Lots of interesting Fed income tax data

[pjigar]

Quote:

Originally Posted by COcheesehead Yep, it’s America. I grew up lower middle class at best. Today we are in the top 2-3% and frankly proud to be there.

Could't agree more. I was born in a poor family near the bottom 1% of the "world" and now we are in the top 5% of US households (which I would presume will put us in the top 1% of the world). And by the way, LBYM allowed us to invest and be part of the capitalistic system. It was painful to make the tough choices (especially when all our friends and associates were spending like there is no tomorrow) to save now and spend later. IMHO people underestimate/ignore the power of compounding and don't want to practice delayed gratification.

[Love This Community]

As our salaries keep going up so does the tax bite. We cringe at every bracket bump but say to ourselves that we’re blessed to be earning more to pay more into the system. As mentioned in my other three, I am working towards simplifying my portfolio and need to find ways to reduce the tax bite during retirement. Our options are limited with W-2 earnings. Even after maxing out 401k’s, contributing to back door Roth and HSA’s we end up paying significant $$ in taxes. As others mentioned, I’ll gladly be in the top 1% paying 30%.

I’ve experienced the power of compounding and seeing daily fluctuations in 4 digits. Can only imagine what this looks like when the daily fluctuations are in mid- high 5 digits.

[COcheesehead]

Quote:

Originally Posted by pjigar Could't agree more. I was born in a poor family near the bottom 1% of the "world" and now we are in the top 5% of US households (which I would presume will put us in the top 1% of the world). And by the way, LBYM allowed us to invest and be part of the capitalistic system. It was painful to make the tough choices (especially when all our friends and associates were spending like there is no tomorrow) to save now and spend later. IMHO people underestimate/ignore the power of compounding and don't want to practice delayed gratification.

Congratulations to you. That is what it is all about.

[COcheesehead]

Quote:

Originally Posted by Love This Community As our salaries keep going up so does the tax bite. We cringe at every bracket bump but say to ourselves that we’re blessed to be earning more to pay more into the system. As mentioned in my other three, I am working towards simplifying my portfolio and need to find ways to reduce the tax bite during retirement. Our options are limited with W-2 earnings. Even after maxing out 401k’s, contributing to back door Roth and HSA’s we end up paying significant $$ in taxes. As others mentioned, I’ll gladly be in the top 1% paying 30%. I’ve experienced the power of compounding and seeing daily fluctuations in 4 digits. Can only imagine what this looks like when the daily fluctuations are in mid- high 5 digits.

The fluctuations take some getting used. In the past on bad days or years, I would say to myself, wow we lost the value of a new car today or we lost the value of a new house this year. Now I just look at it as a percentage. It doesn’t feel so bad. It can also work in the opposite direction too.

[Koolau]

Quote:

Originally Posted by COcheesehead The fluctuations take some getting used. In the past on bad days or years, I would say to myself, wow we lost the value of a new car today or we lost the value of a new house this year. Now I just look at it as a percentage. It doesn’t feel so bad. It can also work in the opposite direction too.

Yeah, the first time my portfolio threw off more earnings than my salary was a "woo-hoo" experience. I didn't understand Financial Independence back then, but, looking back, I had achieved FI and only needed to RE some years later.

[pb4uski]

Quote:

Originally Posted by Love This Community As our salaries keep going up so does the tax bite. We cringe at every bracket bump but say to ourselves that we’re blessed to be earning more to pay more into the system. As mentioned in my other three, I am working towards simplifying my portfolio and need to find ways to reduce the tax bite during retirement. Our options are limited with W-2 earnings. Even after maxing out 401k’s, contributing to back door Roth and HSA’s we end up paying significant $$ in taxes. As others mentioned, I’ll gladly be in the top 1% paying 30%. I’ve experienced the power of compounding and seeing daily fluctuations in 4 digits. Can only imagine what this looks like when the daily fluctuations are in mid- high 5 digits.

Are you sure about that 30%?

For a married couple with $350k of ordinary income and $150k of preferenced income, federal income tax would only be 18.5%.

Even if you add Illinois state income tax of 4.9% that is 23.4%.

Add in SS taxes assuming ordinary income is wages and you get to 26.8%, still well short of 30%.

The only reason i mention it is because people quite frequently overestimate what they're paying for taxes.

[Love This Community]

Quote:

Originally Posted by pb4uski Are you sure about that 30%? For a married couple with $350k of ordinary income and $150k of preferenced income, federal income tax would only be 18.5%. Even if you add Illinois state income tax of 4.9% that is 23.4%. Add in SS taxes assuming ordinary income is wages and you get to 26.8%, still well short of 30%. The only reason i mention it is because people quite frequently overestimate what they're paying for taxes.

I was referring to when W-2 income increases to more than $400K and the highest tax bracket not the effective tax rate. Happy to stand corrected. You’re the expert in this space and would rely on your numbers more than mine any day.

[SevenUp]

Quote:

Originally Posted by Love This Community I was referring to when W-2 income increases to more than $400K and the highest tax bracket not the effective tax rate. Happy to stand corrected.

The chart below assumes MFJ both under age 63, one earner, no dependents, no 401k or IRA contributions, no state tax, and a fixed $150K of qualified dividends. SS and medicare payroll taxes included.

The case study spreadsheet (in Excel) used to generate the chart can generate similar charts with different assumptions.

[donheff]

Quote:

Originally Posted by SevenUp The chart below assumes MFJ both under age 63, one earner, no dependents, no 401k or IRA contributions, no state tax, and a fixed $150K of qualified dividends. SS and medicare payroll taxes included. The case study spreadsheet (in Excel) used to generate the chart can generate similar charts with different assumptions.

Nice chart SevenUp. It visually captures both the progressive and regressive aspects of the Federal tax system. I would like to see the same image decade by decade for the past 50 years. Couple those side by side by income distributions. Visuals are easier to grasp than lengthy descriptions.

[target2019]

Instead of reading articles and viewing charts, I've been watching Succession. It's the closest I've been to the Uber-rich.

According to real life (mine), you take the advantages and disadvantages that piled up throughout the years, use your "human capital", and find a path that lets you end up with more than enough.

Pay some tax? No problem.

[SevenUp]

Quote:

Originally Posted by donheff I would like to see the same image decade by decade for the past 50 years.

That exercise I leave to others!

[BubbaChris]

I am late to this thread, but I want to thank the OP for posting a current version of something I picked up earlier on our financial journey. The percentage of actual Federal tax paid by where the earners are by percentile. 88% paid by the top 25% of earners.

We had a handful of really good DINK earning years in the late 1990’s and I remember TurboTax had a screen which told me where our AGI stood as a percentile using the prior year’s statistics. It took some of the emotional bite out of the taxes we paid. I remember AMT undoing some of our tactics, and having 401k contributions returned and recategorized as income because DW was considered ‘highly compensated’ within her organization. In hindsight it meant we were on the path to FI. Even without adjusting for inflation, we never returned to that level of earning. But the good habits added to what time/compounding would do for us.

Lately we’ve been playing in the other end of the earnings spectrum to get the insurance premium tax credits which facilitated ER for us. The value of this, especially the time freedom of ER, means we are limited in what levers we can pull to manage future RMDs.

I’m okay with that too If we have to pay IRMAA down the road, it just means we’re back into an upper-percentile again and we will likely be blessed with having more than enough to enjoy those years too.

Best regards,
Chris