Reader Case Study: We are 'rich' by most people's standards, but when can we retire?

[randymarsh]

I think I was thinking about stock options? Isn't that how CEOs can say "My salary is $1" but then they're paid almost entirely in stock? Not really familiar with these things, just thought it might be what's going on. OP's salary could be ~600K but then gets another 600K in options.

[TerriM]

I think I was thinking about stock options? Isn't that how CEOs can say "My salary is $1" but then they're paid almost entirely in stock? Not really familiar with these things, just thought it might be what's going on. OP's salary could be ~600K but then gets another 600K in options.

Stock is generally W2'd.

[MDM]

Below is a quick rough guesstimate that gets federal + state income taxes to $360K.  Many other possible ways to get there.

The maximum mortgage principal upon which the interest is deducible is 1 million dollars. Assuming 4% interest, the most he could deduct per month for mortgage interest is $3333, or $40,000 annually. That's dramatically smaller than your estimate of $322,093. (See IRS Publication 936.)

But it gets even worse because since his AGI is so high, his itemised deductions are reduced by roughly $25,000. (See Line 29 of Sch. A.)

Furthermore, since his AGI is over $374,700, he cannot claim any exemptions, so he would have 0, not 2.

You also apparently did not include Additional Medicare Tax, which would be an additional approximately $6,750 of tax on top of everything else.

The state tax estimate is also low for either NYC or California. The real average rate would be more like 11-12%.

In summary, OP's taxes seemed low to me too. The figure may be accurate, but it would involve more complicated techniques than disclosed in the above chart.

Thanks for the possible refinements.

- I'll add a max mortgage interest calc.
- itemized deduction reduction is already considered
- the 2 exemptions were already given a value of $0
- AMT already included.  Multiple irritating things with this acronym, eh? The real situation probably gets hit by the other AMT as well....
- state tax estimate would be high for Texas (0%). 
Other ways to get the tax down (beyond the 0% state tax) is for much of the income to be in qualified dividends, deferring a large fraction of income (457-like plan), etc.  Of course we're just speculating - OP could clarify if desired.

[TerriM]

- state tax estimate would be high for Texas (0%). 

Well darn it.  We could just move to Texas and pay NO state taxes?  That sounds fantastic.  What's the downside?

You know, MA is nicknamed Taxachusetts, but MA doesn't even compete compared to California.... Or probably New York either.

[MDM]

I assumed you were making these by hand for each post.

That would be waaaay too much work. ;)

[MDM]

Well darn it.  We could just move to Texas and pay NO state taxes?  That sounds fantastic.  What's the downside?

Fire ants.

[NICE!]

Charitable contributions $24,000

I know this is conjecture but $24k charitable on that income would be a criminally low, especially with our favorable tax code. I'm halfway there on 1/10 the income and I feel like I'm not giving enough.

Cathy, you're totally right about California's lack of progressiveness in state income taxation. I really dislike the so-called liberal politics in the state because they're not liberal at all. It is basically the bad aspects of left of center politics (bloated government, overly powerful unions, nothing gets done) without much of the good. Luckily I think the state is getting the renewable energy & climate issues right...or at least faster than almost anywhere else in the US due to the 2020 renewable energy standard and high adoption of hybrid/electric vehicles. But of course LA is still a train wreck as far as public transport and over-reliance on the automobile go.

[chasesfish]

- state tax estimate would be high for Texas (0%). 

Well darn it.  We could just move to Texas and pay NO state taxes?  That sounds fantastic.  What's the downside?

You know, MA is nicknamed Taxachusetts, but MA doesn't even compete compared to California.... Or probably New York either.

As a recent new moderate income resident of Texas in one of their high income/high housing cost area, the main downside is property taxes (or rent if you don't own).  The difference in property taxes between what I had in Georgia verses a similar house here is about $6,000. ($9,000 verses $3,000)  At a 6.25% state income tax rate, you have to earn more than $96,000 to break even from the no state income tax.  There's also substantial fees and red tape from the state for any type of professional license.  The sales tax here is only marginally higher than what I was paying in Georgia. 

The math works better the higher your income.

[mak1277]

I think I was thinking about stock options? Isn't that how CEOs can say "My salary is $1" but then they're paid almost entirely in stock? Not really familiar with these things, just thought it might be what's going on. OP's salary could be ~600K but then gets another 600K in options.

Stock is generally W2'd.

A stock option generally isn't taxable when it's granted...only when it's exercised.