanity! The remaining $11.8k is still easily enough for a decent used car and gas--though mom and dad will definitely have to pay for the sky-high insurance! But that's probably fair because statistically he's a true menace to life, limb, and property behind the wheel at that age.

And this is all still in New York state, by the way. If any of these people lived anywhere else, their state and local tax rates would be significantly lower--even zero in some places.

So maybe this whole "we pay half of our money to the government!" meme is a bunch of baloney pushed by people trying to make you mad and turn off your brain so you'll make bad decisions that just so happen to serve their purposes.

[vnatale]

You are correct about effective tax rate ...which is different from marginal tax rate, which is the tax rate on your next $$$ earned.

For my 2023 tax return I am in the 22% federal tax bracket.

State is 5%.

Therefore, 27% total for the next $$$ earned.

But then there is Social Security / Medicare, which combined is 7.65%.

In my case since I'm self-employed, I pay for both ends so a total of 15.3%.

Therefore, for any additional $$$ I earn my total tax rate is 42+%. For not that high an income.

I will come later and report what was my total effective tax rate on my 2023 income for federal / state / social security & medicare.

[boglerdude]

That teen (or a senior, or an unskilled immigrant) wont have jobs when socialists force $30/hour min wage. And when they ban evictions again...

[barrett]

You are correct about effective tax rate ...which is different from marginal tax rate, which is the tax rate on your next $$$ earned.

For my 2023 tax return I am in the 22% federal tax bracket.

State is 5%.

Therefore, 27% total for the next $$$ earned.

But then there is Social Security / Medicare, which combined is 7.65%.

In my case since I'm self-employed, I pay for both ends so a total of 15.3%.

Therefore, for any additional $$$ I earn my total tax rate is 42+%. For not that high an income.

I will come later and report what was my total effective tax rate on my 2023 income for federal / state / social security & medicare.

Vinny, please do report back with your overall effective tax rate. Also, do contributions to a solo 401(k) just not make sense for you due to your age? I know you've written on here about building a TIPS ladder out to the age of 103 so figure you are a long-term guy. Maybe better to pay RMDs on solo 401(k) money than to pay everything up front?

Also, you've worked non-stop, right? So no time for Roth conversions before taking SS?

[vnatale]

You are correct about effective tax rate ...which is different from marginal tax rate, which is the tax rate on your next $$$ earned.

For my 2023 tax return I am in the 22% federal tax bracket.

State is 5%.

Therefore, 27% total for the next $$$ earned.

But then there is Social Security / Medicare, which combined is 7.65%.

In my case since I'm self-employed, I pay for both ends so a total of 15.3%.

Therefore, for any additional $$$ I earn my total tax rate is 42+%. For not that high an income.

I will come later and report what was my total effective tax rate on my 2023 income for federal / state / social security & medicare.

Vinny, please do report back with your overall effective tax rate. Also, do contributions to a solo 401(k) just not make sense for you due to your age? I know you've written on here about building a TIPS ladder out to the age of 103 so figure you are a long-term guy. Maybe better to pay RMDs on solo 401(k) money than to pay everything up front?

Also, you've worked non-stop, right? So no time for Roth conversions before taking SS?

Good memory on all.

Shortly when I get back to my tax return information to 2023 for hopefully finally successfully e-filing them this morning I will then provide that information here.

I'm a no debt person in every possible way. So, the only debt I've ever really had in my life was $2,000 in student loan debt from the last two years of undergraduate and one year of graduate school. The no debt extends to wanting to reduce future tax liabilities as much as possible. In other words, pay it now and be forever done with it. I like to have my future income as unencumbered as possible.

When Roth first became available in 1998 I converted all I had at that time. That included paying taxes on an IRA that was worth $130,000 which had a basis of $30,000. Five years later I sold the whole thing for $25,000 so paid a lot of taxes on what turned out to be a loss. But it all came back and more so no regrets there.

Ever since 1998 I have always done the maximum Roth contribution for any choice - 401(k), Individual IRA, Solo 401(k).

While I did work non-stop (and still am but much less) there were no made sense opportunities to do any Roth conversions. However, I was accomplishing the same by always making the Roth choice for any eligible retirement contributions.

[vnatale]

So I was SUPPOSED to first be completing my tax return. But once I had my Excel tax file open I had to do this more fun task.

As usual, nothing is simple, so here is a table of looking at my taxes in different ways. (By the way, I was mistaken earlier. I thought I was in the 22% marginal tax bracket. For 2023 I was in the 12% marginal tax bracket. That will change in this year -- 2024 -- as this will be my first year of Required Minimum Distributions).

Capture.JPG (16.91 KiB) Viewed 686 times

The last column is Total Income including the full amount of the Social Security received (adding back in the amount not taxed).

The whole Social Security thing is a double tax as not only will those Require Minimum Distributions push me well into the 22% marginal tax bracket ... it will also result in more Social Security being taxed (at that 22% marginal tax bracket). Seems like that could be viewed as a 44% federal tax rate on some of those Required Minimum Distributions?

[ArthurPooh]

So maybe this whole "we pay half of our money to the government!" meme is a bunch of baloney pushed by people trying to make you mad and turn off your brain so you'll make bad decisions that just so happen to serve their purposes.

What are some examples of these bad decisions?

[vnatale]

So maybe this whole "we pay half of our money to the government!" meme is a bunch of baloney pushed by people trying to make you mad and turn off your brain so you'll make bad decisions that just so happen to serve their purposes.

What are some examples of these bad decisions?

Voting for the wrong political candidates!

[barrett]

The whole Social Security thing is a double tax as not only will those Require Minimum Distributions push me well into the 22% marginal tax bracket ... it will also result in more Social Security being taxed (at that 22% marginal tax bracket). Seems like that could be viewed as a 44% federal tax rate on some of those Required Minimum Distributions?

That sounds incorrect to me, Vinny. The 22% bracket for 2024 is $47,151 to $100,525 (up from $44,726 to $95,375 in 2023). Without actually knowing your income (including SS) I am going to guess that your federal rate won't go above 22%. Adding 22% and 22% doesn't sound right. I think the RMD will just mean that you have more of your income taxed at 22% for 2024.

Here is a tax calculator tool that was shared on Bogleheads:

https://engaging-data.com/tax-brackets/

I used that tool when trying to max out the 12% bracket for 2023. Of course I am holding off to age 70 to collect SS (I'm now now 65) and won't have to take my first RMD until 2031, so didn't have to take those into account.

[vnatale]

The whole Social Security thing is a double tax as not only will those Require Minimum Distributions push me well into the 22% marginal tax bracket ... it will also result in more Social Security being taxed (at that 22% marginal tax bracket). Seems like that could be viewed as a 44% federal tax rate on some of those Required Minimum Distributions?

That sounds incorrect to me, Vinny. The 22% bracket for 2024 is $47,151 to $100,525 (up from $44,726 to $95,375 in 2023). Without actually knowing your income (including SS) I am going to guess that your federal rate won't go above 22%. Adding 22% and 22% doesn't sound right. I think the RMD will just mean that you have more of your income taxed at 22% for 2024.

Here is a tax calculator tool that was shared on Bogleheads:

https://engaging-data.com/tax-brackets/

I used that tool when trying to max out the 12% bracket for 2023. Of course I am holding off to age 70 to collect SS (I'm now now 65) and won't have to take my first RMD until 2031, so didn't have to take those into account.

Use these simple assumptions.

The Required Minimum Distributions are all taxed in the 22% territory. Then because my income will be higher there will be $15,000 of Social Security that had not been taxed in 2023 that will be taxed in 2024. Now that $15,000 will also be taxed at 22%.

So that it where I come up $15,000 of those Required Minimum Distributions causing a total of 44% in taxes.

22% on the $15,000 of Requirement Minimum Distributions with a corresponding 22% on the $15,000 of Social Security that in 2023 had not been taxed.

[Pointedstick]

If you're self-employed and therefore paying both halves of the FICA taxes, don't forget to deduct the employer half of it. That should reduce the effective tax rate a bit.

[barrett]

Vinny,

You seem to be saying that if you have $10,000 taxed at 22% and another $10,000 also taxed at 22% that you now have $20,000 being taxed at 44%. The tax on that $20,000 is $4,400, not $8,800.

Remember that you have $11,600 that is only taxed at 10% and that the next $35,550 is only taxed at 12%.

But I am sure you know all of this and that you and I are just somehow looking at the numbers differently.

[Xan]

Vinny,

You should also consider donating your RMD. That avoids the taxes if I'm understanding correctly.

[vnatale]

If you're self-employed and therefore paying both halves of the FICA taxes, don't forget to deduct the employer half of it. That should reduce the effective tax rate a bit.

I never forget that. In absolute terms the $$$ amount of taxes saved would be:

Business Income X 13.5% X 0.5 X Marginal Tax Rate

Also, there is the 20% deduction for Qualified Business Income which though not reducing the self-employment tax does reduce one's taxes by whatever that amount is X Marginal Tax Rate.

[vnatale]

Vinny,

You seem to be saying that if you have $10,000 taxed at 22% and another $10,000 also taxed at 22% that you now have $20,000 being taxed at 44%. The tax on that $20,000 is $4,400, not $8,800.

Remember that you have $11,600 that is only taxed at 10% and that the next $35,550 is only taxed at 12%.

But I am sure you know all of this and that you and I are just somehow looking at the numbers differently.

I'm saying that assume in 2023 I was in the 22% tax bracket.

In 2024 the only change is that I have another $10,000 of income, which is taxed at 22%. But it has the unfortunate effect of now causing $10,000 of Social Security that was not taxed in 2023 due to my overall income levels to now be taxed at 22% in 2024.

In both cases the Social Security collected was the same but because of that additional other $10,000 it's now causing $10,000 more Social Security to be taxed.

So, yes, the first $10,000 is only taxed at 22% but its presence is now causing $10,000 of income from another source (Social Security) that had been previously untaxed to now be taxed.

There is a term for this as you can see from the below article.

I assume you are somewhat unaware of this because you are not yet collecting Social Security. I was also oblivious to it until it became a reality for me.

Last December I had a choice of getting income in December 2023 or January 2024. This was going to be one of the impacts for taking it in December. There were other different negative impacts for taking it in January 2024 (mainly that it would now be included in additional income on top of having to start the Required Minimum Distributions in 2024).

https://finance.yahoo.com/news/6-ways-a ... %20benefit.

6 Ways To Avoid a Social Security ‘Tax Torpedo’ Upon Taking Retirement Benefits

[vnatale]

Vinny,

You should also consider donating your RMD. That avoids the taxes if I'm understanding correctly.

You understand correctly.

However, that is not in my future for two main reasons.

1) I already have a significant amount in my Vanguard Charitable Donor Fund.

2) From being intimately involved in the finances of several non-profits I have a jaded view of how poorly non-profits handle donor funds.

I'm really a business-pointed person and it was somewhat of a mismatch me being so involved and for so long with various non-profits.

It's now become a struggle for me to makes the minimum $500 distribution required by that Vanguard Fund every three years.

I used to be a regular heavy contributor to three organizations, but things have changed with each of them and my view of them.

By the way ... I'm a major believer in giving whatever sum of money one is giving to only a handful of organizations rather than what some other people do - like 15, 20 - with all of them being relatively small sums of money. From being on the side of receiving that money there is are certain administrative costs to handling those small donations.

Best case is five of us each doing each of our total donations to one of five organizations.

Worst case is five of us doing our total donations 20% to each of those five organizations.

Scenario two results in them each getting the same amount of money as Scenario one but with the minimum administrative costs.

But, of course, this is coming from a mind that is generally focused on maximizing efficiencies and not taking into account other factors.

[Xan]

I would seriously consider giving the whole smash to your local Mobile Loaves and Fishes or local Meals on Wheels.

[barrett]

There is a term for this as you can see from the below article.

I assume you are somewhat unaware of this because you are not yet collecting Social Security. I was also oblivious to it until it became a reality for me.

Ah, right, the dreaded SS tax torpedo that I see discussed on Bogleheads and for the most part just gloss over. I stand corrected and this discussion is pushing me to be as proactive as possible to bring down tax-deferred assets (including I-Bond interest) before I start SS in late 2028. Actually my RMDs don't kick in until 2031 and it will probably make sense in my case to either Roth convert or just do tIRA withdrawals for two more years after SS starts. So thanks for the reminder.

[DogBreath]

So maybe this whole "we pay half of our money to the government!" meme is a bunch of baloney pushed by people trying to make you mad and turn off your brain so you'll make bad decisions that just so happen to serve their purposes.

LOL, maybe not. Add in sales tax, real estate tax (even if you rent, you pay this via higher rent), utilities tax, etc, etc and you will be well over 50%, particularly if you make/spend a lot of money.

[vnatale]

There is a term for this as you can see from the below article.

I assume you are somewhat unaware of this because you are not yet collecting Social Security. I was also oblivious to it until it became a reality for me.

Ah, right, the dreaded SS tax torpedo that I see discussed on Bogleheads and for the most part just gloss over. I stand corrected and this discussion is pushing me to be as proactive as possible to bring down tax-deferred assets (including I-Bond interest) before I start SS in late 2028. Actually my RMDs don't kick in until 2031 and it will probably make sense in my case to either Roth convert or just do tIRA withdrawals for two more years after SS starts. So thanks for the reminder.

The other thing to become aware of once you reach a certain age is Medicare. I read the Medicare for Dummies book twice four months before I went on Medicare. It was fortuitous that I did that when I did that as it educated me about income and Medicare premiums and I had enough time to manage the income in the year prior to going on Medicare.

Just like we have increased taxes depending upon your level of taxable income you have increased Medicare premiums (including those you pay for Drug plans) according to your MAGI (which is almost identical to Adjusted Gross Income).

I've since managed my income so that I've not had to pay any of these additional premiums.

One's premium is based upon one's income for two years prior, so 2024 Medicare premiums are based upon your 2022 MAGI. There are ways to get out of these additional premiums. But the best way, if you can do it, is to keep your income below where you'd have to pay those extra premiums.

[vnatale]

There is a term for this as you can see from the below article.

I assume you are somewhat unaware of this because you are not yet collecting Social Security. I was also oblivious to it until it became a reality for me.

Ah, right, the dreaded SS tax torpedo that I see discussed on Bogleheads and for the most part just gloss over. I stand corrected and this discussion is pushing me to be as proactive as possible to bring down tax-deferred assets (including I-Bond interest) before I start SS in late 2028. Actually my RMDs don't kick in until 2031 and it will probably make sense in my case to either Roth convert or just do tIRA withdrawals for two more years after SS starts. So thanks for the reminder.

Another article:

https://smartasset.com/taxes/social-sec ... &bsft_tv=4

How to Avoid the Social Security Tax Torpedo

[vnatale]

Retirement Planning > Social Security > Claiming Strategies

7 Things to Know About Social Security and Taxes
John Manganaro By John Manganaro


https://www.thinkadvisor.com/2024/04/15 ... b7f74b0930