Author Topic: Hurt Feelings  (Read 12961 times)

Zx

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Hurt Feelings
« on: April 14, 2015, 06:23:11 PM »
I've been experimenting with tax rates in Oregon using an online calculator.

It seems no matter how I slice it, I am going to pay 25% +/- 1% in total tax every year.

I've never really figured it out before now, but I do remember working for the railroad and putting in 13 twelve hour days on one paycheck. When I got the check, it came out to me working 7 twelve hour days for me and 6 twelve hour days for the government, making it an effective tax rate of 43%.

I learned my lesson; I never worked that hard again.

But now it seems living in Oregon is going to cost me 9% of my income, whether or not I spend any of it. Being married, the tax rate is the same from 6500 to 250,000, being 9%. This is tax rate: "For earnings between $16,300.00 and $250,000, you'll pay 9.00% plus $1,011.00"

For federal, the tax rate is:  "For earnings between $73,800.00 and $148,850, you'll pay 25% plus $10,162.50"

Are there ways to mitigate this damage to your FIRE date? Maybe it's always been this way, but it appears to me to be ridiculous.


Eric

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Re: Hurt Feelings
« Reply #1 on: April 14, 2015, 06:27:19 PM »
Your feelings are hurt because income taxes exist?  You could mitigate this damage by either a) growing thicker skin b) realizing that the money paid doesn't just evaporate, you receive benefits from it c) contribute the max to your pre-tax retirement accounts to reduce your taxable income and/or d) move to another location with different taxes

Also, this is incorrect:

I've never really figured it out before now, but I do remember working for the railroad and putting in 13 twelve hour days on one paycheck. When I got the check, it came out to me working 7 twelve hour days for me and 6 twelve hour days for the government, making it an effective tax rate of 43%.

I learned my lesson; I never worked that hard again.

It's not your tax rate that changed.  Many employers change withholding amounts on overtime or bonus payments.  This has no bearing on your overall tax amount paid.  That's why you file a tax return each year.
« Last Edit: April 14, 2015, 06:29:14 PM by Eric »

Jeremy E.

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Re: Hurt Feelings
« Reply #2 on: April 14, 2015, 06:28:38 PM »
If you max out your IRA and Traditional 401k, you will bring your taxable income down quite a bit. Alternatively you could consider a different state, for example Washington doesn't have state tax, however all of the states have to pay for everything somehow, Washington just finds other areas to collect taxes from.

Jeremy E.

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Re: Hurt Feelings
« Reply #3 on: April 14, 2015, 06:30:11 PM »
Yet another way to reduce your taxes would be to donate a lot of your earnings

Zx

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Re: Hurt Feelings
« Reply #4 on: April 14, 2015, 06:31:09 PM »
Your feelings are hurt because income taxes exist?  You could mitigate this damage by either a) growing thicker skin b) realizing that the money paid doesn't just evaporate, you receive benefits from it c) contribute the max to your pre-tax retirement accounts to reduce your taxable income and/or d) move to another location with different taxes

My feelings are hurt because it's such a large chunk. I'm not a toddler, thanks. If you can't perceive a joke it's not my fault.

Your a and b are snarky and presumptuous. Your c is pretty good, but it doesn't mitigate the tax rate, does it? And d isn't an option at the moment.

Zx

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Re: Hurt Feelings
« Reply #5 on: April 14, 2015, 06:35:02 PM »
If you max out your IRA and Traditional 401k, you will bring your taxable income down quite a bit. Alternatively you could consider a different state, for example Washington doesn't have state tax, however all of the states have to pay for everything somehow, Washington just finds other areas to collect taxes from.

I was just thinking of getting the rate down but I guess that is pretty much set in stone no matter what I do?

I am not concerned really about getting out of paying taxes, just that 25% seems a bit much. Not as much as when Phil Mickelson complained about paying a 65% effective tax rate because he lived in CA and was thinking of moving and everyone hating on him for saying it.

It just seems screwy somehow. If everyone was paying 25% of their working income, seems like there would be no deficit problems in the government. But I guess they'd just increase spending again or something.

Exflyboy

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Re: Hurt Feelings
« Reply #6 on: April 14, 2015, 06:35:28 PM »
Yes you get screwed in Oregon.. You get more screwed in California.

As to the Federal, you do realise that its only the income that is OVER the threashold that is taxed at the higher rate right?

so the first $18,150 is taxed at 10%, the portion of income between 18,150 and $73,800 is taxed at 15% and over 73,800 at 25%.. up to 148k.

Then you have potential reductions... max out the 401k plan and your taxable income drops by $24k if your over 50.... If you can use a traditonal IRA.. thats another $6500 (depends on the income limits).

You comment about the working overtime and being taxed.. Well thats not strictly true.. you see you are taxed for OT at the bonus (i,e very high) rate.. When you do your taxes at the end of the year that is simply reconciled as ordinary income

Eric

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Re: Hurt Feelings
« Reply #7 on: April 14, 2015, 06:46:59 PM »
Your feelings are hurt because income taxes exist?  You could mitigate this damage by either a) growing thicker skin b) realizing that the money paid doesn't just evaporate, you receive benefits from it c) contribute the max to your pre-tax retirement accounts to reduce your taxable income and/or d) move to another location with different taxes

My feelings are hurt because it's such a large chunk. I'm not a toddler, thanks. If you can't perceive a joke it's not my fault.

Your a and b are snarky and presumptuous. Your c is pretty good, but it doesn't mitigate the tax rate, does it? And d isn't an option at the moment.

I still think a & b are the best options.  While I agree that it's presumptuous to assume that you can grow thicker skin, as an MMM reader, I have faith in you!  It's generally assumed that anyone who can complain joke about taxes can just as easily not complain joke about taxes.  Try it!

C is also good, and yes, it could change your tax rate.  It depends on your income and how close you are to the prior tax bracket.  The Feds have more tax brackets, so it's more likely to be able to change your federal rate than it would be for your Oregon rate.  It looks like that 9% band is pretty wide.  But there's also a 9.9% rate, so it's possible if you were in that state tax bracket, you could drop it down to 9.0% through pre-tax retirement contributions.

Exflyboy

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Re: Hurt Feelings
« Reply #8 on: April 14, 2015, 06:48:35 PM »
To give you an example.. we made about $110k last year and paid $12k federal and $7.7k State (Oregon).

Thats  17.9% total tax (state and federal)

We don't have a mortgage either, if we did the Fed would be lower.

Zx

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Re: Hurt Feelings
« Reply #9 on: April 14, 2015, 07:03:13 PM »
Your feelings are hurt because income taxes exist?  You could mitigate this damage by either a) growing thicker skin b) realizing that the money paid doesn't just evaporate, you receive benefits from it c) contribute the max to your pre-tax retirement accounts to reduce your taxable income and/or d) move to another location with different taxes

My feelings are hurt because it's such a large chunk. I'm not a toddler, thanks. If you can't perceive a joke it's not my fault.

Your a and b are snarky and presumptuous. Your c is pretty good, but it doesn't mitigate the tax rate, does it? And d isn't an option at the moment.

I still think a & b are the best options.  While I agree that it's presumptuous to assume that you can grow thicker skin, as an MMM reader, I have faith in you!  It's generally assumed that anyone who can complain joke about taxes can just as easily not complain joke about taxes.  Try it!

C is also good, and yes, it could change your tax rate.  It depends on your income and how close you are to the prior tax bracket.  The Feds have more tax brackets, so it's more likely to be able to change your federal rate than it would be for your Oregon rate.  It looks like that 9% band is pretty wide.  But there's also a 9.9% rate, so it's possible if you were in that state tax bracket, you could drop it down to 9.0% through pre-tax retirement contributions.

Hey, I'm not complaining. I'm not even wearing pants...much less complainypants!

That post was written in shock, not disgust. Like I said, I'd never computed my tax rate before except that one time when I was expecting a nice paycheck as a reward for kicking ass at work and got a slap upside the head instead. So I went to a site that computes your tax rate, taking into account married/single, dependents, and income. I was just amazed at how much it was.

For state I'll never get close to the 9.9% tax rate, and in this job I'll never get close to the next bracket up for Federal, either.  I seem to find myself in the middle of both state and federal brackets so it won't help me to pay a ton of 401k. That's OK, I can deal with paying taxes, I just thought there were...you know...tricks that you guys knew about and used.

But they can't make me eat more than rice and beans or keep two cars around or use Verizon. That I can control.

Zx

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Re: Hurt Feelings
« Reply #10 on: April 14, 2015, 07:16:46 PM »
Yes you get screwed in Oregon.. You get more screwed in California.

As to the Federal, you do realise that its only the income that is OVER the threashold that is taxed at the higher rate right?

so the first $18,150 is taxed at 10%, the portion of income between 18,150 and $73,800 is taxed at 15% and over 73,800 at 25%.. up to 148k.

Then you have potential reductions... max out the 401k plan and your taxable income drops by $24k if your over 50.... If you can use a traditonal IRA.. thats another $6500 (depends on the income limits).

You comment about the working overtime and being taxed.. Well thats not strictly true.. you see you are taxed for OT at the bonus (i,e very high) rate.. When you do your taxes at the end of the year that is simply reconciled as ordinary income

Oh yes! Now I see how you only paid 17.8%. I was dazzled for a moment.

So if I contribute a bunch into 401k to get us under the 73,800 threshold, all I'm doing is reducing the portion of income that get taxed at 25%. That would effectively reduce the tax rate for me.

But at my staggering debt it's probably more beneficial just to contribute up to the 4% matching and use the rest to slaughter debt.

Thanks for the instruction, all you Mustaches!

h2ogal

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Re: Hurt Feelings
« Reply #11 on: April 14, 2015, 07:33:25 PM »
New York chiming in.... I think we beat you all!  CNN says NY is Number 1 in taxes. 


http://money.cnn.com/pf/features/lists/total_taxes/

Hmmm.....but what do we get for all those taxes? 

 - The ultimate in tanks, warfare and surveillance gear so we feel SAFE
 - Lots of donations to luxury condo developers
 - 3.5 billion in Prisons (only California beats us and spends more) so we can lock up everyone!   (Only Florida beats NY in % residents in the hoosegow)

Yes we are definitely looking to retire to another state.

Zx

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Re: Hurt Feelings
« Reply #12 on: April 14, 2015, 07:41:28 PM »
New York chiming in.... I think we beat you all!  CNN says NY is Number 1 in taxes. 


http://money.cnn.com/pf/features/lists/total_taxes/

Hmmm.....but what do we get for all those taxes? 

 - The ultimate in tanks, warfare and surveillance gear so we feel SAFE
 - Lots of donations to luxury condo developers
 - 3.5 billion in Prisons (only California beats us and spends more) so we can lock up everyone!   (Only Florida beats NY in % residents in the hoosegow)

Yes we are definitely looking to retire to another state.

Oh the Hilarity! Yep I know Oregon isn't tops in taxes, but it's right up there! My wife loves Portland and never wants to leave. I'm hoping someday we are on vacation and we'll see a spot and just go YEAH, this is IT!

h2ogal

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Re: Hurt Feelings
« Reply #13 on: April 14, 2015, 08:00:29 PM »
But at least in NY we have our long winters going for us!!!!   

Janie

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Re: Hurt Feelings
« Reply #14 on: April 14, 2015, 08:06:21 PM »
Quote
I seem to find myself in the middle of both state and federal brackets so it won't help me to pay a ton of 401k.
Why do you say that? You'd still save on taxes even if you remain in the same bracket. Just as importantly, investing would help future you immensely.

Another Reader

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Re: Hurt Feelings
« Reply #15 on: April 14, 2015, 08:11:18 PM »
Live and work on the Vancouver, Washington side (put wife's business HQ there as well) and pay no income tax.  Do all your shopping on the Portland side and pay no sales tax.  The best of both worlds.

Neustache

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Re: Hurt Feelings
« Reply #16 on: April 14, 2015, 08:27:23 PM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear. 

scottish

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Re: Hurt Feelings
« Reply #17 on: April 14, 2015, 08:27:51 PM »
Come up here and you can pay even more. 
But at least we have free health care.

Zx

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Re: Hurt Feelings
« Reply #18 on: April 14, 2015, 08:42:05 PM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear.

I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down. I've been schooled on how to do that, but on other threads I've already been counseled that I should contribute up to the matching amount into 401k and throw the rest at debt. Better return that way.

Prairie Stash

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Re: Hurt Feelings
« Reply #19 on: April 14, 2015, 09:00:36 PM »
Come up here and you can pay even more. 
But at least we have free health care.
You can also pay a lot less. On 73k the provincial/federal combined rate is 15.9%, lower than Oregon. The key is to max out RRSP, a tough task for most people. No complainypants  up here.

Prairie Stash

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Re: Hurt Feelings
« Reply #20 on: April 14, 2015, 09:09:25 PM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear.

I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down. I've been schooled on how to do that, but on other threads I've already been counseled that I should contribute up to the matching amount into 401k and throw the rest at debt. Better return that way.
Look at how $1000 put into investments will increase NW, with associated tax benefits. Then compare to paying off debt. Which way makes NW grow faster?

aspiringnomad

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Re: Hurt Feelings
« Reply #21 on: April 14, 2015, 09:26:10 PM »

Zx

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Re: Hurt Feelings
« Reply #22 on: April 14, 2015, 10:30:13 PM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear.

I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down. I've been schooled on how to do that, but on other threads I've already been counseled that I should contribute up to the matching amount into 401k and throw the rest at debt. Better return that way.
Look at how $1000 put into investments will increase NW, with associated tax benefits. Then compare to paying off debt. Which way makes NW grow faster?

Hmmm...never thought of it that way. I thought it was just destroy debt, no questions asked.

Lets see, if I put 10k into 401k, I save 1500 federal tax, 900 state tax, and if it makes 4% then I make 400...so the 10k gives me 12.8k per year?

But if I put it against the school loan at 7.5%, I get 750 in interest reduction I didn't have to pay. So the 10k makes me 10.75k

That just doesn't seem...right. If I'm calculating correctly, then I'm further ahead to drop it into the 401k instead of paying off the debt?

Zx

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Re: Hurt Feelings
« Reply #23 on: April 14, 2015, 10:30:38 PM »

Neustache

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Re: Hurt Feelings
« Reply #24 on: April 15, 2015, 05:45:02 AM »
For that first year, yes, the math is correct as you automatically get a 15% return from the feds, which is much greater than the 7% return on the loans (not to mention market returns and your state tax reduction).  The 2nd year the math isn't as much in favor of doing that, not with that interest rate on the loans.  Why are your school loans so high?  Refi those bad boys!

Neustache

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Re: Hurt Feelings
« Reply #25 on: April 15, 2015, 06:15:44 AM »
Hurt feelings?

http://youtu.be/EuJzSTNDUGI

I need this show to be at the library.  LOL.

Ricky

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Re: Hurt Feelings
« Reply #26 on: April 15, 2015, 06:53:57 AM »
Hm...never knew the rate in Oregon was that high. Definitely washes out any sales tax savings!

NotJen

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Re: Hurt Feelings
« Reply #27 on: April 15, 2015, 08:04:47 AM »
Hm...never knew the rate in Oregon was that high. Definitely washes out any sales tax savings!
That's ... the point. Federal/State/Local government has to get the money to provide you services from somewhere, whether it be income tax, sales tax, property tax, etc.

Murse

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Re: Hurt Feelings
« Reply #28 on: April 15, 2015, 08:16:28 AM »
Hm...never knew the rate in Oregon was that high. Definitely washes out any sales tax savings!
That's ... the point. Federal/State/Local government has to get the money to provide you services from somewhere, whether it be income tax, sales tax, property tax, etc.
For mustachians oregons rates are awful, for consumerist sucka's it is probably about even. I personally would prefer doing away with our income tax's and going to strictly sales tax, but I refuse to have both.

Ricky

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Re: Hurt Feelings
« Reply #29 on: April 15, 2015, 08:35:28 AM »
Hm...never knew the rate in Oregon was that high. Definitely washes out any sales tax savings!
That's ... the point. Federal/State/Local government has to get the money to provide you services from somewhere, whether it be income tax, sales tax, property tax, etc.
For mustachians oregons rates are awful, for consumerist sucka's it is probably about even. I personally would prefer doing away with our income tax's and going to strictly sales tax, but I refuse to have both.

Yep, that was my point. Most here wouldn't otherwise make up the difference by paying sales tax. Maybe Oregon is secretly Mustachian and knows this.

For instance, sales tax here in NC is generally 7% and income tax is a flat 5.8%. If you spent all your income at stores, that would be a 12.8% rate. Given a $45k individual median income, $5k sounds reasonable for groceries and store expenditures for a Mustachian. So 1/9 of 7% is .77%. So the effective tax NC tax rate for an NC Mustachian would be ~6.57%. This, of course, increases as spending increases. So no, they don't necessarily make their money in other places, whether they need to or not.
« Last Edit: April 15, 2015, 09:18:13 AM by Ricky »

JLee

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Re: Hurt Feelings
« Reply #30 on: April 15, 2015, 08:38:30 AM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear.

I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down. I've been schooled on how to do that, but on other threads I've already been counseled that I should contribute up to the matching amount into 401k and throw the rest at debt. Better return that way.
Look at how $1000 put into investments will increase NW, with associated tax benefits. Then compare to paying off debt. Which way makes NW grow faster?

Hmmm...never thought of it that way. I thought it was just destroy debt, no questions asked.

Lets see, if I put 10k into 401k, I save 1500 federal tax, 900 state tax, and if it makes 4% then I make 400...so the 10k gives me 12.8k per year?

But if I put it against the school loan at 7.5%, I get 750 in interest reduction I didn't have to pay. So the 10k makes me 10.75k

That just doesn't seem...right. If I'm calculating correctly, then I'm further ahead to drop it into the 401k instead of paying off the debt?

$750 in interest reduction for paying it off after a year.  If you had $10k sitting for 10 years at 7.5%, you're looking at $10,610.32 in interest.

Murse

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Re: Hurt Feelings
« Reply #31 on: April 15, 2015, 09:47:45 AM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear.

I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down. I've been schooled on how to do that, but on other threads I've already been counseled that I should contribute up to the matching amount into 401k and throw the rest at debt. Better return that way.
Look at how $1000 put into investments will increase NW, with associated tax benefits. Then compare to paying off debt. Which way makes NW grow faster?

Hmmm...never thought of it that way. I thought it was just destroy debt, no questions asked.

Lets see, if I put 10k into 401k, I save 1500 federal tax, 900 state tax, and if it makes 4% then I make 400...so the 10k gives me 12.8k per year?

But if I put it against the school loan at 7.5%, I get 750 in interest reduction I didn't have to pay. So the 10k makes me 10.75k

That just doesn't seem...right. If I'm calculating correctly, then I'm further ahead to drop it into the 401k instead of paying off the debt?

$750 in interest reduction for paying it off after a year.  If you had $10k sitting for 10 years at 7.5%, you're looking at $10,610.32 in interest.
This is trickier then it is being made to sound because we are deferring taxes. So, the question becomes what will your retirement taxes be? If you are going to shoot for 0% taxes in retirement then the math is that simple, if you shoot for anything higher, you then need to subtract from that 12.8k whatever you think your effective tax rate will be. A portion of that money going into the 401k may still be the governments.

Me personally, because that 7.5% interest is guaranteed (and tax free savings,) when the 401k may be taxed later and has risk involved (it honestly could be cut in half tomorrow,) I would go for the risk free 7.5%. You also have to take into account that once that 401k money is put away you are not allowed to touch it until retirement, however every dollar you put towards the loan frees up future money that you can then choose to save, or spend depending on life's circumstances. We are talking about decreasing expenses (paying off that loan) vs leaving expenses constant and investing in the market in an untouchable safe.

Any loan with interest >5% is a no brainer to me.


JLee

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Re: Hurt Feelings
« Reply #32 on: April 15, 2015, 10:03:13 AM »
dagiff1 - I think you are making a mistake that I used to make - you don't need have enough deductions to move in a different tax bracket to get tax savings. 

If you contribute 11K to a traditional IRA and you make X amount of income, it reduces your taxable income by 11K, so that if you are in the 25% bracket you don't have to pay $2750 in taxes that you would have otherwise (and you have 11K in your IRA, score!).  You don't have to have enough deductions to jump to the 15% bracket, as only the income in that bracket is taxed at 15%, and the rest above that bracket limit is taxed at 25%. 

Someone else will explain it better than I did if what I said isn't clear.

I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down. I've been schooled on how to do that, but on other threads I've already been counseled that I should contribute up to the matching amount into 401k and throw the rest at debt. Better return that way.
Look at how $1000 put into investments will increase NW, with associated tax benefits. Then compare to paying off debt. Which way makes NW grow faster?

Hmmm...never thought of it that way. I thought it was just destroy debt, no questions asked.

Lets see, if I put 10k into 401k, I save 1500 federal tax, 900 state tax, and if it makes 4% then I make 400...so the 10k gives me 12.8k per year?

But if I put it against the school loan at 7.5%, I get 750 in interest reduction I didn't have to pay. So the 10k makes me 10.75k

That just doesn't seem...right. If I'm calculating correctly, then I'm further ahead to drop it into the 401k instead of paying off the debt?

$750 in interest reduction for paying it off after a year.  If you had $10k sitting for 10 years at 7.5%, you're looking at $10,610.32 in interest.
This is trickier then it is being made to sound because we are deferring taxes. So, the question becomes what will your retirement taxes be? If you are going to shoot for 0% taxes in retirement then the math is that simple, if you shoot for anything higher, you then need to subtract from that 12.8k whatever you think your effective tax rate will be. A portion of that money going into the 401k may still be the governments.

Me personally, because that 7.5% interest is guaranteed (and tax free savings,) when the 401k may be taxed later and has risk involved (it honestly could be cut in half tomorrow,) I would go for the risk free 7.5%. You also have to take into account that once that 401k money is put away you are not allowed to touch it until retirement, however every dollar you put towards the loan frees up future money that you can then choose to save, or spend depending on life's circumstances. We are talking about decreasing expenses (paying off that loan) vs leaving expenses constant and investing in the market in an untouchable safe.

Any loan with interest >5% is a no brainer to me.
Ah yes, excellent point. :)

Neustache

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Re: Hurt Feelings
« Reply #33 on: April 15, 2015, 10:07:17 AM »
I still don't see why someone wouldn't refi that rate regardless of how quickly they decide to pay it off - is it a pain to refi student loans time/cost wise?  I've never had 'em, so I don't know. 

Murse

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Re: Hurt Feelings
« Reply #34 on: April 15, 2015, 10:55:13 AM »
I still don't see why someone wouldn't refi that rate regardless of how quickly they decide to pay it off - is it a pain to refi student loans time/cost wise?  I've never had 'em, so I don't know.
my understanding is that it is hard to refinance student loans, I do not know because I have never had them as well.

mm1970

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Re: Hurt Feelings
« Reply #35 on: April 15, 2015, 11:00:14 AM »
I've been experimenting with tax rates in Oregon using an online calculator.

It seems no matter how I slice it, I am going to pay 25% +/- 1% in total tax every year.

I've never really figured it out before now, but I do remember working for the railroad and putting in 13 twelve hour days on one paycheck. When I got the check, it came out to me working 7 twelve hour days for me and 6 twelve hour days for the government, making it an effective tax rate of 43%.

I learned my lesson; I never worked that hard again.

But now it seems living in Oregon is going to cost me 9% of my income, whether or not I spend any of it. Being married, the tax rate is the same from 6500 to 250,000, being 9%. This is tax rate: "For earnings between $16,300.00 and $250,000, you'll pay 9.00% plus $1,011.00"

For federal, the tax rate is:  "For earnings between $73,800.00 and $148,850, you'll pay 25% plus $10,162.50"

Are there ways to mitigate this damage to your FIRE date? Maybe it's always been this way, but it appears to me to be ridiculous.
I feel ya.  We owe a crap ton this year.

We earned $30k more and our taxes went up $14k.  That's 45%
Now, that's just Federal taxes.  Add on state taxes plus SS and medicare, which is about 17.5%.  Wow, I went full time and ended up paying >62% in taxes on the additional amount.

JLee

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Re: Hurt Feelings
« Reply #36 on: April 15, 2015, 11:12:11 AM »
I've been experimenting with tax rates in Oregon using an online calculator.

It seems no matter how I slice it, I am going to pay 25% +/- 1% in total tax every year.

I've never really figured it out before now, but I do remember working for the railroad and putting in 13 twelve hour days on one paycheck. When I got the check, it came out to me working 7 twelve hour days for me and 6 twelve hour days for the government, making it an effective tax rate of 43%.

I learned my lesson; I never worked that hard again.

But now it seems living in Oregon is going to cost me 9% of my income, whether or not I spend any of it. Being married, the tax rate is the same from 6500 to 250,000, being 9%. This is tax rate: "For earnings between $16,300.00 and $250,000, you'll pay 9.00% plus $1,011.00"

For federal, the tax rate is:  "For earnings between $73,800.00 and $148,850, you'll pay 25% plus $10,162.50"

Are there ways to mitigate this damage to your FIRE date? Maybe it's always been this way, but it appears to me to be ridiculous.
I feel ya.  We owe a crap ton this year.

We earned $30k more and our taxes went up $14k.  That's 45%
Now, that's just Federal taxes.  Add on state taxes plus SS and medicare, which is about 17.5%.  Wow, I went full time and ended up paying >62% in taxes on the additional amount.
Isn't the highest federal bracket 39.6%?

Zx

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Re: Hurt Feelings
« Reply #37 on: April 15, 2015, 01:02:17 PM »
I have never re-financed student loans. It wasn't until this forum that I knew such a thing was possible, as I thought I was locked in. I'll look into this and see what it takes.

I can see that it's better to take the guaranteed 7.5% return by paying off a debt at 7.5% than investing and hoping to get a return that beats it. I've seen it's best to pay off all debt >5% in this thread and someone else of some renown on this forum told me 3%. ALL of our debt is at rates >3%, except the car loan which is at 1.69%, and we are selling the car.

After reading all of what you told me, I'm going to contribute to 401k at the matching rate and wipe out debt with the rest.

Axecleaver

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Re: Hurt Feelings
« Reply #38 on: April 15, 2015, 01:25:30 PM »
Quote
I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down.
Every dollar you apply to tax-advantaged retirement accounts reduces your effective tax rate. The effective tax rate you calculate is a combination of all the taxes you pay divided into your gross income. Theoretically, it should include all income taxes (city, state, and federal), all payroll taxes (social security, Medicare) all consumption taxes (car tax and boat tax in Virginia, sales tax), fuel taxes (gasoline), sin taxes (liquor and smokes), and all property tax (school, county, fire district, whatever). But that's tough to add up, and most of the online ones just tell you your state, fed and payroll effective tax rates, so let's start there.

Take a look at the 2014 federal tax brackets here: http://taxfoundation.org/article/2014-tax-brackets. Notice that there are plateaus where the effective rates jump. So if you are Married Filing Jointly (MFJ) and you grossed $120,000, and you had itemized deductions of $20,000 ($12,400 standard deduction plus some schedule A stuff) bringing you to AGI of $100,000, you'd pay taxes like this:

$0          -  18,150 10% = 1,815
$18,150 -  73,800 15% = 8,347.50 (Note you pay 15% on the amount BETWEEN 18150 and 73,800, not the whole thing!)
$73,800 - 100,000 25% = 6,550
Total $16,712.50
Effective tax rate = 16712.50 / 120000 = 13.9%

Works essentially the same way with state taxes, but they have different plateaus/brackets.

Now, here is where the magic happens and how you can lower your effective tax rate. Let's say I decide to contribute $11,000 to my IRAs (assume my wife has one, too). I'm going to realize those tax savings in the 25% bracket. For every four dollars you put in to your retirement, you pay a dollar less in taxes. This lowers your effective tax rate:

$0          - 18,150 10% = 1,815
$18,150 - 73,800 15% = 8,347.50 (Note you pay 15% on the amount BETWEEN 18150 and 73,800, not the whole thing!)
$73,800 - 89,000 25% = 3,800 (net savings $2750, or 25% of 11k)
Total $13,962.50
Effective tax rate = 16712.50 / 120000 = 11.6%

This proof of concept works for any reduction amount down to an effective tax rate of zero. The higher your bracket, the more effective deductions are.

Zx

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Re: Hurt Feelings
« Reply #39 on: April 15, 2015, 02:15:59 PM »
Quote
I know I could save on taxes by throwing more into 401k, but I was hoping you could get the rate down.
Every dollar you apply to tax-advantaged retirement accounts reduces your effective tax rate. The effective tax rate you calculate is a combination of all the taxes you pay divided into your gross income. Theoretically, it should include all income taxes (city, state, and federal), all payroll taxes (social security, Medicare) all consumption taxes (car tax and boat tax in Virginia, sales tax), fuel taxes (gasoline), sin taxes (liquor and smokes), and all property tax (school, county, fire district, whatever). But that's tough to add up, and most of the online ones just tell you your state, fed and payroll effective tax rates, so let's start there.

Take a look at the 2014 federal tax brackets here: http://taxfoundation.org/article/2014-tax-brackets. Notice that there are plateaus where the effective rates jump. So if you are Married Filing Jointly (MFJ) and you grossed $120,000, and you had itemized deductions of $20,000 ($12,400 standard deduction plus some schedule A stuff) bringing you to AGI of $100,000, you'd pay taxes like this:

$0          -  18,150 10% = 1,815
$18,150 -  73,800 15% = 8,347.50 (Note you pay 15% on the amount BETWEEN 18150 and 73,800, not the whole thing!)
$73,800 - 100,000 25% = 6,550
Total $16,712.50
Effective tax rate = 16712.50 / 120000 = 13.9%

Works essentially the same way with state taxes, but they have different plateaus/brackets.

Now, here is where the magic happens and how you can lower your effective tax rate. Let's say I decide to contribute $11,000 to my IRAs (assume my wife has one, too). I'm going to realize those tax savings in the 25% bracket. For every four dollars you put in to your retirement, you pay a dollar less in taxes. This lowers your effective tax rate:

$0          - 18,150 10% = 1,815
$18,150 - 73,800 15% = 8,347.50 (Note you pay 15% on the amount BETWEEN 18150 and 73,800, not the whole thing!)
$73,800 - 89,000 25% = 3,800 (net savings $2750, or 25% of 11k)
Total $13,962.50
Effective tax rate = 16712.50 / 120000 = 11.6%

This proof of concept works for any reduction amount down to an effective tax rate of zero. The higher your bracket, the more effective deductions are.

Great post, thank you. Yes, my sticking point was thinking that when you hit the higher tax bracket, ALL your income was taxed at the higher rate. I see now I can effectively reduce my rate by dropping cash into 401k.

Neustache

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Re: Hurt Feelings
« Reply #40 on: April 15, 2015, 02:19:50 PM »
^^ I knew someone would come in and explain it better than I could. 

Zx

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Re: Hurt Feelings
« Reply #41 on: April 16, 2015, 09:27:22 AM »
^^ I knew someone would come in and explain it better than I could.

You explained it perfectly! The comprehension problem lay with my thickness, not your lucid mini-thesis. I feel like I'm learning my financial ABCs, struggling with basics.

Neustache

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Re: Hurt Feelings
« Reply #42 on: April 16, 2015, 12:41:58 PM »
I was there about 6 months ago.  I have finally wrapped my head around basic investing, now I'm working on taxes.  I just keep reading the same things over and over, but it's like learning a whole new set of vocabulary.  It'll come....soonish...I hope.  LOL.

mm1970

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Re: Hurt Feelings
« Reply #43 on: April 16, 2015, 03:20:54 PM »
I've been experimenting with tax rates in Oregon using an online calculator.

It seems no matter how I slice it, I am going to pay 25% +/- 1% in total tax every year.

I've never really figured it out before now, but I do remember working for the railroad and putting in 13 twelve hour days on one paycheck. When I got the check, it came out to me working 7 twelve hour days for me and 6 twelve hour days for the government, making it an effective tax rate of 43%.

I learned my lesson; I never worked that hard again.

But now it seems living in Oregon is going to cost me 9% of my income, whether or not I spend any of it. Being married, the tax rate is the same from 6500 to 250,000, being 9%. This is tax rate: "For earnings between $16,300.00 and $250,000, you'll pay 9.00% plus $1,011.00"

For federal, the tax rate is:  "For earnings between $73,800.00 and $148,850, you'll pay 25% plus $10,162.50"

Are there ways to mitigate this damage to your FIRE date? Maybe it's always been this way, but it appears to me to be ridiculous.
I feel ya.  We owe a crap ton this year.

We earned $30k more and our taxes went up $14k.  That's 45%
Now, that's just Federal taxes.  Add on state taxes plus SS and medicare, which is about 17.5%.  Wow, I went full time and ended up paying >62% in taxes on the additional amount.
Isn't the highest federal bracket 39.6%?
Yes.  It was a combination of things though.
We refinanced our house in 2013, so our mortgage interest deduction was lower.
We earned $15k more in investments, which aren't taxed, so we have to pay that tax.  The decrease in deductions and increase in income pushed us into the 33% tax bracket.

The *net* result is that our gross income went up $30k but our net taxes went up $14k (due to a combination of increased earnings and decreased credits and deductions)