This post is a bit of a rant that developed in my mind as I prepared myself to move onto a PPACA-compliant health insurance plan this year. I also have the wonderful blessing of a dramatically increased income this year. So in this post, I'm going to talk about a decidedly first world problem. Despite all the whining I'm going to do in the remainder of this post, there is no doubt that additional income is a good thing. No matter how high your taxes get (with some very minor exceptions well hidden in the tax code) more income is always good. You never give it all to Uncle Sam. Of course, the marginal utility of that income, especially compared with the time and life energy used to obtain it, may go down very rapidly as you move into the upper tax brackets. However, the only thing worse than paying taxes is not having to pay taxes (because you didn't make any money.) That caveat said, let's move into the (drumroll please)
Top 16 Reasons It Sucks To Have A High Income
# 1 Progressive Income Tax System
Our income tax system is progressive. That means that the more you make, the higher percentage of your income you will have to pay. This is especially dramatic “on the margin” where your marginal tax rate takes effect. Our current top federal tax bracket is 39.6%. That means that once you're in the bracket, you only get 60 cents of the next dollar you earn. And we haven't even started talking about state taxes. In California, the top tax bracket is 12.3%. That means you only get to keep 48% of your next dollar. That's quite a bit different from the 75 or even 85 cents that much of the middle class gets. (BTW-I have had the opportunity to have a 15% marginal tax rate as an attending physician. If you'd like to try it, I know a recruiter I can introduce you to.)
#2 Medicare Taxes
Social Security has its issues, but at least you don't pay Social Security tax on your earnings once you make over $118,500 (2015.) Medicare tax, however, never goes away. In fact, it even increases thanks to Obamacare (see # 8 below.) 2.9% on every dollar you earn. Remember that California high earner? He's down to 45 cents now.
#3 No Tax Credits
Anybody can look at a chart of the tax brackets and realize that tax day can be pretty painful for high earners. However, what most people don't understand is that there are lots of little items in the tax code that make it even more painful than it at first appears. One of these is the phase-out of the tax credits. High earners don't get an earned income credit, the child tax credit, the saver's credit, the Hope Scholarship/American Opportunity Credit, the Lifetime Learning Credit, the child credit, the adoption credit, and even a good chunk of the child care credit.
#4 Loss of Exemptions
In fact, there really is no benefit to having kids for high earners. You know how everyone jokes about getting that tax break for having your kid on New Year's Eve? You might as well tell the doc to sleep in and meet you for an induction on January 2nd. Remember those nifty little $4000 (2015) exemptions for you and each of your dependents? They're gone completely by $380K ($432K married.) What does that mean? Well, that doc in California's family of six will be paying an extra $13,200 in taxes.
# 5 Reduction of Itemized Deductions
But wait, it gets worse. Not only do you lose all those exemptions, you also start losing part of your itemized deductions. Remember how giving to charity or paying mortgage interest and property taxes was supposed to help you reduce your tax bill? It still does, but perhaps as low as only 20% as much as for a lower earner. This phaseout begins in 2015 at an income of $258,250 ($309,900 married.) It's a little tricky to calculate, but the rule is that your itemized deductions are reduced by 3% of the amount by which your adjusted gross income exceeds the threshold income. So, if you had an AGI of $600,000, then you exceed the married threshold by $290,100. 3% of that is $8703. So $8703 of your itemized deductions don't count. Sorry. Another tricky little way to raise that marginal tax rate even higher than you thought it was.
# 6 Social Security Benefits Are Progressive Too
The real deal for getting a high “investment return” on your Social Security dollars is for very low earners. The payback for every dollar taken out of their paycheck is really quite good. Not so for those who had maximal income ($118.5K for 2015) for 35 years. It's even worse if you had maximal income for more than 35 years. Those extra years of contributions don't do you any good at all.
# 7 Increased taxation of SS benefit
Not only do you get a much worse return on those dollars, but you get to pay more taxes on them too. High earners pay income taxes on 85% of their Social Security dollars. That's right. You put after-tax money into this “account” and then you pay taxes again when you “take it out.” That's like a reverse HSA/Stealth IRA. Instead of getting a break when you put money in, having it grow quickly due to the tax-protection in the account, and then getting a break when you take it out, you pay taxes before putting it in, have it “grow” slowly, and then pay taxes again upon “withdrawal.” Quite a deal, that.
# 8 Obamacare taxes
Two other poorly understood tax increases on high earners include the two Obamacare taxes. One is an increase in Medicare tax from 2.9% to 3.8% for every dollar over $200K ($250K married.) (That takes our California doc's total marginal rate up to 56%, not counting any phaseouts, if you're still keeping track.) The other is the increased capital gains taxes for high earners. Not only do those in the highest bracket pay 20% on their capital gains instead of 15%, but those making over $200K ($250K married) pay an extra 3.8% on those capital gains, for a total capital gains tax rate of 23.8%.
# 9 No subsidy for PPACA
Obamacare actually gets high earners coming and going. Not only do they pay more for Obamacare, but they get less. Most Americans are now having their health insurance subsidized. The Obamacare subsidies are extended to earners all the way up to 400% of the Federal Poverty Level. For a family of six, that's as much as $128K. That includes 85% of Americans who are getting some kind of a subsidy for their health insurance.
# 10 Expected to Pay
Most doctors and others who either have or are assumed to have a high income have experienced this. When you go out with a group of friends or family, there may be an expectation that you will pay more than your fair share for the activity. Just like with taxes, that's not all bad. The only thing worse than being expected to pay is not being able to pay, and that usually isn't the case. But it is one reason why high-earners tend to socialize with other high earners.
# 11 Long Time and High Expense to Get There
This one particularly chafes doctors. That doc may have an income of $400K, but he didn't start having it until 35 or 40, and at that point he was still $300K in debt. Many non-physician high earners have a similar issue. If you actually looked at their lifetime earnings, especially after-tax and after the costs of education, it wouldn't be nearly as impressive as one might think. This is the basis for Ben Brown's “Deceptive Income of Physicians” arguments.
# 12 No education benefit for savings bonds
Perhaps you've heard that you can use Series EE or Series I Savings Bonds as kind of an education savings account. If you spend the proceeds on education, they're supposed to be tax-free. Well, not for high earners. Better pad up that 529.
# 13 Contribution Limits and Hassles
High earners don't get to deduct traditional IRA contributions and can't make ESA contributions. They also can't make direct Roth IRA contributions, although at least they can now do them through the backdoor if they can figure out the pro-rata issue. But after spending literally days explaining to high earners how the backdoor Roth IRA works, there is no doubt it's a pain in the butt that only high earners have to deal with. High-earners are far more likely to have to deal with multiple retirement accounts and even a taxable account. Lower earners can pretty much do all their savings in a 401(k) and/or a Roth IRA.
#14 Can't Deduct Student Loan Interest
Those who most need this deduction (those with high student loans) often can't get it. Sorry. Phases out at $65K ($130K married.) Could be worse. At least PSLF doesn't have a phase out….yet.
#15 AMT Issues
The AMT catches lots of folks, including more and more of the middle class all the time. However, the AMT exemption phases out too the more you earn!
#16 No Need-Based Financial Aid
At least need-based college financial aid, unlike most of these issues, takes into account both income and net worth. However, having either will usually eliminate any grants or scholarships.
As mentioned at the beginning, these are first world problems. But beware, high-earners, the financial services industry isn't the only one who sees you as a target. So does Uncle Sam.
What do you think? Are there any other ways high earners are penalized in our society? How high do you think the maximum marginal tax rate should be? Comment below!
Let me add a new one: potential phase out of the Backdoor Roth IRA and the Mega Backdoor Roth IRA thanks to the last Obama budget proposal.
https://blogs.wsj.com/totalreturn/2015/02/02/obama-would-block-strategies-to-pump-up-roth-iras/
Others might recall that 529s made the chopping block, as well.
Those of you counting on PSLF: be warned. You are not loved, nor favored.
I wish people would quit jumping all over anything Obama says. He’s making speeches that are the equivalent of the red meat speeches the Republicans make at their conservative conferences. He’s proposed 6 or 8 tax raises in the last month. Which of those do you really think are going to passed in the next 2 years? Which Republican controlled house of Congress do you expect to write the bill for any of them? The one I thought was most interesting was the one I saw today to force corporations to bring their profits back to the US and pay 14% tax on them. Then there was the one that eliminated the step up in basis at death.
To call these 16 things penalties on high-income earners is just sad. I suppose it’s an interesting thought exercise, but exactly zero tears are being shed for the person earning $250K or $1MM or more who is upset at their tax rate, marginal or effective. Exactly zero tears.
Millions of people in the US live in at near poverty and have no meaningful access to health care. The very least that high income earners can do is pay the relatively measly US income taxes to uphold the already shredded social contract.
Curious what you think the top marginal tax rate should be and what effective tax rate someone who makes $100K, $500K, $1 Million should pay. I guess I find it odd to call a marginal tax rate over 50% and effective tax rates of 25-35% “measly.”
P.S. I took care of 5 people today who had “no meaningful access to health care.” How many did you take care of?
Interesting you bring up the social contact. I always thought that was something everyone participated in, not just those who paid income tax.
However, if anyone feels that they didn’t pay enough you can always pay a little extra. Here is the link.https://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm
I love challenging my liberal friends to make donations to the federal treasury when they complain about taxes being too low. Never had a taker yet.
I’ve taken to an even simpler recommendation — don’t claim any exemptions or deductions on your taxes (or tell your accountant that you don’t want to take any exemptions or deductions). Presto, you’ve contributed to the government, with zero hassle (in fact, filling out your tax return just got easier). The truly generous can overstate their income, and hence pay more in tax — no one has ever gotten in trouble for overpaying.
Again, not a single taker in 20 years of making these recommendations to those who whine about taxes not being high enough. The moral? Those whining believe that everybody else should pay more — but they do everything they can to reduce their own tax bill, by hook or by crook.
You seriously think that someone would voluntarily make a “donation” to Treasury? I think that many people would, but it makes no sense if it’s not broader policy that affects many people. Individual actions like that would be pointless.
As this whole thread (not to mention thousands of years of human behavior and economics) illustrates, “no meaningful access to healthcare” is worsened by tax policies that dis-incentivize healthcare workers from working more.
Apparently it’s much more socially rewarding and “charitable” to propose taxes on others than to actually contribute oneself. See Vice President Gore’s $357 charitable deduction in 1997 and Warren Buffett’s long career of tax-avoidance.
https://www.bloomberg.com/news/articles/2014-03-19/buffett-graham-swap-is-latest-deal-to-limit-u-s-tax-take
Great post. Thanks for considering the effects of the California state tax.
And after paying over 50% in taxes, we still have to pay 10% in sales tax.
P.S. If the key here were you individual actions, then yes, you win. I work in finance, so I didn’t do jack to further the health of any individuals, unless you count my non-judgmental promulgation of the low-carb diet to counteract the failure that is is the low-fat approach. Many pounds would be shed and much risk would be reduced if the population switched to low carb, high fat. I’ll do what I can as a layperson to promote that. There are countless healthcare providers who do unbelievable work. I first have problems with the financing of health care. Can’t wait for single payer. Don’t worry, you’d still make quite a good living, I’m sure.
But the key is broad policy and collective action. From that comes the conditions in which individual action happen, make sense, and develop.
It’s just hard to muster sympathy for the high-income earners you defend, that’s all, when assessing their financial situation compared to the millions who own nothing, and don’t earn enough to support their families. Sure, 50% may be high to you, but no tears will be shed were you to ever pay an effective rate of that. More happiness and fairness would be wrought up on this country, provided the public institutions were also reformend to promote more direct democracy. I have no illusions, of course.
This all said, I generally like your blog and think you write very informative and helpful posts.
Mind if I ask, what is your highest level of education, how long it took you to get there, and how much education debt you had to take on? Because surely, as a finance person, you know that the focus here is not just salary, but the overall picture of earnings, debt, and time.
I have a liberal arts BA from a state school in the Northeast. It took me four years to get that degree. I took on about $20K of debt in the late 90s since my mother married a man who made it possible for me to cover the other half of the cost.
Yes, it’s not just salary. Of course, the wealth inequality makes income inequality look like a plate full of cupcakes.
Single payer might not be the *only* way to do things. There are a number of financing models that all do pretty well around the world.
[Ad hominem attack removed.]
After talking to a few docs in Canada, single payer doesn’t look too bad. The docs have good incomes, get paid the same day they see the patient and submit the claim and according to them, the wait times for stuff the patients actually need are very reasonable.
I don’t think there’s any “defending” going on. These are simply statements of fact. There are lots of reasons it sucks to have a low income. There are also 16 reasons it sucks to have a high income. I’ve had a low income and I’ve had a high income. I prefer the high income. If I didn’t, I’d work less.
I use to be a big single payer. Now I would prefer just a controlled cost environment. Multiple providers each can offer slightly different benefits depending on wants but with costs dictated. Would much simplify billing. (could have one standardized form). Germany uses a system like that and it works pretty well.
Also think we need to simply office billing. Get it down to 4 codes: New simple, new complex, established simple, established complex. Base them on Time and dx codes rather than useless ROS and pointless extra exam documentation.
We’ve only got 4 we use in the ED (plus procedures.) Very rare to bill a level 1 or 2. Almost all visits are 3,4,5, and critical care.
We only use 5 to 6 codes as well. Makes you wonder why we still have the others. but codes shouldnt’ be linked to what your exam and history are. I’m so sick of having a coder try to point out that I only had 11 points instead of 12 or my three paragraphs of history on my worsening anxiety patient is “context”. We doctors document volumes of useless crap just to ensure proper reimbursement. Its regulations run amok.
I agree. My favorite button in the EMS is “All systems reviewed and negative except as noted above.”
If I was ever in office my tax plans would be to use taxes in the way they work economically. The more you tax it the less motivation there is to produce more of it.
We tax cigarettes higher and higher and there is motivation to buy less and less cigarettes. Why not have unemployment benefits with a progressive tax structure? (because it will never pass.)
Basically if we want people to land a job why is unemployment so easy to keep? If you have 99 weeks of it, why not start taxing it at the 6 week mark and start raising the tax rate every two weeks? At some point the worker will be increasingly motivated to find a job (anything better than their rapidly diminishing unemployment. Wouldn’t this lead to more People finding work sooner? There is no incentive to work when you keep getting the same weekly handout.
Unemployment benefits are taxed, just like normal income.
If there are no jobs to be had (like in the middle of a big recession) how are people supposed to get one?
Also, unemployment is not enough to live on in most urban areas, you definitely can’t make your mortgage payment, etc.
The biggest issue with unemployment is how various corporations use it strategically to “lay off” their workforce and then take them back X days later, and repeat this cycle endlessly for decades. These companies have entire support departments set up to put their employees onto unemployment and take them off again en masse multiple times per year. I know people who work in these companies.
I also know a lot of people (with great resumes, high education, and good diverse job experience) who sent out hundreds of resumes, went to hundreds of interviews, etc during this past recession and could not get work for multiple years.
In our new global economy, I think it is probably best if we all have a job (at least on the side, even for much less money than we can make at an employed position) that doesn’t require a job interview. Nobody can fire me from this website. It might not be successful, but it’s mine. Docs can be independent contractors, consultants, authors, entrepreneurs etc etc etc.
If I didn’t have a job, I’d go make one. Sure, many people would never/could never do that. That’s why they’re unemployed.The maximum unemployment check in my state is $496 a week. I can make that mowing lawns. $30 a lawn x 8 lawns a day x 5 days a week = $1200 a week. Take out $200 in expenses, and that’s still twice unemployment. It would take me a while to ramp up, of course (if I wasn’t mowing I’d be knocking doors soliciting business), but I’ve already got all the stuff-truck, mower, trimmer, blower, bags. I know I can do that. I’ve done it before-both knocking doors and mowing lawns. They’re both highly motivating.
Reminds me of Christmas Vacation with Cousin Eddie, classic show.
Clark: “How can they have nothing for their children?”
Ellen: “Well, he’s been out of work for close to seven years.”
Clark: “In seven years, he couldn’t find a job?”
Ellen: “Catherine says he’s been holding out for a management position.”
I too knocked doors, mowed lawns, shoveled snow, picked rock, picked crops, etc.
But this recession was pretty brutal. The county next to me had a 60 percent foreclosure rate. Not a lot of lawns to mow there.
I knew multiple people with graduate degrees who kept hitting a brick wall on interviews and then tried to pick up seasonal jobs in retail and lost out on those due to lack of retail experience.
Short-term government help doesn’t bother me too much. I agree that 99 weeks was pushing it, but this recession was nearly unprecedented and to a large extent government-caused by eliminating regulation, neglecting oversite, and pushing home ownership to an unhealthy level.
I’d like to see the unemployed look for a job half time and spend the other half improving the community (cleaning parks, streets, downtown, helping out with whatever office tasks local government need help with, painting, scraping, minor fix up). Same for welfare. I don’t understand why we didn’t launch a big WPA-like effort during this recession. The WPA accomplished amazing things that stand (and are useful) to this day.
The city didn’t require the bank to pay someone to mow the lawns? 🙂
I agree with your thoughts on unemployment pay/WPA. People feel better about themselves when they’re doing something to earn their money rather than getting a handout.
City did.
Banks ignored it and let all lawns go, no repercussions to the banks.
City/County was overwhelmed just trying to execute the flood of foreclosure evictions and limit rampant crime/looting of abandoned houses.
City went bankrupt and defaulted on their muni bonds, pensions, etc.
It has been quite a sequence of ongoing events.
Where are you, Detroit?
At any rate, chances of me mowing lawns to make money are pretty low. I can think of 3 or 4 alternative careers that pay more that I would probably do first. But my point is that I could.
California. SF Bay Area.
County adjacent to mine is in the Central Valley. It led the nation in foreclosures. It’s main city (and the city I was referring to) is Stockton, CA – it defaulted on bonds, pensions, etc.
Okay, maybe a Xeriscape business. 🙂
That would have worked!
Due to the drought and water rationing in my county we’ve all had to tear out our lawns and xeriscape. If they had a beat up pick-up truck/mini-van and a few simple tools they could have made a go of that by commuting over to my county and selling that service door to door.
Superb reasoning. We need to get you in office.
Just barely eligible for the Saver’s credit. Probably the only year I will ever get it…I guess it is a good problem to have…
I’ve thought about working that Saver’s credit for low income family members. I give them some money, they put it in a Roth IRA and get the credit. Like a “rich uncle match.”
Not a bad idea, but you might encounter some practical restraints. Those who qualify for the Saver’s credit usually have no tax liability or might only qualify for the 10%-20% credit like I did (10%). I am not sure on this, but does the EITC get applied before the Saver’s credit? If so, that would limit it’s practical availability. Also can’t do it if they have no income or are students for five months of the year.
The other issue I am running into is the minimum amount to open a Roth IRA with Vanguard is $1000 and that gets you their retirement series funds. You can open up an account with fidelity for them which has different limits, but I’d prefer to limit investment options of investment newbies.
You would also run into a fairness issue of not giving money to people who aren’t eligible for whatever reason.
Still might be possible with certain family members, but a lot of things have to fall your way.
Hijacking the thread, but just to keep an eye out on whether the Roth IRA backdoor conversion will be still available next year.
https://blogs.wsj.com/totalreturn/2015/02/02/obama-would-block-strategies-to-pump-up-roth-iras/?mod=WSJ_hpp_sections_yourmoney
The president is looking to slam the door on the so-called back-door route into Roth IRAs as well as to close off the ability to roll after-tax contributions in a company 401(k) plan into a Roth IRA. The second strategy was simplified by a 2014 ruling from the Internal Revenue Service.
The president’s proposal would apply to distributions beginning next year.
A general rule of thumb with anything Obama says is to see if it can be done via executive order or regulatory will power. If not, it really isn’t worth worrying about. Congress cannot agree to do basic things, I doubt they would go after some arcane tax rule that they themselves probably use. It just doesn’t have the headline grabbing power that politicians love.
Wow…102 replies…This one must have struck a couple nerves!
NOthing gets us going like talking about the unavoidable—
Death and taxes
or for us death by a thousand taxes!
Sucks to have a high [earned] income. Finishing residency in a few months, signed a contract for around 400k (in a higher paid specialty) and was calculating what I’ll actually take home (prior to all expenses). Because of high state income tax, my actual take home will be around 210k after tax. My salary is going up 6-fold, but my take home is only going up 3-fold.
I have an independently wealthy uncle who withdraws about 250k/year from his investments, pays 20% capital gains and thus lives off ~200k/year. Whereas I will make 400k pay almost half in taxes, and take home 200k. As a frugal person I think I can easily live on 100k/yr and save the rest (which is only a 25% savings rate, so likely only a little more than what’s needed in order to retire at the same lifestyle). So my uncle will in unearned income have twice the spending power I do (more since certain expenses are set), while “making” 37.5% less.
The system is set up to force the working middle class to keep working. And it makes it almost impossible to very rapidly save and join the truly wealthy.
In the end I can’t complain because I will likely never want for anything. #firstworldproblems
The lesson I see there is to convert your earned income as quickly as possible into passive income.
But that’s the problem, because it’s extremely difficult to make that transition to passive income because of the progressive tax structure. Even at a savings rate of 25%, it will take decades to come close to the estimated 8.3 million my uncle has saved (based on a safe withdrawal rate of 3% -> 250k/yr). Even with a higher than normal physician income, and higher than normal savings rate, it is unlikely that I’ll ever reach a passive income that equals 100% of my take home pay.
Take for example Mitt Romney who I think earned ~20million the year he ran for president and had an effective tax rate of 14%. That means he took home 17.2 million dollars. I may make 15 mil over my entire career, and of that I may take home about 9 million. Dont fool yourself into thinking that you can join the truly wealthy and live off your passive income by being a working bee in our progressive tax model. You may be able to make it to their ranks, but it won’t be in the traditional way of saving a little every year for retirement. The system needs the workers, and it can’t afford to actually allow them to be able to save a larger portion of what they earn and retire early. Thus the cards are stacked against you. If you are extremely careful, at best you can hope to be able to retire 5-15 years early at the same level you grew accustomed to living at which was lower than your friends because of your high savings rate.
You’ve made one mistake. I do not plan to “join the truly wealthy.” I plan to acquire “enough.” My “enough” is far less than Mitt’s annual income. I’m doing awfully well for having the cards stacked against me. Your description of “at best” sounds pretty darn good to me. The level I’m living at now is very comfortable and certainly meeting both my needs and wants.
Sorry Jim, by “you” I wasn’t refering specifically to you, but to the working middle class. I feel the same way as you do, in that I’m blessed in life. I’m just trying to point out (and I think unfortunately a lot of unhappiness comes from comparisons, so perhaps I shouldn’t even engage the thoughts) that it will take several decades of hard work on our parts to ensure a very comfortable retirement. This is in comparison to someone who manages to get “paid” via capital gains, with the exact same pretax income, would be able to accelerate their savings and retirement by at least 2 fold.
I feel there shouldn’t be such inequality between earned income and investment income. It does allow the rich to stay rich and keeps the middle class in their place. At the same time, few of the upper middle class who recognize these ineuqualities actually want it to change, because they plan to benefit from them later on in their life after years of hard work (I will be irritated if I carefully save in a taxable account for years (paying around 40% every dollar I saved) only to have to pay 40% on any profit I make because the tax laws have changed by the time i want to withdraw money. I’m hoping for 15% capital gains tax again by the time I retire :).
There are good reasons to have the capital gains rate lower than the ordinary rate. First, that money was already taxed when earned. Why should it have to be taxed twice at all? Second, some of that gain is simply inflation, but you have to pay taxes on it anyway. The lower rate helps make up for that. Third, we want to encourage people to invest. Those investments grow the economy.
If you’re really feeling a need to sock it to the super rich, why not just tax capital gains over $10 Million a year or something at ordinary rates? Just realize that once there are new rules, people will learn them and play by them and there will likely be unintended consequences. Maybe they’ll just buy whole life insurance and take out loans. Who knows. Or buy more munis. Or whatever. But people aren’t stupid. If you’re going to change the rules to get their money, they’re going to change their behavior to minimize that effect.
Agree with most of what you said. The issue is that people didn’t always pay ordinary rates on that money to begin with (e.g. CEOs being compensated with stock options).
How do you like the idea of a flat tax on luxury items?
I like the idea of a flat tax on everything and get rid of the income tax all together. But nobody in Congress cares what I think.
if you haven’t already discovered it in the interwebs, check out the MrMoneyMustache website for a reality check on what frugal really means. 100k/yr would qualify as lavish in many eyes. But you have the right idea, live frugally, save lots early on, and you’ll be like your uncle in a few decades.
I’m starting to wonder what he does with his blog earnings given his low spending level.
Will check out the website. My wife likes to give a lot, so I’m sure at least 40k will come out of that 100k. But agree even 60k/year isn’t really frugal, and probably twice what I currently live very comfortably on.
I really like your writing but this article and most of the comments are whinging. You did warn me at he beginning.
Your readers have incomes so large they owe money to the governments. Since they are part of the society and community this is your obligation as a upstanding law abiding citizen.
Get over it because you don’t really have a real problem compared to many people in the community.
“Get over it because you don’t really have a real problem compared to many people in the community.”
Righteous indignation. Are you saying rich people can’t have problems or are you saying poor people can’t take responsibility for their actions? 😉
Would you like it better if I wrote a post about 16 reasons it sucks to have a low income? I’ve had that too. I prefer the high income, even with the additional tax burden.
Is there a link to a good site for deductions one can claim as a business owner?
IRS.gov? 🙂
https://www.irs.gov/instructions/i1040sc/
Via Email:
You missed the increased cost to high earners for Medicare Part B and Part D. If your reportable income at the time you sign up for B and D is above a certain level, you pay considerably more for B and D.
How sad, too bad . . .
Can’t deduct all the interest on that huge house that you bought with all those unused rooms? Lose some deductions on your $300K-plus income???
When I was your age, I topped out at a marginal federal tax rate over 40% on a much, much lower income. I had six years of higher education (no way to deduct any of it), with about four more later when I pursued my PhD. Never made a six figure income, much less several times that. The tax brackets are now much lower than they used to be, and our individual taxes are lower than most developed countries.
I find my Social Security income increasingly taxed (it’s not indexed), despite the fact that I paid tax on the previous income from which I had paid for it. Usually paid SS on all my income, not just part.
The only valid point in your rant is that the tax code is hopelessly confusing and unfair. You should be paying SS on all your income. No deductions for real estate taxes or interest if your house is more than the average family needs. Lower marginal rate, yes, but no loopholes, and definitely progressive.
No backdoor Roths. Pay your taxes like a man. Most of us can only put $5,500 in our Roths, so the amount I was able to put there since they were created is pretty pitiful. I now pay taxes to gradually convert my IRA (formally a 403(b)) to a Roth, so at least my daughter may get out of paying tax again on something she inherits. The Roth, as created in 1997, gave the middle class earner a little relief from taxes in his old age. In 2005, Congress quietly opened the “back door”, giving the truly wealthy a similar
opportunity, thus costing the government billions in unpaid taxes down the road. A big advantage of the Roth is that it can be inherited, providing an heir with tax-free income. The result will be huge fortunes being passed down tax-free, exacerbating the inequalities so vividly revealed last year by Piketty. A good idea somehow twisted to advantage the wealthy.
And if the government helped educate you, expect you to work until you’re in your mid-sixties, like most of us. And I’m fairly sure that in various ways, federal and/or state governments paid for at least the facilities where you studied, if not actually subsidizing the variable costs. Most of us expect to have a working life of four decades of more (I paid Social Security taxes for a full half century). Doctors, especially, should have a moral obligation to provide their vital services until the mid-sixties.
BTW, I enjoy your website. You are doing a good job there, and much of it is relevant to any middle class person trying to manage his/her money well. I learned most of those lessons the hard way, too, and the increasing complexities of both the financial and taxation systems are constantly creating new obfuscation. Now if you rich docs would only make a strong, united push for simplification of the tax code, and elimination of ALL loopholes, something might get accomplished.
See you in the Philly airport sometime. You can buy the drinks. Cheers.
The definition of rich is making one dollar more than your brother-in-law. I suspect if the above poster found himself suddenly penalized for his success (higher taxes, no longer qualifying for benefits/subsidies, etc.), he would be the first to protest, perhaps with the loudest voice. The politics of envy seems to rear its ugly head more frequently on this and other sites.
By the way, my family legally immigrated to the US when I was a kid with only four suitcases to our name. We have created jobs, paid large sums in taxes, and have contributed to our country. Haters gonna hate.
Envy is an emotion that I’ve never understood — and not because I was born with a silver spoon in my mouth. I wasn’t. It is, to me, one of the ugliest and most destructive emotions that exists. I thought that when I had nothing, and I think it now when I am well off.
I seem to remember a study where people were asked where “being rich” begins. As I recall, the number given was invariably at a level of income or wealth that was a certain percentage more than the person answering the question had. I don’t remember what the exact number was, but it was a remarkably consistent number — didn’t matter whether the person answering the question made minimum wage or made millions a year.
There is nothing wrong with this. I know that I did the calculation in my head at the time and realized that that percentage more than I earned and had was right at about what I would consider to be wealthy. The problem comes when it turns to envy and resentment and a “I want to take what that person has away from him” attitude. Healthy people are content with what they have and don’t envy others. They may have justifiable anger at those who steal and rig the system, but they aren’t driven by envy.
50% more. Studies of how much more you need to retire hit the same number- 150% of your current nest egg.
Well, it’s true — if my income were 50% higher, it would be smooth sailing to meet all of my needs and goals! Wouldn’t need a dime more… 🙂
“So at least my daughter may get out of paying tax again on something she inherits.” So I’m to “pay my taxes like a man,” but you’re helping your daughter avoid hers?!
Ewww. Get off my lawn! “Doctors, especially, should have a moral obligation to provide their vital services until the mid-sixties.” That is really really funny.
These comments always make me laugh as well. If the statement does not make sense when using other professions, it usually is a dumb statement. For Example…
“Teachers, especially, should have a moral obligation to provide their vital services until the mid-sixties.”
It is always easier to tax someone else’s money.
Class warfare in picture
https://loft965.files.wordpress.com/2010/05/crabs-pull-each-other-down.gif
Wow.
While the marginal rates are all correct, the effective rates really paid have not gotten much mention here. What should the rates be on income?
That’s obviously a political question without a correct answer.
I am not asking politically. Part of the problem is the complaint is always that taxes are too high (actually, they are historically low right now) but no one will say what they think is a fairer tax rate. Often the difference in marginal and effective tax rates are not mentioned at all – meaning – I know of no one that pays the 39% Federal rate – no one. If all of the tax deferred space is utilized and some planning very very few people will be paying the extra Medicare tax too. When one has high income there are many ways to legally circumvent the tax system – not so much for those working people on w-2 income alone.
I’ll add one more gripe. If you make your money through owning stakes in businesses and/or rental properties you’re not considered to be making “earned income.” I don’t know who “earned it” I didn’t. I spend real time managing these endeavors and pay the full tax rate on the proceeds, yet am able to use none of the tax deferred savings vehicles (IRA, 401k etc). I save 50+% of my earnings and have 98% of my retirement funds in a taxable account. I enjoy benefits of this country and understand our taxes help support that, but I feel sometimes that I disprootionately pay in without being able to reap the few advantages built into the system for most folks.
I don’t think it sucks in any way to make a lot of money, except for others expecting you to pay for them. I’m in sales as an asset gatherer for a big investment manager and make 6 to 7 figure income each year, depending upon sales that year. Paying taxes of almost half a million on a year isn’t the best thing, but when you look at the whole picture, it’s better than not having taxable income
Brian,
As you mentioned you did detail analysis of margin tax rate with different scenario in turbo tax ,whether you have calculated with in hand salary you get in percentage term vs percentage what you pay to government by including scenario of say $400k salary with all above 16 points taken into consideration with married filling jointly and with two kids and then includes
1) property tax paid
2) 40% of in hand income you spend then you pay 10% sales tax
3) misc 1-2% total hidden tax you pay whether it’s electricity utility bill,cellphone bill,gas for car,telephone bill,cable tv bill etc
I think at end whatever extra income anyone making above 300k,government takes away 65% of income in form of all above taxes.
Other point of study loan interest is not tax deductible is another big problem.
For doctors who spent almost 30-35 years of their life in studying/residency and 30 years in job and then 30 years as old retire person( if they live 90-95) years which means doctors only get 1/3rd life(33%) for earning and out of 33%, whole life government get 65% as taxes then for person only 11.5% of his life earning potential he get to earn decent money from which for 10 years he keep paying back student loan.This is the reason I have seen many doctors after age of 65 also still working and thinking in old age what gain he/she get while becoming a doctor and spent whole life to pay to government/system.
How is it that our president has a income of over 400k and only paid 18% in taxes.
Why wonder? Look yourself. Here’s 2014s:
https://www.whitehouse.gov/sites/default/files/docs/20150410093348711.pdf
He paid $93K on $495K of total income, some of which was self-employed but most of which was wages. He put $17K in a SEP and had $159K in itemized deductions- $25K in state taxes, $29K in property taxes, $40K in mortgage interest, and $77K to charity. That’s 19%. Seems about right to me. Maybe you should ask yourself why your rate is so high. Want lower taxes? Try giving away 16% of your income to charity like the Obamas and get yourself some retirement plans.
Hey writing – I am thankful for the information , Does someone know if my company could possibly get a blank URL – IRS W-2 version to complete ?
I never realized how much I was leaving on the table until I started using a salary calculator. Now, I feel empowered to negotiate better pay and make smarter financial decisions for myself and my family.