TIL: No more worrying about tax brackets

[meierlde]

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]

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!]

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

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]

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.


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[audreyh1]

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.


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When you run some software somewhere?

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

 

[audreyh1]

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]

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]

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]

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]

....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]

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]

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]

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.

 

[pb4uski]

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

Not really good or bad... more already previously taxed (at the corporate level) so preferential rates are used to avoid taxing the same income twice.... but you already knew that.

 

[523HRR]

The current tax code screams for simplification. In recent years, it has become almost impossible to effectively manage my federal tax return to a zero tax bill or small amount of tax due because ordinary income can move significantly between tax brackets and investment income (qualified vs unqualified) can be unpredictable, while short-term vs long-term gains/losses in any one year can also vary...all taxed at different rates. But most challenging to get a handle on are the Pease Limitations on deductions, personal exemption phase-outs, and the Alternative Minimum Tax. Triggers for additional Medicare Tax on investment income and the Net Investment Income tax kicking in at different levels just add more complexity. Who the heck knows what my 'marginal' tax rate is at any one moment in time. Moving toward a flatter, simpler tax code with fewer deductions and credits would be a welcome change if the political environment would ever allow it.

 

[razztazz]

Not really good or bad... more already previously taxed (at the corporate level) so preferential rates are used to avoid taxing the same income twice.... but you already knew that.

Yes I knew it is a conceit sold by people who pay for the tax code to be the way it is. It's called getting preferential treatment not avoiding taxing the same money twice as the story is constructed. Despite what your comeback will be I know you already knew that. Have a nice day

 

[Gumby]

"Taxes are what we pay for civilized society...."

-- Justice Oliver Wendell Homes, Jr., dissenting in Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927).

 

[pb4uski]

Yes I knew it is a conceit sold by people who pay for the tax code to be the way it is. It's called getting preferential treatment not avoiding taxing the same money twice as the story is constructed. Despite what your comeback will be I know you already knew that. Have a nice day

And yours is one sold by people who don't understand math.

Besides, you don't know me well enough to make such a claim.

 

[Danmar]

Only with close proximity to the U.S. does $200,000 seem like 'a fairly low amount'! Holy first world problems Batman! And one still has to go far beyond the top marginal rate before one's effective tax rate gets anywhere close to the top marginal rate.

Of course if you are making a million plus a year, you can look at it any way you like... but I would suggest that if you are making that much income as salary that maybe it is time to spend some of it on a good tax accountant and compensation negotiator, they are both tax deductible.

Agree it's not a problem, but since I'm retired and well qualified to look after my own taxes (CPA) I don't think I need either a good tax accountant of compensation negotiator.

 

[haha]

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!


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Not dumba at all though it went against you that time. People who profess to believe in efficient markets will see that what you know is that if you sell you will pay a tax; while what you guess is that the stock price will go down.

If it is strategically important that you not take a loss, go ahead and sell. Otherwise, the odds are with standing pat.

Ha

 

[scrinch]

Not dumba at all though it went against you that time. People who profess to believe in efficient markets will see that what you know is that if you sell you will pay a tax; while what you guess is that the stock price will go down.

If it is strategically important that you not take a loss, go ahead and sell. Otherwise, the odds are with standing pat.

Ha

Agreed. To me, tax timing is like market timing. If you have a reason to be in or out of an investment, you should do it. You shouldn't let market conditions or tax conditions control your investment decisions. So it's not dumb to hold the stock until next year, but in my opinion it is misguided to let the tax issue be the overriding factor if you have other reasons to want to sell today.

 

[Souschef]

I am in shock this year

I sold my rental unit in 2014, and this is the first year i have no write offs.
The thing that tripped me up were the year end capital gains from the mutual funds.
Well as my dad used to say, you made the money, pay the taxes.

 

[scrinch]

"Taxes are what we pay for civilized society...."

-- Justice Oliver Wendell Homes, Jr., dissenting in Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927).

I live in a part of the world where most find a way to pay little or no taxes...either they hide from the tax man or they pay him off. The impact on society is immense. Unmaintained government properties, govt employees who have to look for "alternate" income, woefully inadequate infrastructure, very weak rule of law (see item #2), police who require that you pay them to come investigate a theft (another #2), etc.

No one likes paying taxes, but when you can see what low taxes can lead to, it illustrates OWH Jr's point and puts the taxes in a different light. Now taxes seem like they really are buying a greater degree of civilization.