TIL: No more worrying about tax brackets

[RunningBum]

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Originally Posted by audreyh1 What matters is the effective tax rate - divide your taxes owed by your AGI and you get a better idea of what taxe rate you are paying (this method excludes non-taxed income).

It depends on why you are figuring it out. If you want to know how much you are paying in income taxes, yes. But if you are trying to decide how much to convert to a Roth IRA, in many cases the marginal rate matters. If you go over the 15% bracket with all income, in most cases you are not only paying 15% on your Roth conversion, but you've just some pushed dividend/LTCG income into being taxable at 15%, for a net 30% on that extra amount. I call it the phantom 30% tax bracket between 15% and 25%. Now, going $5 over that is not going to make a real difference, but going $10K over does because you'll pay $3K on that extra income. It would be better to spread out the conversion if possible so that you don't push divs/LTCGs into being taxable so that you don't hit that phantom 30% bracket at all.

Rarely does going into a new tax bracket actually hurt, unless you hit something like the subsidy cliff, which isn't actually a tax bracket.

Many, many years ago I worked with someone who got a 5cent/hr raise, and found that it actually did reduce her tax home pay, by something like $1. I think this was because of the withholding tables used, and I'd think it would've come out right at final tax filing time, but she actually went to her boss and told him to take the raise back.

[RunningBum]

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Originally Posted by dtbach I really pay no attention to tax rates. Years back I held off selling a high flying stock because it would have put me into a higher tax rate. Then it dove in value and took care of that problem for me. How fricking dumb was that!

I did something very similar. I held off on selling much of my company stock options before the dotcom bubble burst because I was moving to a state with a 2% lower tax rate the next year. I figured it was enough to buy a pretty nice car, but it wound up costing me over $1M.

I still pay attention to tax rates in general, but I make decisions like this based on the correct factors, and then try to optimize for taxes if I can--for example, tax loss harvesting or limiting gains if I'm not selling all shares. I don't let the tax tail wag the whole dog.

[jabbahop]

Quote:

Originally Posted by audreyh1 What matters is the effective tax rate - divide your taxes owed by your AGI and you get a better idea of what taxe rate you are paying (this method excludes non-taxed income).

I wonder why the irs or states don't show that at the bottom of your tax form. Your marginal rate is 28%, your effective rate is 18%. It might make people feel a bit better.


Sent from my iPad using Tapatalk

[harley]

Quote:

Originally Posted by jabbahop I wonder why the irs or states don't show that at the bottom of your tax form. Your marginal rate is 28%, your effective rate is 18%. It might make people feel a bit better.

I think it's because they don't want to start a precedent of doing something that makes sense or is helpful. They have a reputation to maintain.

[athena53]

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Originally Posted by jabbahop I wonder why the irs or states don't show that at the bottom of your tax form. Your marginal rate is 28%, your effective rate is 18%. It might make people feel a bit better.

Or it might make them cry. You know that for most of the population the most important figure is their refund.

[meierlde]

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Originally Posted by harley I think it's because they don't want to start a precedent of doing something that makes sense or is helpful. They have a reputation to maintain.

Actually Turbotax does that on its 5 year and two year summaries near the bottom of the page, they list the effective tax rate on the 5 year for the last 5 years even.

[RunningBum]

Quote:

Originally Posted by jabbahop I wonder why the irs or states don't show that at the bottom of your tax form. Your marginal rate is 28%, your effective rate is 18%. It might make people feel a bit better.

TurboTax does, on page 1 of the output file, in the federal tax return summary. Within the program too, IIRC.

[LOL!]

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Originally Posted by audreyh1 What matters is the effective tax rate - divide your taxes owed by your AGI and you get a better idea of what taxe rate you are paying (this method excludes non-taxed income).

That's one way to think about it, but a significant fraction of our income during our working years never ever showed up in AGI, so our effective tax rates were ridiculously small.

[LOL!]

The article says

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Everybody's money is taxed at the same rate, regardless of total income

Somebody forget to tell the author that some income is taxed at different rates. Folks here know I am thinking about qualified dividend income and long-term capital gains.

[Fedup]

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Originally Posted by RunningBum I did something very similar. I held off on selling much of my company stock options before the dotcom bubble burst because I was moving to a state with a 2% lower tax rate the next year. I figured it was enough to buy a pretty nice car, but it wound up costing me over $1M. I still pay attention to tax rates in general, but I make decisions like this based on the correct factors, and then try to optimize for taxes if I can--for example, tax loss harvesting or limiting gains if I'm not selling all shares. I don't let the tax tail wag the whole dog.

I lost the same million when the dot come burst, but so glad to make it back whole and still retire. Luckily I did buy a few expensive pieces of jewelry, I was not into frugality then. But the jewelries serve as a reminder of the good time.


Sent from my iPad using Early Retirement Forum

[audreyh1]

Quote:

Originally Posted by jabbahop I wonder why the irs or states don't show that at the bottom of your tax form. Your marginal rate is 28%, your effective rate is 18%. It might make people feel a bit better. Sent from my iPad using Tapatalk

When you run some software somewhere?

Turbotax calculates that for you as part of the report they generate.

[audreyh1]

Quote:

Originally Posted by LOL! That's one way to think about it, but a significant fraction of our income during our working years never ever showed up in AGI, so our effective tax rates were ridiculously small.

That's right! You had all sorts of deductions and reductions (401K, etc), so you can end up paying a very low income tax rate.

Doesn't change anything about how you think about it.

[scrinch]

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Originally Posted by dtbach I really pay no attention to tax rates. Years back I held off selling a high flying stock because it would have put me into a higher tax rate. Then it dove in value and took care of that problem for me. How fricking dumb was that!

Yep, tail waggin' the dog. Gotta remember which end is the dog!

[papadad111]

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Originally Posted by pb4uski Yes, a common misconception that sometimes drives me nuts in that some people in the 25% tax bracket will complain so loudly about how taxes are so high and its not worth working because they earn $100k and pay $25k to the feds. And when you point out to them that it just isn't true they can't understand and tell me how wrong I am, but if you take Taxcaster and model $100k of income for a MFJ couple with standard deductions the tax is $11,444 or 11% of income even though they are in the 25% bracket.

The issue is not so much the "25 percent tax bracket". People tend to state that without doing the math.

Just the same , It's the combination of all the taxes not just the federal graduated tax rate that come out ...and painfully paid .... equating to 25 percent or more. To wit:

Federal
State
FICA /SS/unemployment
Medicare supplemental

Add those all up and even someone in the 15 percent "federal" bracket is likely paying close to 20 percent of total income to the tax man. Especially in big cities like NYC or California or Oregon which have high tax rates. Higher bracket people pay even more. Then add sales tax where applicable, tax on pensions, additional obamacare tax on investment income and it's painful.

My last year of working I was paying nearly 50 percent of my gross income to federal state and local taxes. Crazy !

[scrinch]

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Originally Posted by papadad111 The issue is not so much the "25 percent tax bracket". People tend to state that without doing the math. Just the same , It's the combination of all the taxes not just the federal graduated tax rate that come out ...and painfully paid .... equating to 25 percent or more. To wit: Federal State FICA /SS/unemployment Medicare supplemental ... My last year of working I was paying nearly 50 percent of my gross income to federal state and local taxes. Crazy !

If we're counting non-optional insurance as tax, don't forget to include homeowner's (required by mortgage holder) and auto insurance.

[pb4uski]

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Originally Posted by papadad111 ....Add those all up and even someone in the 15 percent "federal" bracket is likely paying close to 20 percent of total income to the tax man. Especially in big cities like NYC or California or Oregon which have high tax rates. Higher bracket people pay even more. Then add sales tax where applicable, tax on pensions, additional obamacare tax on investment income and it's painful. My last year of working I was paying nearly 50 percent of my gross income to federal state and local taxes. Crazy !

Why don't you add gas taxes to your pity party while you are at it? Or move to somewhere that taxes you less.

[scrabbler1]

I have seen up close how those with nearly the same incomes (federal AGI) can pay vastly different amounts of federal income taxes. I do my ladyfriend's taxes and I do my own. Her income is totally from wages while mine is totally from investments. Yet, her federal taxes due are thousands of dollars more than mine (and that doesn't include her FICA taxes) because a good part of my income is from qualified dividends and long-term cap gains, and they are taxed at 0%. And I have some muni bond fund income which is tax-free and doesn't appear in my federal AGI. I itemize my deductions some years which saves me a little but not a lot.


On the state side, our tax bills are nearly the same because the state treats all types of investment income alike. We both take the standard deduction.

[Lucantes]

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Originally Posted by dtbach I really pay no attention to tax rates.

+1
I would rather earn it and have to pay some tax than to not earn it at all!

[razztazz]

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Originally Posted by scrabbler1 I have seen up close how those with nearly the same incomes (federal AGI) can pay vastly different amounts of federal income taxes. I do my ladyfriend's taxes and I do my own. Her income is totally from wages while mine is totally from investments. Yet, her federal taxes due are thousands of dollars more than mine (and that doesn't include her FICA taxes) because a good part of my income is from qualified dividends and long-term cap gains, and they are taxed at 0%. And I have some muni bond fund income which is tax-free and doesn't appear in my federal AGI. I itemize my deductions some years which saves me a little but not a lot.

I remember an example of this was made in 2012 when they compared Romney's income with newt Gingrich's. they had made about the same money in some recent year but Newt paid heaps more taxes because it was "bad" income ie mostly earned income from working. (giving speeches) and Romney's money was mostly from his money making more money and business related income. "Good" money

[papadad111]

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Originally Posted by pb4uski Why don't you add gas taxes to your pity party while you are at it? Or move to somewhere that taxes you less.

Sadly the long arm of the USA IRS tax code hits us all regardless of where We live ... Even moving does solve the issue.

USA and believe it or not.. North Korea ... are about the only 2 nations that have global taxation.

We can run but we can't hide.

It's not a pity party, I was really just explaining how many people can easily draw the conclusion about absolute tax burden percentages regardless of the graduated nature of the "federal" tax code.