Tax Rates and ER Decision

[Bestwifeever]

At least many of the retirees here seem to be able to manage their incomes to minimize their taxes (and presumably did what they could while working to do the same or to defer taxes). DH and I have almost everything in an IRA so anything paid to us from that, including dividends and capital gains which we now receive rather than reinvest, is taxed as ordinary income.

Hmm, what's that old saying about death and taxes ?

 

[HFWR]

...did you just want to bitch about taxes?

Whiskey Rebellion - Wikipedia, the free encyclopedia

A time-honored American tradition...

I have two tax "concerns", inasmuch as they affect me and my circumstances the most: nearly all my savings are tax deferred, so no reduced rates for cap gains or divvies, and RMDs. Not much I can do about the former, but some ROTH transfers may slightly improve the latter.

 

[phil1ben]

Since this topic was moved to the political forum I guess I can be somewhat more political. So I will shift the focus of the original post. Twenty-five years ago I quit my megajob and found and own my own business (1 shareholder and 1 officer) currently with 30 employees. I have been FI for years but planned on working until 60-65 (now 54). I will now RE in large measure due to the increase in taxes. Simply stated the most recent changes were the straw that broke the camels back.

In the next two years I will try and transition the business to my senior people who will pay for their stock from available cash flow (i.e. long term capital gains). Hopefully they can continue the business for their own benefit and the benefit of the other employees. I will make myself available to help them.

The political point (that I am now making) is that the change in tax law has caused me to make this decision early which will have an effect on the employees that work at my small company. One can argue that this decision (for whatever reason) is the right decision for me personally anyway. One is only on the earth for so long........

The decisions in Washington to hammer the successful do have a real life effect on everyone. Most of the people they are hammering are not Warren Buffets, Bill Gates or Jamie Dimons but small successful business owners---whose decisions have an effect on millions of wage earners. There are thousands and thousands of us. I am sure others on this Board and thousands elsewhere are confronting similar decisions.

I think I feel a little better now.

 

[brewer12345]

The political point (that I am now making) is that the change in tax law has caused me to make this decision early which will have an effect on the employees that work at my small company. One can argue that this decision (for whatever reason) is the right decision for me personally anyway. One is only on the earth for so long........

Or perhaps your former employees will take the business in a new and vastly more successful direction now that you have finally gotten out of the way. Who knows?

 

[Chuckanut]

The decisions in Washington to hammer the successful do have a real life effect on everyone. Most of the people they are hammering are not Warren Buffets, Bill Gates or Jamie Dimons but small successful business owners---whose decisions have an effect on millions of wage earners.

Of course! At the risk of sounding cynical, please remember that it is socialism for the very rich and capitalism for everybody else.

 

[phil1ben]

Or perhaps your former employees will take the business in a new and vastly more successful direction now that you have finally gotten out of the way. Who knows?

For their sake, I sincerely hope you are right.

 

[ziggy29]

The political point (that I am now making) is that the change in tax law has caused me to make this decision early which will have an effect on the employees that work at my small company. One can argue that this decision (for whatever reason) is the right decision for me personally anyway.

Which also frees up the jobs for people who need them more. Who knew it was a "jobs" program?

 

[karluk]

I guess I'm just not seeing OP's point. He's had enough and is ready to turn the reins over to competent replacement. What's different between him and any other retiree on this forum?

I think what OP is experiencing is not so much excessive tax rates, but lowered marginal utililty. He doesn't think the financiall rewards are worth the effort, but obviously his soon-to-be former employees feel differently, or they wouldn't be willing to take over the business. The extra dollars aren't worth as much to OP because he already has enough. His employees still need the extra money, so the dollars mean more to them.

Typical retirement scenario, cloaked in gripe about taxes.

 

[sengsational]

22 years ago, with a new baby, both DW and I worked full time. I looked at Federal tax, state tax, FICA, on DW's income and decided right there that the system made it not worth it to keep the second job. So glad for that because I'm sure we were much happier, and our kids better adjusted.

 

[Danmar]

I have signed up for the Class of 2015. My decision was further confirmed when I met with my accountant and I saw with hard figures the pain of the most recent increase in tax rates. I am paying income tax at the rate of 39.6 federal, 4.1 State (which is relatively low. i.e. had I remained a NJ resident I would be paying 11.0% State tax), 3.0% Obamacare tax, real estate tax, sales tax, capital gains tax etc...

With all of this, MORE than 50% of my income goes to pay taxes. When you are in the highest bracket most of your deductions phase out so there is not much one can do. Mortgage interest, state and local taxes all phase out.

Simply stated, working and paying tax on W-2 income is not worth it. The founders never contemplated that it would be "One for you and One for me".

The point of my post is that the most recent higher tax rates have strongly effected my decision to retire. I would request that this post does not turn into a discussion of "how lucky I am to be in the 39.6% bracket" but that replies should focus on the effect that the most recently enacted higher tax rates have on one's decision to retire.

Wow. I never would have guessed US rates could be so high. I see your point. I pay less in Canada.

 

[brewer12345]

I guess I'm just not seeing OP's point. He's had enough and is ready to turn the reins over to competent replacement. What's different between him and any other retiree on this forum?

Apparently he is special because he makes a lot of money.

 

[Walt34]

Just a gentle reminder that it is okay to disagree and still be civil. Moderators have received two complaints about this thread.

 

[M Paquette]

Wow. I never would have guessed US rates could be so high. I see your point. I pay less in Canada.

Note that the federal rate he is quoting is the marginal tax rate, the rate charged on his 'last dollar earned'. My marginal tax rate hits at the 25% tax bracket. I do not, however, pay 25% of my income in Federal taxes. The effective tax rate, the total federal taxes paid divided by adjusted gross income, is below the marginal tax rate for all taxpayers. Effective rate only approaches the marginal rate as income rises to infinity. Note that this never happens.

In my case, while the marginal tax rate is 25%, the effective tax rate after I get done with Schedule A, D, and assorted other forms that produce a net tax credit, is a whopping 0%. The tax code is a marvel of complexity, producing ample opportunity to both justify screams of outrage and the gleeful tenting of fingers while muttering "Excellent!".

 

[ERD50]

...
In the next two years I will try and transition the business to my senior people who will pay for their stock from available cash flow (i.e. long term capital gains). Hopefully they can continue the business for their own benefit and the benefit of the other employees. I will make myself available to help them. ...

Or perhaps your former employees will take the business in a new and vastly more successful direction now that you have finally gotten out of the way. Who knows?

For their sake, I sincerely hope you are right.

I hope so too, but in my limited experience as an observer, the people who take over a business from the founder(s) seldom have the same combination of drive and/or skill set to succeed in the same way.

But there are exceptions, maybe this will be one.

Regarding the earlier posts about the difference between marginal and effective tax rates, it would be interesting for reference if the OP would calculate their effective tax rate. But still, the marginal tax rates do set the measure for any marginal income.

-ERD50

 

[clifp]

Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman

If you drive a car, I'll tax the street,
If you try to sit, I'll tax your seat.
If you get too cold I'll tax the heat,
If you take a walk, I'll tax your feet.

Don't ask me what I want it for
If you don't want to pay some more
'Cause I'm the taxman, yeah, I'm the taxman

Now my advice for those who die
Declare the pennies on your eyes
'Cause I'm the taxman, yeah, I'm the taxman
And you're working for no one but me.

Growing up I didn't pay too much attention to the lyrics of the Beatles tax man. I later learned that UK top tax bracket back in the 60s was actually 95% and Harrison was right 19 for you and one for me. I started my first real job in 1981 before the Reagan tax cuts had taken place and marginal rates were 70%. I did find out that many of my coworkers (mostly engineers) were well in the 50% range and near 60 with state income tax. So I guess the point is it could be worse.

Anecdotally, it seems to me that 50% really is the tipping point where people are really disincentive to work and devote their attention to reducing taxes or simply quitting the rat race.

 

[Theduckguru]

Deciding to retire because you don't like being in the 39% tax braket? PM me, I'll be more than happy to un-retire and take up your miserable existance.

 

[phil1ben]

Regarding the earlier posts about the difference between marginal and effective tax rates, it would be interesting for reference if the OP would calculate their effective tax rate. But still, the marginal tax rates do set the measure for any marginal income.

-ERD50

Thank you for your thoughts and I have the same concern you do.

It is true that until a married couple filing joint makes more than $450,000.00 annually they do not reach the 39.6% level. I am aware of the difference between marginal and effective and it is an important difference. To answer your question, most of my income is at the highest rate causing most of it to go to the government. My effective federal tax rate is closer to 39.6% than the next rate of 35%. That is why at 54 I have determined it is no longer worth the time, sleepless nights and aggravation. A number of my friends feel the same way.

I started this discussion with the concept that this result was never intended by the founders. It was never intended by Lincoln, by T. Roosevelt or even John Kennedy who said " he was committed to "an across-the-board, top-to-bottom cut in personal and corporate income taxes." which was actually passed by Congress a few months after his death.

The current tax rates are stifling and although it is currently popular to "hammer" the wealthy it is very important to remember the long range effect it will have on everyone. Shoot at me if you will but it does not change the facts.

Happy New Year to all.

 

[REWahoo]

My effective federal tax rate is closer to 39.6% than the next rate of 35%.

My back of the envelope calculation of fed. income tax says you have an annual income north of $1M. Difficult to garner much sympathy here for paying less than 39% of that in taxes.

 

[Theduckguru]

My federal income tax calculator results yield 35.4% on $1 million as a single, 34.5% married.

 

[Alan]

My back of the envelope calculation of fed. income tax says you have an annual income north of $1M. Difficult to garner much sympathy here for paying less than 39% of that in taxes.

+1

I think the OP suffers so much tax for his level of income because he said it was mostly W-2 income. There are some high income wealthy people who have publicly declared their income have very low effective tax rates (<15%) because they can structure much of their income to be from sources such as stock options, carried interest, qualified dividends etc that are taxed at 15% and also can be offset some of it with CG losses.

 

[Ticker]

Crazy as it sounds, I am happy to pay my share of taxes. I see the results everyday in our great country, either in the infrastructure, the care we take of our citizens, the security that the money has brought us, the education of our kids, the supporting of our elders, etc.....None of this is free.

Excessive taxation? Maybe to you, but I'll gladly pay it for the lifestyle I enjoy and the country that I currently live in.

 

[ERD50]

Deciding to retire because you don't like being in the 39% tax braket? PM me, I'll be more than happy to un-retire and take up your miserable existance.

I don't think the OP described his existence as 'miserable' - he merely said he was not motivated to continue to work for that marginal income when so much was taxed. He is at the cusp of his own personal "Laffer Curve".

It's easy for you to say "I'll take yours", but if you did what it takes to achieve that income level on your own, you might feel the same as the OP. What's stopping you?

Growing up I didn't pay too much attention to the lyrics of the Beatles tax man. I later learned that UK top tax bracket back in the 60s was actually 95% and Harrison was right 19 for you and one for me. ....

Yes, I always thought that was poetic licence - it was years later that I made the connection between the UK 95% marginal tax rate and the 19/1 ratio.

Crazy as it sounds, I am happy to pay my share of taxes. I see the results everyday in our great country, either in the infrastructure, the care we take of our citizens, the security that the money has brought us, the education of our kids, the supporting of our elders, etc.....None of this is free.

Excessive taxation? Maybe to you, but I'll gladly pay it for the lifestyle I enjoy and the country that I currently live in.

And what is your marginal/effective tax rate?

-ERD50

 

[Ticker]

'And what is your marginal/effective tax rate?"
25/12.9
not quite sure of the relevance since it is top line dependent. If I made more, I'd still be happy to pay the going rate (render unto Caesar). I also pay 4% state, almost 10% sales, and 1.9% ad velorem. I pay tolls to cross bridges, and donate back my gov't stipend for sitting on a local governing board.

 

[brewer12345]

My back of the envelope calculation of fed. income tax says you have an annual income north of $1M. Difficult to garner much sympathy here for paying less than 39% of that in taxes.

"Livia is like the woman with a Virginia ham under each arm, crying cause she hasn’t got any bread." - Junior Soprano

 

[scrabbler1]

I have multiple marginal tax rates depending on the type of income it is. If the extra income is home-state muni bond income then it is zero. If it is out-of-state muni bond fund income then it is about 6.5% (my home-state marginal income tax rate). Same is true if it is QD or LTCG because I am in the 0% federal bracket for those types of income. If the extra income is ordinary dividend income, then it is about 21.5%, my combined fed+state marginal income tax rate.

Oddly, in recent years when I was itemizing my deductions, if they included medical expense then sometimes the federal 0% QD and LTCG was not quite zero because they each raised my income floor on Schedule A and therefore boosted my taxable income slightly.

My average tax rate (fed+state) as a percent of all income (including all tax-free muni bond income) is about 8%.