Had a "red pill" moment: I pay the govt. more than I pay myself...

[Watchmaker]

It's clearer, but it looks to me like you are saying your taxes are equal to 1.25X your savings, and that your savings are equal to your spending. If that's the case, it means you have an average tax rate (not marginal) of 38.5%, which can't be right. Maybe I'm still not understanding what you're saying.

I'm actually genuinely impressed... You nailed it WatchMaker. My effective income tax rate this year will be ~38% across Fed/State/Local (NYC)/SSI+Med. Single, High Income, High Income-Tax Locality. That's just on earned income, to be fair.

For comparison, my equivalent tax rate to the one you are calculating is 23.4%.

[minority_finance_mo]

It's clearer, but it looks to me like you are saying your taxes are equal to 1.25X your savings, and that your savings are equal to your spending. If that's the case, it means you have an average tax rate (not marginal) of 38.5%, which can't be right. Maybe I'm still not understanding what you're saying.

I'm actually genuinely impressed... You nailed it WatchMaker. My effective income tax rate this year will be ~38% across Fed/State/Local (NYC)/SSI+Med. Single, High Income, High Income-Tax Locality. That's just on earned income, to be fair.

For comparison, my equivalent tax rate to the one you are calculating is 23.4%.

Out of curiosity, how does that compare to your effective Fed rate, @Watchmaker ?

[Chris Pascale]

US taxes can be pretty high if you're not very rich, or lower-to-lower-middle income, especially on self-employed people making like $200k, and if you're like me in NY with high sales tax, a state income tax, and high property taxes.

But it's the price of living extremely well. It's the price of never worrying if the road or bridge or tunnel will be out.

[mizzourah2006]

I don't know what your income is but it seems you'd have to be well into the 35% if not the 37% tax bracket before you were paying more in income tax than your expenses even if frugal.

Also, the average tax payer is paying considerably less than 10% effective tax rate.

Not sure how this comparison is applicable but interesting to ponder nonetheless.

If you are talking about just effective federal tax rate, yes. But if you include state taxes, sales taxes, property taxes, personal property taxes, FICA, etc. I could easily see how the average person pays ~15-20% of their gross income into taxes of some kind.

[mistymoney]

Taxes are also a form of paying yourself - it's your share of the collective expenses of society. Even when you feel like you are paying in more than you get out, this is false thinking. You get roads and non-poison food and educated children and a host of other unseen benefits because we decided we didn't want to live in a Dickens novel anymore.

Not to get off-track, but I'll address this because a lot of folks have brought up whether we're arguing against taxation. No one is arguing whether taxes are intrinsically good or bad, or whether the money gets spent wisely.

The paradigm that Richest Man in Babylon introduces is saving/investing is the way to "pay yourself", because it is what buys you freedom. Expenses are not paying yourself in that paradigm. Even those that add a ton of value, like food or rent. No one would argue that you shouldn't buy food because it's not "paying yourself." But let's not pretend buying food is paying yourself.

I see that @Telecaster has explained part of my point better. For a lot of people, SSI is a (govt mandated) form of savings. You are putting money in that you will pull out in future, same with unemployment insurance. Sure, for a lot of people this gets mentally recast as an expense but it is more truly a form of savings.

And it was also a way for employers to start paying into the retirement system for each employee.

[DadJokes]

I don't know what your income is but it seems you'd have to be well into the 35% if not the 37% tax bracket before you were paying more in income tax than your expenses even if frugal.

Also, the average tax payer is paying considerably less than 10% effective tax rate.

Not sure how this comparison is applicable but interesting to ponder nonetheless.

If you are talking about just effective federal tax rate, yes. But if you include state taxes, sales taxes, property taxes, personal property taxes, FICA, etc. I could easily see how the average person pays ~15-20% of their gross income into taxes of some kind.

I tallied mine up earlier in the thread, and it came out to roughly 13.3% of gross income, but we avoid a lot of federal income taxes, thanks to pre-tax investing. I did taxes for a friend last year, and, despite having a very similar gross income as us, their tax bill was significantly higher.

Overall
Federal income: 1.3%
FICA: 6.8%
State & local: 5.2%

[mizzourah2006]

Hunting down numbers for 2020:

Federal income tax: $1,400
Social Security taxes: $5,750
Medicare taxes: $1,350
City property tax: $600
County property tax: $2,000
Sales tax: $2,730*

Grand total: $13,830

I'm definitely paying myself more than that, and I'm consuming more than that too. Overall, I'd say that I'm getting a pretty good deal.

*As for sales tax, I can only make a best guess. Gross income was $105,000; other taxes were $11,100; $45,000 was invested; and $15,800 goes to the mortgage. That leaves about $33,100 that was spent. If we take a conservative estimate and say that only $5,100 was spent on tax-free items, that leaves $28,000 that was taxed at 9.75%, leaving only $2,730 for sales tax.

Edit: we also pay fuel tax of $0.274 per gallon, vehicle registration fees, and an alcoholic beverage tax, which I'm not going to tally up. I imagine that it all comes out to under $200 for everything.

Here is ours with 2 young kids.

Federal Income Taxes: $34,000
Social Security Taxes: $11,700
Medicare/Medicaid Taxes: $3,750
State Income Taxes: $12,500
Property Taxes: $3,000
Sales Taxes: ~$8,000 (our sales tax rate is 9.5%)

Total: ~$73,000

and that's after maxing out 401ks, HSAs, and FSAs.

Edited to add that that is 28% of our gross income.

[simonsez]

US taxes can be pretty high if you're not very rich, or lower-to-lower-middle income, especially on self-employed people making like $200k, and if you're like me in NY with high sales tax, a state income tax, and high property taxes.

But it's the price of living extremely well. It's the price of never worrying if the road or bridge or tunnel will be out.

US taxes are high for the not very rich in relation to what?  Other earners (richer or poorer) in the US?  Earners at different times in the US?  Other earners around the world? What is your comparison group that 200k is lower-to-lower-middle income or "not very rich"?  Did you mean 20k?

Median HH income is not even to 70k yet. Or if you prefer on an individual basis, median earnings for 2020 in the U.S. is just above 40k.

https://www.census.gov/library/publications/2021/demo/p60-273.html

[Chris Pascale]

US taxes can be pretty high if you're not very rich, or lower-to-lower-middle income, especially on self-employed people making like $200k, and if you're like me in NY with high sales tax, a state income tax, and high property taxes.

But it's the price of living extremely well. It's the price of never worrying if the road or bridge or tunnel will be out.

US taxes are high for the not very rich in relation to what?  Other earners (richer or poorer) in the US?  Earners at different times in the US?  Other earners around the world? What is your comparison group that 200k is lower-to-lower-middle income or "not very rich"?  Did you mean 20k?

Median HH income is not even to 70k yet. Or if you prefer on an individual basis, median earnings for 2020 in the U.S. is just above 40k.

https://www.census.gov/library/publications/2021/demo/p60-273.html

Typo from a very tired person. Not sure what I meant.

Providing hospice to a relative, and it's taking its toll.

[ChpBstrd]

How much of the current distrust of government + class warfare zeitgeist is based on the observation that different people pay vastly different tax rates?

[gdborton]

That makes it look like you're including payroll taxes (I'm high income and my effective income tax rate is more like 8-10%) in that number and excluding it from Americans paying themselves. SS and Medicare may not be the best investment, but it is still something that the government pays back out to you eventually (and includes insurance against your kids). So I think you'd have to subtract it out from the taxes and add it to the savings column.

I also wonder if that average includes any savings from mortgage payments or not. Lots of questions without digging a little deeper.

Really interesting point about whether you should include SSI/Medicare in your savings. My gut says I don't see it as savings because the expected return is much less than you're putting in, but definitely a point to debate.

@FIPurpose, out of curiosity, I'd love to learn how your effective rate is 8-10%. That's great!

have you looked at your ss statement, seen what was paid in, and compare benefits to a comparable annuity? And then there is access to medicare. Who know what that would cost elderly under the old system.

After working nearly 30 years, I was amazed at how small the actual total was that I had paid in, and then to try to get a comparable annuity, I found it to be quite an affordable benefit. Sure - I could have put it into the stock market, but I can see how SS is a great benefit to those that would never have been able to do that. I don't want to live in a situation with hoardes of hungry elderly homeless people with nothing after their savings run out.

And this is discounting the disability and payment to dependant minors that was also included in the benefits.

And the spousal survival benefit and it is inflation adjusted.   You can argue that you'd rather do something else with the money (I personally would) but the value is tremendous for what you get.

This thread is really interesting. To be honest, I've never actually done the math on what your expected return is on SSI/Medicare. Has anyone done this?

Would certainly make a case that some of this portion should be considered something other than an "expense." That said, as someone nearing 30, I doubt I'll see the benefit of these programs given their current funding levels...

Yes people have done this analysis, you can see some of it on Wikipedia (find your own sources if you don't like this one):
https://en.wikipedia.org/wiki/Social_Security_(United_States)#Estimated_net_benefits_under_differing_circumstances

Basically, anyone making more than $35k/yr is losing out.

To your second point, unless we phase it out or rework it (we should, but will be a difficult conversation) everyone will get something. The problem is that you'll only be able to collect a portion of what's collected from the employed each year. The issue is directly tied to birth rates, smaller generations means fewer people are working per person collecting benefits, so you'll get something but will be smaller and smaller each year unless/until we start making babies.

Really it's a program that depends on more people paying in than collecting, which isn't the case with declining/aging populations.

[FIPurpose]

That makes it look like you're including payroll taxes (I'm high income and my effective income tax rate is more like 8-10%) in that number and excluding it from Americans paying themselves. SS and Medicare may not be the best investment, but it is still something that the government pays back out to you eventually (and includes insurance against your kids). So I think you'd have to subtract it out from the taxes and add it to the savings column.

I also wonder if that average includes any savings from mortgage payments or not. Lots of questions without digging a little deeper.

Really interesting point about whether you should include SSI/Medicare in your savings. My gut says I don't see it as savings because the expected return is much less than you're putting in, but definitely a point to debate.

@FIPurpose, out of curiosity, I'd love to learn how your effective rate is 8-10%. That's great!

have you looked at your ss statement, seen what was paid in, and compare benefits to a comparable annuity? And then there is access to medicare. Who know what that would cost elderly under the old system.

After working nearly 30 years, I was amazed at how small the actual total was that I had paid in, and then to try to get a comparable annuity, I found it to be quite an affordable benefit. Sure - I could have put it into the stock market, but I can see how SS is a great benefit to those that would never have been able to do that. I don't want to live in a situation with hoardes of hungry elderly homeless people with nothing after their savings run out.

And this is discounting the disability and payment to dependant minors that was also included in the benefits.

And the spousal survival benefit and it is inflation adjusted.   You can argue that you'd rather do something else with the money (I personally would) but the value is tremendous for what you get.

This thread is really interesting. To be honest, I've never actually done the math on what your expected return is on SSI/Medicare. Has anyone done this?

Would certainly make a case that some of this portion should be considered something other than an "expense." That said, as someone nearing 30, I doubt I'll see the benefit of these programs given their current funding levels...

Yes people have done this analysis, you can see some of it on Wikipedia (find your own sources if you don't like this one):
https://en.wikipedia.org/wiki/Social_Security_(United_States)#Estimated_net_benefits_under_differing_circumstances

Basically, anyone making more than $35k/yr is losing out.

To your second point, unless we phase it out or rework it (we should, but will be a difficult conversation) everyone will get something. The problem is that you'll only be able to collect a portion of what's collected from the employed each year. The issue is directly tied to birth rates, smaller generations means fewer people are working per person collecting benefits, so you'll get something but will be smaller and smaller each year unless/until we start making babies.

Really it's a program that depends on more people paying in than collecting, which isn't the case with declining/aging populations.

You only read the first chart. That's for single people. For married single-income families, the net benefit is still positive for income >95k. Basically marriage boosts your SS benefit by a huge amount.

You'd also have to consider how many older people would be left in poverty without SS (both older people, the disability benefit, and the orphan benefit). If SS did not exist, then our welfare payments would be much higher. So to the government's balance sheet, the program at a whole can still be worth it even if it runs slightly in the red.

[Telecaster]

Yes people have done this analysis, you can see some of it on Wikipedia (find your own sources if you don't like this one):
https://en.wikipedia.org/wiki/Social_Security_(United_States)#Estimated_net_benefits_under_differing_circumstances

Basically, anyone making more than $35k/yr is losing out.

To your second point, unless we phase it out or rework it (we should, but will be a difficult conversation) everyone will get something. The problem is that you'll only be able to collect a portion of what's collected from the employed each year. The issue is directly tied to birth rates, smaller generations means fewer people are working per person collecting benefits, so you'll get something but will be smaller and smaller each year unless/until we start making babies.

Really it's a program that depends on more people paying in than collecting, which isn't the case with declining/aging populations.

Keep in mind that the "I" in SSI stands for "insurance."   The way all insurance works is by transferring money who don't make claims to people who do.   So by necessity, a certain number of people can't get back what they pay in.   

[gdborton]

Yes people have done...

Keep in mind that the "I" in SSI stands for "insurance."   The way all insurance works is by transferring money who don't make claims to people who do.   So by necessity, a certain number of people can't get back what they pay in.   

Bleh I hate the way quotes work on this forum. Takes up too much space.

I don't disagree here at all, just posting the data that I had knowledge of.

[gdborton]

You only read the first chart. That's for single people. For married single-income families, the net benefit is still positive for income >95k. Basically marriage boosts your SS benefit by a huge amount.

You'd also have to consider how many older people would be left in poverty without SS (both older people, the disability benefit, and the orphan benefit). If SS did not exist, then our welfare payments would be much higher. So to the government's balance sheet, the program at a whole can still be worth it even if it runs slightly in the red.

I didn't, it's just what I commented on.

FWIW I don't have a plan for changing it beyond a vague idea of making payments go to a personal account w/ maybe some % additional contributed to the other benefits that are paid out (disability, etc).  I do have the firm belief though that the system as is isn't well designed, and that it discourages personal savings and therefore is a net negative on society.

[Watchmaker]

Out of curiosity, how does that compare to your effective Fed rate, @Watchmaker ?

Effective Fed rate is 16%.

[rantk81]

The tax code has a whole bunch of "cliffs" at income levels.  Once you get up into the income range where you start to be affected by these "cliffs" -- they kind of stack upon one-another, and your "effective tax rate" (all things considered) essentially compounds upon itself.  So anyone who finds their way into the upper-medium income category ends up paying quite a lot in taxes.  When I mention these "cliffs" -- I'm not just talking about the progressive marginal rates.  I'm also referring to the tons of other credits/deductions that get phased out or eliminated at various levels.  These things really add up once you start making a medium/upper income.  I think that the people in this range are the folks who pay the bulk of the taxes.

For the folks who earn far far more, they proactively seek out "creative" ways to legally avoid as many taxes as they can, and can end up paying a shockingly low amount of taxes, relative to the folks I mentioned in the prior paragraph.

Not saying this is good, or bad... just how it seems to function.

[FIPurpose]

At least according to the tax policy institute, the group that pays the most in taxes are the 80-95% group which I believe corresponds to people making 140k - 270k.

The problem should really focus that people in the top 5% tend to get more of their income from capital gains and there for tend to have a lower tax rate overall. Something like treating Cap Gains for anyone making over 300k a year as income and lowering the 22% bracket to 20% I think would really help balance the unfairness in our current tax structure. But the top 5% are also the biggest political donors.

[elysianfields]

At least according to the tax policy institute, the group that pays the most in taxes are the 80-95% group which I believe corresponds to people making 140k - 270k.

The problem should really focus that people in the top 5% tend to get more of their income from capital gains and there for tend to have a lower tax rate overall. Something like treating Cap Gains for anyone making over 300k a year as income and lowering the 22% bracket to 20% I think would really help balance the unfairness in our current tax structure. But the top 5% are also the biggest political donors.

Or the top 5% hold several millions in stock value against which they can borrow at very low margin interest rates essentially forever, deduct the interest payments, and then pass the stock to their heirs at a stepped-up basis.  Since the borrowed money is debt rather than income, it’s not taxed.

Edited to correct a stupid typo.

[gdborton]

Or the top 5% hold several millions in stock value against which they can borrow at very low margin interest rates essentially forever, deduct the interest payments, and then pass the stock to their heirs at a stepped-up basis.  Since the borrowed money is debt rather than income, it’s not taxed.

I might be doing this soon! MMM inspired me w/ his margin'd house purchase, I've scheduled a call w/ Fidelity to discuss options.  For anyone that's curious, the rep that I've talked to so far told me Fidelity has lower rates than what are listed on the site and also offer fixed rates lines of credit as well. No idea yet if they're lower rates than typical bank loans.

[Telecaster]

Or the top 5% hold several millions in stock value against which they can borrow at very low margin interest rates essentially forever, deduct the interest payments, and then pass the stock to their heirs at a stepped-up basis.  Since the borrowed money is debt rather than income, it’s not taxed.

I might be doing this soon! MMM inspired me w/ his margin'd house purchase, I've scheduled a call w/ Fidelity to discuss options.  For anyone that's curious, the rep that I've talked to so far told me Fidelity has lower rates than what are listed on the site and also offer fixed rates lines of credit as well. No idea yet if they're lower rates than typical bank loans.

Will you keep us posted how that works out?

[gdborton]

Will you keep us posted how that works out?

I'll try, but I'm not sure I'll even do it (I've been eyeing houses for years, but have yet to pull the trigger) and also there was a 7 year gap between some of my posts on this forum.

[roomtempmayo]

At least according to the tax policy institute, the group that pays the most in taxes are the 80-95% group which I believe corresponds to people making 140k - 270k.

Just anecdotally, when @rantk81 mentioned cliffs, the number that jumped to mind when I started noticing it was about 140k (MFJ).  You're beyond the heavily redistributive benefits (WIC, Medicaid, rental assistance, etcetera), and you've hit the phase out on the middle class deductions/benefits (student loan interest and the third stimulus come to mind, along with some local property tax refunds), but you don't make enough or have enough assets to engage in long term structural tax avoidance.

[gdborton]

Just anecdotally, when @rantk81 mentioned cliffs, the number that jumped to mind when I started noticing it was about 140k (MFJ).  You're beyond the heavily redistributive benefits (WIC, Medicaid, rental assistance, etcetera), and you've hit the phase out on the middle class deductions/benefits (student loan interest and the third stimulus come to mind, along with some local property tax refunds), but you don't make enough or have enough assets to engage in long term structural tax avoidance.

There are a couple sides to this. Obviously you aren't getting aid, but iirc ss tax caps at $125k so some benefit there. Another thing you missed is that you get boned on Roth IRA above a certain income.

or have enough assets to engage in long term structural tax avoidance.

You can have plenty of assets at 140k income, that's pretty much the point of this blog.  What sort of tax avoidance are you thinking is only available at higher net worth though? Please be specific as I'd like to avoid taxes.

[roomtempmayo]

Just anecdotally, when @rantk81 mentioned cliffs, the number that jumped to mind when I started noticing it was about 140k (MFJ).  You're beyond the heavily redistributive benefits (WIC, Medicaid, rental assistance, etcetera), and you've hit the phase out on the middle class deductions/benefits (student loan interest and the third stimulus come to mind, along with some local property tax refunds), but you don't make enough or have enough assets to engage in long term structural tax avoidance.

There are a couple sides to this. Obviously you aren't getting aid, but iirc ss tax caps at $125k so some benefit there. Another thing you missed is that you get boned on Roth IRA above a certain income.

or have enough assets to engage in long term structural tax avoidance.

You can have plenty of assets at 140k income, that's pretty much the point of this blog.  What sort of tax avoidance are you thinking is only available at higher net worth though? Please be specific as I'd like to avoid taxes.

To the questions above:

For 2022, Social Security applies to $147k per earner.

In very high earning areas, compensation itself is often structured to minimize rather than maximize W2 income.  Other ways of being compensated are stock or deferred compensation plans.  At $200k, not very many HR departments are thinking about how to make the number on their employees paychecks lower, but at $600k they often are.

As to the "not enough assets" comment, yes, it's possible to report low W2 income while having high assets.  But at some point you have to accumulate those assets, and unless you inherit them, usually that will involve reporting them as income.

Most of the higher net worth strategies involve businesses, real property, and/or intergenerational transfers.  Turn your personal property into business property, then pass it back to your heirs as personal property tax free.  Or, perhaps more commonly, start a business and treat as many personal expenses as possible as business expenses.  Vehicle leases?  Business.  House?  Owned by a shell property company and leased 75% to the business and 25% to the family.  Vacation home?  Also a business property that's leased on a nightly basis to the family.  Oh, and you can launder these "business" assets $15k/year tax free to every child and grandchild.

One of the disadvantages to holding all or most of your net worth in tax advantaged accounts is that this sort of tax avoidance is more difficult.

[gdborton]

To the questions above:

For 2022, Social Security applies to $147k per earner.

In very high earning areas, compensation itself is often structured to minimize rather than maximize W2 income.  Other ways of being compensated are stock or deferred compensation plans.  At $200k, not very many HR departments are thinking about how to make the number on their employees paychecks lower, but at $600k they often are.

I guess I'd agree w/ this to some extent... a lot of my comp has historically come from RSUs, but I always saw it as a way to attach golden handcuffs moreso than tax avoidance, especially since it's taxed as ordinary income when you actually get it. Although I see the potential for issue of a vc backed startup founder holding equity in a Roth IRA, starts off worthless eventually worth billions non taxable.

As to the "not enough assets" comment, yes, it's possible to report low W2 income while having high assets.  But at some point you have to accumulate those assets, and unless you inherit them, usually that will involve reporting them as income.

Accumulation of assets itself isn't seen as income (buying stock), but I see your point wrt equity compensation. I made plans to be a millionaire when I was only making $52k though.

Most of the higher net worth strategies involve businesses, real property, and/or intergenerational transfers.  Turn your personal property into business property, then pass it back to your heirs as personal property tax free.  Or, perhaps more commonly, start a business and treat as many personal expenses as possible as business expenses.  Vehicle leases?  Business.  House?  Owned by a shell property company and leased 75% to the business and 25% to the family.  Vacation home?  Also a business property that's leased on a nightly basis to the family.  Oh, and you can launder these "business" assets $15k/year tax free to every child and grandchild.

One of the disadvantages to holding all or most of your net worth in tax advantaged accounts is that this sort of tax avoidance is more difficult.

You are not wrong, but you gotta turn a profit 3 out of 5 years to actually have a business be considered a business. I've been mulling this over for a while and don't personally feel safe writing off business expenses w/o matching business income.  YT honestly seems the best for this as anything in a video can be a business expense.

[wageslave23]

Just anecdotally, when @rantk81 mentioned cliffs, the number that jumped to mind when I started noticing it was about 140k (MFJ).  You're beyond the heavily redistributive benefits (WIC, Medicaid, rental assistance, etcetera), and you've hit the phase out on the middle class deductions/benefits (student loan interest and the third stimulus come to mind, along with some local property tax refunds), but you don't make enough or have enough assets to engage in long term structural tax avoidance.

There are a couple sides to this. Obviously you aren't getting aid, but iirc ss tax caps at $125k so some benefit there. Another thing you missed is that you get boned on Roth IRA above a certain income.

or have enough assets to engage in long term structural tax avoidance.

You can have plenty of assets at 140k income, that's pretty much the point of this blog.  What sort of tax avoidance are you thinking is only available at higher net worth though? Please be specific as I'd like to avoid taxes.

To the questions above:

For 2022, Social Security applies to $147k per earner.

In very high earning areas, compensation itself is often structured to minimize rather than maximize W2 income.  Other ways of being compensated are stock or deferred compensation plans.  At $200k, not very many HR departments are thinking about how to make the number on their employees paychecks lower, but at $600k they often are.

As to the "not enough assets" comment, yes, it's possible to report low W2 income while having high assets.  But at some point you have to accumulate those assets, and unless you inherit them, usually that will involve reporting them as income.

Most of the higher net worth strategies involve businesses, real property, and/or intergenerational transfers.  Turn your personal property into business property, then pass it back to your heirs as personal property tax free.  Or, perhaps more commonly, start a business and treat as many personal expenses as possible as business expenses.  Vehicle leases?  Business.  House?  Owned by a shell property company and leased 75% to the business and 25% to the family.  Vacation home?  Also a business property that's leased on a nightly basis to the family.  Oh, and you can launder these "business" assets $15k/year tax free to every child and grandchild.

One of the disadvantages to holding all or most of your net worth in tax advantaged accounts is that this sort of tax avoidance is more difficult.

This is not good advice. 

The stock options are taxed, the timing depends but they are taxed. 

The rest is just tax fraud and you can commit tax fraud at any income level.  And you have a very good chance of getting caught.  If you get red flagged for anything in one year, they will look at other things as well.  If they find enough fraud and/or underreporting/lack of evidence, they will open up other years... This is how people ending up losing everything.  I've worked in CPA firms for 10+ years, and have seen dozens of people get caught.  This is the equivalent of saving money on your grocery bill by shoplifting, not a good long term strategy.

Poor and middle class people are the only ones that get excited about giving $15k tax free to people (giving more than $15k is still tax free, you just have to fill out some paperwork).  Even if you give away $15k to 10 people every year that's only $150k.  The estate tax exemption is $11 million dollars.  I wouldn't give more than 4 people $15k a year, even if it was tax free.  Plus the person giving away the money "tax free" has already paid taxes on the money when they earned it.

[roomtempmayo]

This is not good advice...

The rest is just tax fraud and you can commit tax fraud at any income level. 

Oh, I certainly don't want to come across as giving any advice.  In my mind, what I described above falls in the category of what's wrong with the world, not what's right about it.

But as for fraud, if something like the vehicle exemption is fraud, then fraud is pretty widely accepted.

Here's an anecdote.  A buddy owns a fully WFH business.  He has no travel at all involved.

He sat down with his accountant last fall as the year was shaping up to be a good one, and his accountant started a conversation about where to "put" the money.  His advice was that buddy could use a new car, so he should buy a new car as a business expense even though he doesn't drive a mile for work.  The reasoning being that it's just accepted that businesses need vehicles, and every vehicle is 100% deductible since you can't own a fraction of a vehicle.  So now he's on the list for a Tesla for his WFH business, that in actuality will be the vehicle his wife uses to take the kids to school.

Now, how widespread is that?  If I go to a boat ramp on a Saturday morning, I see a whole lot of company trucks hooked up to boat trailers.  Fishing seems to be popular work.

I think this is the sort of stuff that rankles lots of ordinary people about taxes more than their specific tax rate.

[gdborton]

This is not good advice...

The rest is just tax fraud and you can commit tax fraud at any income level. 

I wouldn't call it tax fraud as much as it's incorrect. If you "lease" a house to your family, you're either collecting rent from them (taxable income) or you are not.  Even if you do it for tax reasons, it doesn't save you money.

Oh, I certainly don't want to come across as giving any advice.  In my mind, what I described above falls in the category of what's wrong with the world, not what's right about it.

But as for fraud, if something like the vehicle exemption is fraud, then fraud is pretty widely accepted.

Here's an anecdote.  A buddy owns a fully WFH business.  He has no travel at all involved.

He sat down with his accountant last fall as the year was shaping up to be a good one, and his accountant started a conversation about where to "put" the money.  His advice was that buddy could use a new car, so he should buy a new car as a business expense even though he doesn't drive a mile for work.  The reasoning being that it's just accepted that businesses need vehicles, and every vehicle is 100% deductible since you can't own a fraction of a vehicle.  So now he's on the list for a Tesla for his WFH business, that in actuality will be the vehicle his wife uses to take the kids to school.

Now, how widespread is that?  If I go to a boat ramp on a Saturday morning, I see a whole lot of company trucks hooked up to boat trailers.  Fishing seems to be popular work.

I think this is the sort of stuff that rankles lots of ordinary people about taxes more than their specific tax rate.

If your buddy deducts his vehicle, as you've described it, that's fraud. You're supposed to estimate how much the vehicle is used for business vs personal.  You can't buy half a vehicle, but you can track miles.  You can fuzz this a LOT by meeting w/ "clients"/"potential clients" as the IRS isn't the supreme authority on who might be doing business w/ you and what kind, but you'll want receipts/names in the event of an audit.

Side note: He is not my buddy, so if you aren't going to collect the tax fraud reward, would you mind sending me his details so I can? 🤣

[roomtempmayo]

I wouldn't call it tax fraud as much as it's incorrect. If you "lease" a house to your family, you're either collecting rent from them (taxable income) or you are not.  Even if you do it for tax reasons, it doesn't save you money.

I know a couple who does this, and I'm not sure I understand the gain.

I think what's going on is that by classifying their house as a business asset they're able to use the depreciation to offset taxes on other income they've rolled into that business entity.

[Telecaster]

I wouldn't call it tax fraud as much as it's incorrect. If you "lease" a house to your family, you're either collecting rent from them (taxable income) or you are not.  Even if you do it for tax reasons, it doesn't save you money.

I know a couple who does this, and I'm not sure I understand the gain.

I think what's going on is that by classifying their house as a business asset they're able to use the depreciation to offset taxes on other income they've rolled into that business entity.

Keep in mind you have to lease to family at market rates, otherwise it becomes personal property for tax purposes. 

[wageslave23]

This is not good advice...

The rest is just tax fraud and you can commit tax fraud at any income level. 

Oh, I certainly don't want to come across as giving any advice.  In my mind, what I described above falls in the category of what's wrong with the world, not what's right about it.

But as for fraud, if something like the vehicle exemption is fraud, then fraud is pretty widely accepted.

Here's an anecdote.  A buddy owns a fully WFH business.  He has no travel at all involved.

He sat down with his accountant last fall as the year was shaping up to be a good one, and his accountant started a conversation about where to "put" the money.  His advice was that buddy could use a new car, so he should buy a new car as a business expense even though he doesn't drive a mile for work.  The reasoning being that it's just accepted that businesses need vehicles, and every vehicle is 100% deductible since you can't own a fraction of a vehicle.  So now he's on the list for a Tesla for his WFH business, that in actuality will be the vehicle his wife uses to take the kids to school.

Now, how widespread is that?  If I go to a boat ramp on a Saturday morning, I see a whole lot of company trucks hooked up to boat trailers.  Fishing seems to be popular work.

I think this is the sort of stuff that rankles lots of ordinary people about taxes more than their specific tax rate.

It's definitely wide spread. And I have no moral feelings either way. But from a practical standpoint, I don't think it's worth it. The IRS is dumb, but not as dumb as you'd think.  Your friend better be able to produce a mileage log for the whole year. Have a second vehicle that he could use personally, otherwise the IRS would say they know he's lying because everyone has to drive some personal miles.  And then the rest of his return better be squeaky clean or else they will start opening up other cans of worms.  Common areas being meals and entertainment (receipts, names of people met with and why), travel (receipts, names of passengers, person met with, better be there for only one day or else the trip is considered personal), loans to and from the company, etc.  People and "tax guys" think they are really clever until they get audited.  Then they wind up going to a CPA firm to clean up the mess.

[Much Fishing to Do]

At least according to the tax policy institute, the group that pays the most in taxes are the 80-95% group which I believe corresponds to people making 140k - 270k.

The problem should really focus that people in the top 5% tend to get more of their income from capital gains and there for tend to have a lower tax rate overall. Something like treating Cap Gains for anyone making over 300k a year as income and lowering the 22% bracket to 20% I think would really help balance the unfairness in our current tax structure. But the top 5% are also the biggest political donors.

I've seen every tax bracket thru my career and in running my own business, including one extreme outlier year of making over $1M.  In the end I've always paid more in taxes the more I made (of course absolute, but also percentagewise).  And maybe I'm the only one in the world that feels this way...but it all seemed about right to me.  In the end when I only made like $60k with a few kids and didn;t owe any taxes other than SS (which comes back to you at a better rate the lower you make), that seemed about right, and I appreciated the millionaires paying the big bucks to fund the military and infrastructure and safety net programs.  When I made $1.5M and paid about $550k in taxes, sure it hurt (cause I can live many years off of $550k) but it was my turn to be that guy funding the military and infrastructure and safety net programs.  I liked that the hit on the final dollars were so high it encouraged me to pay my employees more (cause they would keep most when I would not) and fund my DAF (because it would keep all and I would not).


Its all pretty complex.  I could be pissed about those making big money from capital gains as opposed to working and therefore paying a lower percentage than I was, but when you factor in the double taxation on those gains (what the business paid in tax before the gain was paid out) maybe they did pay a lot that was hidden. 

So yeah, I think those that make $60k with a family and pay little should be grateful for what those that produce a lot of money pay toward taxes, and I think those that make millions should be happy to spread it out. 

And yes, obviously democrats and republicans both hate me a lot and equally when I talk taxes as they would each cringe at half of what I say above, so I don't in the real world.  I have an anonymous forum for that....

[Telecaster]

Oh, I certainly don't want to come across as giving any advice.  In my mind, what I described above falls in the category of what's wrong with the world, not what's right about it.

But as for fraud, if something like the vehicle exemption is fraud, then fraud is pretty widely accepted.

Here's an anecdote.  A buddy owns a fully WFH business.  He has no travel at all involved.

He sat down with his accountant last fall as the year was shaping up to be a good one, and his accountant started a conversation about where to "put" the money.  His advice was that buddy could use a new car, so he should buy a new car as a business expense even though he doesn't drive a mile for work.  The reasoning being that it's just accepted that businesses need vehicles, and every vehicle is 100% deductible since you can't own a fraction of a vehicle.  So now he's on the list for a Tesla for his WFH business, that in actuality will be the vehicle his wife uses to take the kids to school.

Your buddy is getting some bad advice.  The IRS deduction is based on the percentage of business use of the vehicle, not who owns it. 

The above is true for sole proprietorships and LLCs anyway. 

[wageslave23]

At least according to the tax policy institute, the group that pays the most in taxes are the 80-95% group which I believe corresponds to people making 140k - 270k.

The problem should really focus that people in the top 5% tend to get more of their income from capital gains and there for tend to have a lower tax rate overall. Something like treating Cap Gains for anyone making over 300k a year as income and lowering the 22% bracket to 20% I think would really help balance the unfairness in our current tax structure. But the top 5% are also the biggest political donors.

I've seen every tax bracket thru my career and in running my own business, including one extreme outlier year of making over $1M.  In the end I've always paid more in taxes the more I made (of course absolute, but also percentagewise).  And maybe I'm the only one in the world that feels this way...but it all seemed about right to me.  In the end when I only made like $60k with a few kids and didn;t owe any taxes other than SS (which comes back to you at a better rate the lower you make), that seemed about right, and I appreciated the millionaires paying the big bucks to fund the military and infrastructure and safety net programs.  When I made $1.5M and paid about $550k in taxes, sure it hurt (cause I can live many years off of $550k) but it was my turn to be that guy funding the military and infrastructure and safety net programs.  I liked that the hit on the final dollars were so high it encouraged me to pay my employees more (cause they would keep most when I would not) and fund my DAF (because it would keep all and I would not).


Its all pretty complex.  I could be pissed about those making big money from capital gains as opposed to working and therefore paying a lower percentage than I was, but when you factor in the double taxation on those gains (what the business paid in tax before the gain was paid out) maybe they did pay a lot that was hidden. 

So yeah, I think those that make $60k with a family and pay little should be grateful for what those that produce a lot of money pay toward taxes, and I think those that make millions should be happy to spread it out. 

And yes, obviously democrats and republicans both hate me a lot and equally when I talk taxes as they would each cringe at half of what I say above, so I don't in the real world.  I have an anonymous forum for that....

Very sober, accurate assessment of the tax laws.  As a tax preparer, I concur.