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Tax Rate - confused
Old 02-22-2007, 10:36 AM   #1
Dryer sheet wannabe
 
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Tax Rate - confused

"As a consequence, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5%, while a 45-year-old couple earning $500,000 pays at 43.2%. There are some exceptions: A 30-year-old couple earning $50,000 a year, for instance, pays 24.4%, and a 60-year-old couple making $150,000 a year faces a tax rate of 47.7%."

http://articles.moneycentral.msn.com...TaxRate40.aspx

Is there something I missed when comparing the tax rate for the 30-yr-old couples earning $20k vs $50k? Why is the $50k couple get a lower tax rate than the $20k couple?
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Re: Tax Rate - confused
Old 02-22-2007, 10:51 AM   #2
Recycles dryer sheets
 
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Re: Tax Rate - confused

Some possible reasons:

1. Because sales tax is "regressive" -- i.e. the low income person pays sales tax on their entire income because they spend everything whereas the higher income person isn't paying sales tax on their savings. Same thing for some other taxes like the gas tax.

2. Because SS & Medicare are flat so everyone is paying 7.65% -- until you hit the maximum limit in the $90k range, so it again is "regressive."

3. Because if you have enough money to save you can contribute to a 401k or IRA and pay no tax on that income.

4. Because passive income like capital gains and qualified dividends are taxed at lower rates.
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Re: Tax Rate - confused
Old 02-22-2007, 11:16 AM   #3
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Re: Tax Rate - confused

Thanks!
I was thinking of another scenario; where for e.g., the $20k comes from retirement fund via 72(t) or capital gains; thus avoiding the SS & Medicare flat rate, 10% penalty for early withdrawal plus getting a lower tax rate. Of course, $20k per year isn't much over here, but if it's a 3rd world country.... we would be millionaires...?
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