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Old 02-17-2010, 07:01 PM   #41
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I'm not sure I understand the reasoning. Say you made an additional $50,000. Wouldn't a small amount (not most) go to the taxman?

I wonder if the word "taxes" has as much of a negative connotation in other countries.
We are pretty close to being in the 25% bracket for 2010 given a couple different things this year versus 2009. That gives us a marginal rate of around 40%. Add in some phase outs of deductions/credits, and the marginal rate will jump. Maybe to 50%. Add to that the change from zero tax rate on dividends in my current 15% bracket to 15% tax on dividends in the 25% bracket.

I'm just in that sweet spot of not paying a lot of taxes despite high income. I make much more and some of the good deal I have now goes away. Not that I'm opposed to making more money, just hard to get motivated when I would only keep half roughly.
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Old 02-17-2010, 07:12 PM   #42
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It also includes a lot of option premium income, which gets taxed like capital gains. Since I harvested a huge amount of losses, this is "tax free" and will remain so for several more years. Then, I will start paying taxes again.
This is a common way to keep taxes low- run a losing investment program. Keep at it, your taxes will (rightly) stay low.

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Old 02-17-2010, 07:16 PM   #43
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We are pretty close to being in the 25% bracket for 2010 given a couple different things this year versus 2009. That gives us a marginal rate of around 40%.
I do not understand your meaning here. If you are in the 25% bracket, your marginal rate is 25%. That is what is meant by being in the 25% bracket. Or do you mean that your federal marginal rate is 25%, and the state 15%, making them together equal 40% not allowing for offsets?

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Old 02-17-2010, 08:58 PM   #44
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I do not understand your meaning here. If you are in the 25% bracket, your marginal rate is 25%. That is what is meant by being in the 25% bracket. Or do you mean that your federal marginal rate is 25%, and the state 15%, making them together equal 40% not allowing for offsets?
Fed 25%, State 7%-8%, SS/Medicare 7.65%. Roughly 40% marginal rate before factoring in phase outs at the state and fed level.
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Old 02-17-2010, 09:03 PM   #45
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We are pretty close to being in the 25% bracket for 2010 given a couple different things this year versus 2009. That gives us a marginal rate of around 40%. Add in some phase outs of deductions/credits, and the marginal rate will jump. Maybe to 50%. Add to that the change from zero tax rate on dividends in my current 15% bracket to 15% tax on dividends in the 25% bracket.

I'm just in that sweet spot of not paying a lot of taxes despite high income. I make much more and some of the good deal I have now goes away. Not that I'm opposed to making more money, just hard to get motivated when I would only keep half roughly.
You are in a nice sweet spot. But say you win a $10,000 scratch card. Would you not cash in because you'd have to pay half in taxes?
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Old 02-17-2010, 09:12 PM   #46
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This is a common way to keep taxes low- run a losing investment program. Keep at it, your taxes will (rightly) stay low.

Ha
Well, I don't know anyone invested in equities when the bottom fell out who didn't have some losses. Unless you keep all your money under the mattress, you will be exposed to nasty moves in the market. The solution: sell near the bottom, replace with like things immediately or wait 30 days to replace with exacts. Same economic position, but with a tax cushion. Nice way to make lemonade out of lemons.

During 2008, I beat the S & P 500 by 6.8%. During 2009, by 5.2%. YMMV.
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Old 02-17-2010, 09:32 PM   #47
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You are in a nice sweet spot. But say you win a $10,000 scratch card. Would you not cash in because you'd have to pay half in taxes?
No doubt I would spend the few minutes to take it to the gas station or the downtown lottery office to cash it and gladly pay tax on it.

But in a not so hypothetical situation for me, let's say I could take a job paying $60,000 more. It would be a lot more stressful, require significantly more than 40 hours per week, and would require hard work during most of those hours, including learning a new field of practice. It would also likely require a fair amount of non-reimbursed non-deductible expenses that I don't have now (rather long commute, wardrobe, dry cleaning, etc).

I have chosen not to pursue this more stressful course of action. That is what I mean when I say I'm not particularly concerned about earning a lot more money. In other words, I'm not willing to work a lot harder when a majority or very large minority of my additional earnings will be confiscated by the taxmen.
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Old 02-18-2010, 09:25 AM   #48
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^^^
So taxes play a role in the cost-benefit analysis but it isn't the main role. The main factor would be the amount of additional work and time the promotion would require.
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Old 02-18-2010, 09:31 AM   #49
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You are in a nice sweet spot. But say you win a $10,000 scratch card. Would you not cash in because you'd have to pay half in taxes?
There's a big difference between willingly paying 50% in taxes on lottery or gambling winnings (actually, for me it would be 25% as this is not earned income, taxed at my marginal rate and there's no state income tax) and paying 50% on $10,000 of overtime work or a second job.

I'll gladly accept $10,000 in "free money" that's taxed at 50%. I'm much less likely to work longer hours for an extra $10,000 that's taxed at 50%.
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Old 02-18-2010, 09:47 AM   #50
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^^^
So taxes play a role in the cost-benefit analysis but it isn't the main role. The main factor would be the amount of additional work and time the promotion would require.
If you want to phrase it in the cost-benefit analysis format, here it is. The cost is a significant increase in my labor effort and time plus unreimbursed expenses noted (rather long commute, wardrobe, dry cleaning). Implicit in the cost is loss of most of my free time (most of my weekday evenings, and 1/2 of my weekend). The benefit is the pay I would receive net of taxes.

So per this analysis, you are correct, the taxes are not the "main role", since no individual consideration serves a "main role" in the cost benefit analysis. But the taxes are what tips the scale against the decision to pursue this course of action. If the "benefits" were greater (ie if I could move the taxes mostly back onto the benefits side of the scale), my decision would be different.

For example, say the disutility of working significantly more plus unreimbursed additional expenses are a $40,000 cost to me, and the benefits of net pay after taxes are $30,000 (half of my $60,000 gross pay). Costs exceed benefits, hence I would not pursue. Say taxes were cut in half (to 1/4 my gross pay increase of $60,000), and my costs remain $40,000. My benefits of net pay after tax would be $45,000, hence I would receive a $5,000 net benefit by pursuing the new opportunity.

And I can also read the writing on the wall. I'm pretty sure I would quickly become "rich" and subject to even higher taxation as a member of the elite rich class.

So, meh, not interested! I'm ok being the no-tax-paying millionaire next door.
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Old 02-18-2010, 11:45 AM   #51
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The decision is easy for a job that you aren't going to like. But would you ever turn down a raise where your job stays completely the same because of tax reasons?
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Old 02-18-2010, 12:03 PM   #52
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The decision is easy for a job that you aren't going to like. But would you ever turn down a raise where your job stays completely the same because of tax reasons?
If the job remains exactly the same -- same duties, same responsibilities, same hours -- then accepting the raise is *exactly* like accepting a winning lottery ticket in the amount of the raise or bonus! Of course it makes no sense to turn it down when you don't have to work longer or harder to get the extra money -- regardless of the tax rate on that windfall.

Now if I had to take a second job to get the extra money, or if the "raise" came with longer hours and/or increased responsibilities and stresses, I just might turn it down. In fact, in my current situation I almost certainly would decline it; I want more free time and less stress a lot more than I want a little more money.
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Old 02-18-2010, 06:23 PM   #53
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This is very interesting. I read a tax study recently that said the US gets a higher percentage of its tax revenue from wealthy individuals than most other OECD countries. This is despite the fact max marginal tax rates are lower in the US than most other countries. This issue seems to be the many deductions that are allowed. The strangest to Canadians is mortgage deductibility. Makes absolutely no sense. Not hard to see why your gov't can't balance its budget. Much fewer deductions allowed in Canada. I paid about 30% combined fed/provincial tax in 2008. This would not be atypical I think.
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Old 02-18-2010, 06:29 PM   #54
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Not hard to see why your gov't can't balance its budget. Much fewer deductions allowed in Canada. I paid about 30% combined fed/provincial tax in 2008. This would not be atypical I think.
I agree about mortgage interest deduction. Want a housing bubble? Among other strategies, it always helps to make mortgage interest deductible. But realtors and the mortgage industry are big political contributors, and that is all that matters.

On your combined 30%, is that your marginal rate, or the overall bite? In other words, if you earned $100,000, did you pay $30,000 to those two entities?

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Old 02-18-2010, 06:37 PM   #55
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30% is average rate. Max marginal rate is 39%. Difference is low marginal rates at the bottom incomes and some deductions (mostly alimony).
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Old 02-18-2010, 07:40 PM   #56
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In other words, I'm not willing to work a lot harder when a majority or very large minority of my additional earnings will be confiscated by the taxmen.
Remember that income subject to SS taxes is capped at $106,800. So you're really looking at more like a ~32% marginal rate.
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Old 02-18-2010, 07:51 PM   #57
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This is very interesting. I read a tax study recently that said the US gets a higher percentage of its tax revenue from wealthy individuals than most other OECD countries.
Greater income inequality in the US also plays a part.
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Old 02-18-2010, 07:51 PM   #58
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I'll gladly accept $10,000 in "free money" that's taxed at 50%. I'm much less likely to work longer hours for an extra $10,000 that's taxed at 50%.
Yes, work doesn't pay. This is a problem with our tax system (IMO). Tax authorities operate exactly the opposite of businesses that have profit motives.

For example, many businesses offer their employees perks for working overtime. Someone normally earning $20/hr might get $30/hr for working the weekend or perhaps $40/hr for working a holiday. Businesses do this for a reason. They believe that the extra productivity is worth the additional cost. Employees do it for the same reason. As a teenager at McDonald's, I got time and a half when working more than 8 hours a day. These were gladly accepted opportunities.

The tax system is exactly the opposite. Effectively, the tax system offers people less for working more. An employee who normally earns $20/hr gets only $12/hr for working overtime. While the employee receives more money, it is at a rate significantly less than their normal salary. The incentive to perform additional work is greatly reduced.

The tax system does not encourage productivity. My effective tax rate is 34.6% and my marginal tax rate is 43.5%. The benefits of work (e.g., money) are being overshadowed by the costs (e.g., stress). This encourages me to early retire. While this may be good for me, it is not good for the government. When I retire, the $60K/yr in total taxes that I currently pay to the government will drop to less than $10K/yr. The government is encouraging me to work less and give them less money.
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Old 02-18-2010, 08:07 PM   #59
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You are welcome. According to de gubbermint i don't work for a living - all that rental income is unearned income. Means i don't pay into social security, which is cool, but also means i will collect pocket change for SS at some point. Also means no IRA. The interest income is taxed at regular income rates. We are kid-free and unmarried. Last year I spent 17.1% of my AGI on Federal taxes and 7.4% of AGI on state taxes. At least we don't have sales tax here, but property tax on our home cost a couple percentage points of AGI. So maybe 26.5% of my AGI goes to providing infrastructure, police and fire protection, offering cash inducements to Afghan poppy farmers, and as much government as i can stand or afford.

Maybe the lesson here is that I should have more cash in stocks busily increasing in value but not throwing off profit. If convinced that stocks made more money i guess i would... Just too chicken to count on Mr. Market to provide for me.
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Old 02-19-2010, 08:49 AM   #60
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Greater income inequality in the US also plays a part.
agree. When I was younger and trying to increase my net worth, I always thought the lower taxes in the US would be great. Now that I have "overcome" Canada's high tax environment (at least to some extent), I have changed my thinking. Canada's more generous social safety net encourages a more egalitarian society I think. This in turn encourages less crime and probably improves quality of life given a set level of wealth. So in summary-earn it in the US and spend it in Canada.
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