State of US Household Wealth...

[sheehs1]

Absolutely samclem.

A comparison of the middle 20% from 50 years ago to now would probably open some eyes. There is a very weird perception (mostly being contrived by those with an agenda) that the middle class is getting boned today when in reality the comfort level is probably much higher...

There are plenty of people with an agenda that would love nothing more than to somehow convince as many people as possible that they "deserve" more and that the rich are taking it away from them.

I really am curious I guess...

If you are someone that believes the wealth inequality is getting out of hand, what SHOULD the distribution be?

Interesting points...and when one thinks about it...a lot of truth in this. The ways in which someone described the middle class is getting squeezed....are costs being born by all. The middle class is not unique with that. Some just have more than others. Always has been, always will be.

 

[Mulligan]

Absolutely samclem.

You would be hard pressed to find an example of a government interfering and making things better.

A comparison of the middle 20% from 50 years ago to now would probably open some eyes. There is a very weird perception (mostly being contrived by those with an agenda) that the middle class is getting boned today when in reality the comfort level is probably much higher...

There are plenty of people with an agenda that would love nothing more than to somehow convince as many people as possible that they "deserve" more and that the rich are taking it away from them.

I really am curious I guess...

If you are someone that believes the wealth inequality is getting out of hand, what SHOULD the distribution be?

I read an interesting statistic, that in 1980 a high school graduate earned 71% of a college graduate, today it's 55%. If people aspire to stay in the middle class, they are going to have to have a higher level of learning. The factory model from generations past will more than likely not keep you in the middle class level.

 

[sheehs1]

The deduction game generally doesn't get most people to zero, but for alot of people it gets them down below what your daughter pays.

Your daughter with nothing to itemize ends up subsidizing a lot of the deductions.

My wife and I put 33k into our 401ks. We paid 7.5k or so in deductible mortage interest, got a 1.5k credit (the equivalent of about a $5k deduction) for replacing our furnance. We deducted 2.5k for property taxes and about 7k in state income taxes. We gave about 3k away to charity. We get the personal exemption that everyone gets of about 7k. We also got the $800 making work pay credit, which is the equivalent of about a 2.5k deduction

So roughly $67k of our income is exempted from Federal income taxes, and we haven't even worked at it. We also don't have any of the deductions for children yet.

Our Federal taxes end up being less than 10% of our gross income.

Not everyone is able to get their tax percentage to 10%. Wow ..that's quite an achievement. I don't think I have ever seen 10%. Everything I do is either phased out, or capped or coming to an end (like a mortgage deduction) so my rate is close to 2.5 to 3 times what yours is. My deductions were half of yours. But...that is what happens when you pay off your mortgage...or no longer have access to a 401K (although I do a Simple but it is capped). So please know I supported your deductions !! LOL !!

I mis-stated my daughters income...it was closer to $48,000. Will be significantly higher next year with a full years worth of teaching salary in there (she has other income). And she will be able to itemize.since she bought a condo this year.....so...maybe she can get to 10%... but I doubt it.

Great example of making generalized comments about taxation, rates, income levels,,,etc....meaning we can't really generalize. It depends on what ones personal circumstances are and which deductions are available for them to take...with the current system.
If we went to a flat tax system of 10 to 15%...I'd be paying 50% plus less tax. Maybe that's why Congress doesn't pursue this with any seriousness.

 

[ERD50]

Not everyone is able to get their tax percentage to 10%. Wow ..that's quite an achievement. I don't think I have ever seen 10%. .

Are you talking marginal rate or overall rate (total FIT/AGI or / Gross income)?

My FIT/AGI was running ~ 10-15% in the last few years of work (higher if I had cap gains, but still ~ 20% even when I had huge CG that put in the 'rich' category). Now, with small income from DW, ~ 4%, sometimes near zero with kids deductions.

-ERD50

 

[Hamlet]

Your daughter's taxes seem high, even with just the standard deduction and the Making Work Pay tax credit.

Did she file as a dependant or something?

Not everyone is able to get their tax percentage to 10%. Wow ..that's quite an achievement. I don't think I have ever seen 10%. Everything I do is either phased out, or capped or coming to an end (like a mortgage deduction) so my rate is close to 2.5 to 3 times what yours is. My deductions were half of yours. But...that is what happens when you pay off your mortgage...or no longer have access to a 401K (although I do a Simple but it is capped). So please know I supported your deductions !! LOL !!

I mis-stated my daughters income...it was closer to $48,000. Will be significantly higher next year with a full years worth of teaching salary in there (she has other income). And she will be able to itemize.since she bought a condo this year.....so...maybe she can get to 10%... but I doubt it.

Great example of making generalized comments about taxation, rates, income levels,,,etc....meaning we can't really generalize. It depends on what ones personal circumstances are and which deductions are available for them to take...with the current system.
If we went to a flat tax system of 10 to 15%...I'd be paying 50% plus less tax. Maybe that's why Congress doesn't pursue this with any seriousness.

 

[Independent]

An interesting point. What's likely causing the excess inflation in these areas you cite?
Higher education: More than $100 billion in federal (or federally backed) student loans each year. That's ten times the amount of private loans. Pumping in government money drives up the price of products and services.
Housing: Fannie and Freddie: Need we say more? Pumping in government money drives up the price of products and services.
Medical costs: 45% of all spending on health care comes from the government. Pumping in government money drives up the price of products and services.

So, maybe we can reduce some of the major causes of inflation by the same method we will reduce the tax "bite"--by reducing government expenditures.

Correct. Don't forget to add:

Housing: The mortgage interest deduction, which probably does more to increase the amount spent on housing than F&F ever did.
Medical: The group medical insurance deduction, which probably ....
Education: Tuition deductions, not as big as loans, but same idea.

Deductions like this create the same economic distortions as direct spending programs.

 

[Independent]

Even my daughter ...working full time this year and showing about $43,000 in income paid $7,300 in taxes (no itemization). With W2's and 1099's you can not hide your income. Meaning ..it's fairly straight forward.

The standard deduction for a single person was $5,700 in 2010. One personal exemption was $3,650. That leaves $33,650 in taxable income.
The tables in the 1040 instructions give a tax of $4,625 or $4,633.

If you want to check the math:
The first $8,375 is taxed at 10%, for a tax of $837.50.
The remaining $25,275 is taxed at 15%, for a tax of $3,791.
That gives a total FIT of $4,629.

 

[sheehs1]

Are you talking marginal rate or overall rate (total FIT/AGI or / Gross income)?

My FIT/AGI was running ~ 10-15% in the last few years of work (higher if I had cap gains, but still ~ 20% even when I had huge CG that put in the 'rich' category). Now, with small income from DW, ~ 4%, sometimes near zero with kids deductions.

-ERD50

My marginal rate was 28%. My effective rate was 24%. My daughters marginal rate was 25% and her effective rate was 18.5%.

My husband is a CPA...and I have scoured for every deduction we might be able to take. So this is the best we can do...considering we are phased out of a lot of deductions, have less than $1,200 in mortgage deduction and our kids are all over 21.
It's a little more complicated than that. He owns his own little CPA firm...so all of his deductions are taken on the side of the corporation. His SEP, his corporate mortgage, his health care......etc.

 

[sheehs1]

Your daughter's taxes seem high, even with just the standard deduction and the Making Work Pay tax credit.

Did she file as a dependant or something?

This gets a little complicated. But to answer your question, my daughter did not claim herself.
Because...technically...my husband and I were separated until August of last year....and so I filed "head of household" for 2010...since I was still footing her bill...for over 50% of her expenses while she was still in college for 2010.

This meant she could not claim herself so she couldn't take the "making work tax credit". But it helped me on the other side.

Stuff happens.

 

[sheehs1]

The standard deduction for a single person was $5,700 in 2010. One personal exemption was $3,650. That leaves $33,650 in taxable income.
The tables in the 1040 instructions give a tax of $4,625 or $4,633.

If you want to check the math:
The first $8,375 is taxed at 10%, for a tax of $837.50.
The remaining $25,275 is taxed at 15%, for a tax of $3,791.
That gives a total FIT of $4,629.

Because of head of household filing...some of my daughters income was taxed at my rate (form 8615). This is probably why it sounds high to everyone.

But between the two of us...we came out better...with filing this way.

Next year will be simpler...

 

[engprodigy]

I read an interesting statistic, that in 1980 a high school graduate earned 71% of a college graduate, today it's 55%. If people aspire to stay in the middle class, they are going to have to have a higher level of learning.

Yeah, I believe what has contributed too that is that a HS diploma really doesn't mean much anymore. The kids that are being handed diplomas now are not very educated on average and are void of the basic math skills that would even be necessary for maintaining a household budget.

And like you said as the world changes people will have to keep themselves competitive; whether that means more education or working longer or harder.

Since some in politics feel that everyone "deserves" a college education I have a feeling the same thing will happen with college degrees.

If you water down curriculum so everyone can achieve something, what is it worth?

 

[Independent]

Entitlements have done a lot to screw with perception.

I'd be shocked to discover a large % of people that have played by the rules and worked hard that have been screwed by the system and are living in near poverty...

I think about people who had a factory jobs and saw the employer go belly up or send the jobs overseas. These people discovered there were no other factory jobs with good wages and ended up working part time in convenience stores. I don't know if that means "near poverty" to you. I think it means a dramatic reduction in income, probably to a level lower than their parents had made at the same age.

 

[Hamlet]

I was talking FIT/ Gross income.

It's pretty easy to get under 10% for married combined gross incomes of 100k-175k if you max out both 401ks, have a mortgage and live in a state that taxes income.

Those Minnesota taxes really "help"

Are you talking marginal rate or overall rate (total FIT/AGI or / Gross income)?

My FIT/AGI was running ~ 10-15% in the last few years of work (higher if I had cap gains, but still ~ 20% even when I had huge CG that put in the 'rich' category). Now, with small income from DW, ~ 4%, sometimes near zero with kids deductions.

-ERD50

 

[samclem]

Correct. Don't forget to add:

Deductions like this create the same economic distortions as direct spending programs.

Good point. There's a lot of talk of this or that government handout or favorable tax treatment being needed to "make XX affordable" when, perversely, the government involvement does exactly the opposite. As a "bonus" they sometimes create customers who never had any business being clients of that particular service, causing problems for them as well (financial, opportunity costs, etc).

I'd be shocked to discover a large % of people that have played by the rules and worked hard that have been screwed by the system and are living in near poverty...

I think there's a big gap in defining what "the rules" are. In my book (probably similar to what our parents thought) "the rules" for getting ahead included doing more than what is expected at work, getting additional training (on your own dime) to make yourself more valuable to employers, taking the crappy, demanding jobs others might shy away from, volunteering for extra hours when someone calls in sick, looking for jobs outside your own company to improve your situation, etc, etc. I know there are people who are surprised and bitter when they believed they "played by the rules" (showed up on time, didn't get into trouble, did what they were told to do) and then someone junior to them gets promoted ahead of them. Meeting the minimums ain't a road to the American dream. It was for a short time, but never before and probably not again.

 

[engprodigy]

Meeting the minimums ain't a road to the American dream.

If you do the minimum expect minimum results.

 

[jdw_fire]

Not everyone is able to get their tax percentage to 10%. Wow ..that's quite an achievement. I don't think I have ever seen 10%. Everything I do is either phased out, or capped or coming to an end (like a mortgage deduction) so my rate is close to 2.5 to 3 times what yours is. My deductions were half of yours. But...that is what happens when you pay off your mortgage...or no longer have access to a 401K (although I do a Simple but it is capped). So please know I supported your deductions !! LOL !!

a married couple filing jointly earning $500,000 of income (none of which is qualified dividends or capital gains) with only $34,000 in non taxable income (i.e. deductions) paid $133,408 in FIT which is 26.7% of income (i find it hard to believe that a household earning $500k/yr would only find $34k in deductions), so you obviously make alot of money. it is understandable, with your income level and your level of deductions, that you find it hard to believe that a household with a middle class income could "only" pay 10% of their income in FIT. (btw if you drop the earnings to $400,000 then the % of income paid in FIT drops below 25%)

edit: i posted this right after reading the post i quoted so it doesnt take into account the posts following it. however i still think it adds some value so i am leaving it here.

 

[sheehs1]

a married couple filing jointly earning $500,000 of income (none of which is qualified dividends or capital gains) with only $34,000 in non taxable income (i.e. deductions) paid $133,408 in FIT which is 26.7% of income (i find it hard to believe that a household earning $500k/yr would only find $34k in deductions), so you obviously make alot of money.

it is understandable, with your income level and your level of deductions, that you find it hard to believe that a household with a middle class income could "only" pay 10% of their income in FIT. (btw if you drop the earnings to $400,000 then the % of income paid in FIT drops below 25%)

edit: i posted this right after reading the post i quoted so it doesnt take into account the posts following it. however i still think it adds some value so i am leaving it here.

JDW...everyones situation and options are different based on whatever deductions they may be able to take advantage of ...at that point in their life. When someone has just started their mortgage ...they have a great deduction versus someone that has essentially paid off their mortgage. Same applies for those that still have children under roof versus those of us that don't.
Same for those with access to 401K's versus those of us that don't.
When a person has "just" those three things they clearly can reduce their taxable income by huge percentages.

If you go back and read the thread....this started with my daughters income.. and my wondering why at her $48,000 dollar income level (right smack in the middle of median income) she was paying 18% versus...another poster who said they paid 10%. The reasons why have already been uncovered...both here and with a phone call to my CPA husband....along with the fact she had no real deductions. At least this thread made me take another look at her taxes...so there was value in that for me.
My other reason for the "WOW" at someone paying 10%...is that...for someone like me who has been both down the income pole and up the income pole, I've never managed to pay 10% so obviously I was either doing something wrong...or ...not doing some things back then that I should have. I offer up my own daughters 18% rate..based on her median income...as an example of how others are also paying more but clearly are middle income. It boils down to "her just starting out with no real deductions and that's what she has to pay".

And I'm going to get a little snarky here. Making blind assumptions about what people make around here ......doesn't seem a cool thing to do. Do I make good money. Yes...for now. Never said I didn't and I'm not complaining. Could I keep more of it?. Yes if I had those deductions to the extent that I would like...but that would require me to have another child at age 55 (which I think would be impossible) or to buy another house (which I don't want)..etc..etc.

 

[jdw_fire]

And I'm going to get a little snarky here. Making blind assumptions about what people make around here ......doesn't seem a cool thing to do. Do I make good money. Yes...for now. Never said I didn't and I'm not complaining. Could I keep more of it?. Yes if I had those deductions to the extent that I would like...but that would require me to have another child at age 55 (which I think would be impossible) or to buy another house (which I don't want)..etc..etc.

i just worked the math backwards (based on your statements of % of income paid in FIT and ur deductions). i will now do the math for your daughter.

If you go back and read the thread....this started with my daughters income.. and my wondering why at her $48,000 dollar income level (right smack in the middle of median income) she was paying 18% versus...another poster who said they paid 10%. The reasons why have already been uncovered...both here and with a phone call to my CPA husband....along with the fact she had no real deductions. At least this thread made me take another look at her taxes...so there was value in that for me.
My other reason for the "WOW" at someone paying 10%...is that...for someone like me who has been both down the income pole and up the income pole, I've never managed to pay 10% so obviously I was either doing something wrong...or ...not doing some things back then that I should have. I offer up my own daughters 18% rate..based on her median income...as an example of how others are also paying more but clearly are middle income. It boils down to "her just starting out with no real deductions and that's what she has to pay".

starting at a gross income of $48,000, if she got to claim herself and only the standard deduction then she would have paid FIT on $38,650 yielding a tax of $5844 which is < 12.2% of her stated income (alot closer to 10% then the 18% number you gave).

since you claimed her she must have gotten some financial benefit from you (supposed to be > 50% which would imply she got an equal or greater income from you then she had earned, making the percentage paid in FIT half or less then the number you gave and therefore 9% or less). the fact that she paid a greater percentage than i showed above is because she really got more income (your paying 50% of her living expenses) than was actually reported on her tax return.

again all i am doing is working the math (backwards in your case and forward in your daughters case).

 

[sheehs1]

What you are doing....is trying to take taxes that are based on someones personal situations...and ability to either take or not take deductions...without one clue. Tax percentages can rise or fall...depending.

I think I will trust my CPA husbands work and the IRS over your generalized statements or the subtle attempt to imply I am lying.

Knock yourself out...but again key assumptions you make are wrong. My daughter was is in college last year. Most of her income came in the last quarter of the year...and I supported her 100% until then...so...

Like I said earlier, I received some value from this thread...but this thread has now become off topic. I probably participated in getting it off topic and to the others I apologize.

 

[beowulf]

I'll give you a real world example with no caveats for being a dependent. My daughter, who lives in another state, is unmarried, has no dependents and takes the standard deduction. This is from her tax 2010 return - AGI - 41,332 (no 401K or IRA contributions as she was unable to afford them), Federal Tax $4,378. That's 10.6% - which for an income that low is one heck of a reduction in available money. Then another $3081 was withheld for FICA. After that, an additional $1,008 was paid in state tax.

Her total deductions, before medical, $8,647, or 20.9% of a small income. You can't tell me the lower middle class isn't squeezed. That's a crock. That $8,647 means a hell of a lot more to someone making less than $50K a year than does 35% of someone making $500K a year. In terms of disposable income, it's the difference between living from paycheck to paycheck and being able to max out 401Ks, buy a house and save a good deal.

Sure, her pay may or may not go up in coming years, but the fact is that, for many people, it doesn't. The progressive tax system in this country is broken and yes, I do have a problem with people making millions of dollars not paying one heck of a lot more in taxes. The only people a flat tax will help is those who earn enough that it has no effect - I don't know what that number is, but a flat tax of 20% would be devastating for someone making $50K and would be shrugged off by someone at the $400K level. I don't want to speculate about tax credits for the working poor, etc., as they have a way of disappearing over time.

I'm consistently amazed at the number of people on this board who complain about taxes yet have incomes 20 times the poverty level. I agree that virtually everyone should have to pay something, but you have to look at the total impact of FIT and FICA when you are talking about people who make less than about $100K a year.

 

[sheehs1]

I'll give you a real world example with no caveats for being a dependent. My daughter, who lives in another state, is unmarried, has no dependents and takes the standard deduction. This is from her tax 2010 return - AGI - 41,332 (no 401K or IRA contributions as she was unable to afford them), Federal Tax $4,378. That's 10.6% - which for an income that low is one heck of a reduction in available money. Then another $3081 was withheld for FICA. After that, an additional $1,008 was paid in state tax.

Her total deductions, before medical, $8,647, or 20.9% of a small income. You can't tell me the lower middle class isn't squeezed. That's a crock. That $8,647 means a hell of a lot more to someone making less than $50K a year than does 35% of someone making $500K a year. In terms of disposable income, it's the difference between living from paycheck to paycheck and being able to max out 401Ks, buy a house and save a good deal.

+1
That is how my initial comments on this thread started. I was surprised my daughters taxes were so high compared to her relative income of under $50K. There were some extenuating circumstances that explain it.....but like your daughter, my daughter can't afford to have 403b contribution deducted from her paycheck...giving her a deduction nor was she able to itemize.

I definitely see where someone making $50K or even someone making $80K..could be disadvantaged by our tax code.. ...IF ....they don't have those deductions to lower their taxable income. And to get those deductions one must have either the cash flow or some money to "invest" on a house...etc.

 

[Independent]

I read an interesting statistic, that in 1980 a high school graduate earned 71% of a college graduate, today it's 55%. If people aspire to stay in the middle class, they are going to have to have a higher level of learning. The factory model from generations past will more than likely not keep you in the middle class level.

I see two problems with the "get more education" prescription.

1) Jobs that really use the extra education also require above average native talent. More education is fine for the 20% or so of the population with the brains to become engineers, accountants, IT gurus, RNs, etc. It may work for another 20% who can figure out some other job that will use their education. I don't know why we would want to send the rest to college.

2) I see some raising-the-bar without raising the reward going on. My former employer has lots of customer service reps working the phones. At one time, they were all HS grads. Over the years, more of them became college grads. Given a choice, my employer will hire a college grad over a HS grad. BUT, wages haven't increased as the number of college grads in the job category went up. It's just a matter of needing more education to get the same job.

 

[GregLee]

I see two problems with the "get more education" prescription.

1) Jobs that really use the extra education also require above average native talent. ...

2) ... It's just a matter of needing more education to get the same job.

But if you actually need more education to get the same job, regardless of whether the job really uses the education, you'd better get that extra education. Or you won't get the job.

 

[Westernskies]

But if you actually need more education to get the same job, regardless of whether the job really uses the education, you'd better get that extra education. Or you won't get the job.

Bingo!

 

[rescueme]

Yeah, I believe what has contributed too that is that a HS diploma really doesn't mean much anymore.

But that's the way it has always been for a lot of folks, hasn’t it? One generation gets so far, the next generation takes it a step further, and so on.

Education? My grandparents (all four) came to this country after WWI. They had no formal education beyond primary school. My parents? My father got his HS diploma (just barely); my mother left school at age 15, primarily to support her struggling parents.

I received my HS diploma and had a year of technical school (back in the days before even community colleges in our area). My DW did the same.

Our son? He has a B/S CIS.

Step by step, generation by generation, education is taken further. Unfortunately, a lot of jobs really don't require the educational level they expect their applicants to have, but hey - if you can hire a $10/hr. clerk that has a degree over somebody who doesn’t, that's just the way it is in today's labor market.

Wait till the labor market comes up with a shortage (yes, it will happen. No, I have no idea when). Then you will see the migration of degreed types out of those lower level positions as they try for something within their field of study. The lower-level jobs will be returned to those with less education.