How do high income folks limit their tax liability?

[DeniseNJ]

NJ is a piece o' crap.  To limit taxes next year I definitley want to have an HSA.  YOu don't pay federal tax on them.  You also don't pay state tax on them . . . EXCEPT in CA and NJ.  what the heck?!?!?  Really?

Somone said NJ has all the crappy tax and HCOL as CA with none of the nice weather.  Amen. 

[FireLane]

So outside of donating to charity, how does a family of 4 in Northern NJ making 227,000 limit their tax liability to something below 30K federal and at least 15 state?  I mean, is paying $45,000 in taxes normal for this income or am I missing something?  I know i'm whining, but I'm seriously asking are any "high" earners out there paying a lot less than this or is this about normal?

Nope, that's normal. I make a similar income, and I paid about $70,000 in taxes last year (federal, state and local, plus SS and Medicare).

The super-rich have accountants who can set up offshore trusts or other tax shenanigans of dubious legality, but for regular working wealthy people like us, there's only so much you can do. I max out my 401(k) and a backdoor Roth each year, and the last few years I've donated a few tens of thousands in appreciated stock to a donor-advised fund, so I can itemize deductions. I deducted mortgage and student loan interest when I had those things.

My advice, as others have said, is to file this under "good problems to have." It'd be nice to have a little more money in my pocket, but I'm already ridiculously fortunate compared to most Americans, let alone most people in the world. If this is the price I pay for that privilege, I can live with that.

Besides, the tax code also gives plenty of advantages to high earners. You'll hit the SS phase-out at $137,000, meaning you'll pay less in Social Security tax as a percentage of your income than most people. Lower-consuming Mustachians will pay less in sales tax. And when you're FIREd and living off investments, taxes on capital gains are almost criminally low.

[better late]

Seriously.  This is the first time I would even consider myself in this catagory.  Before the tax laws changed last year, even though we made about 170 to 200K, we had so many deductables that we "qualified" for everything.  My mortgage intrest used to be 6% (remember those days) so I deducted like 30K just in that.  I always heard about rich ppl paying so little in taxes but now that I'm here I'm only getting half my pay.

I do max my TSP,
I have an FSA (not an HSA since the math doesn't seem to add up for us as we have so many medical exp we would always go way over the high deductable),
Health ins is pretax
I'm doing back door Roths since we can't do a deductable trad IRA,
I get 500 for each kid, 17 and 20 yrs old.

I can't deduct any tuition
Can't deduct trad IRA
Can't itemize since my deductions of 10K SALT (should really be 25K) and 11K mortgage interest aren't more than the standard.
Can't deduct med expenses since they are short of the 7% even at many thousands of dollars.

So outside of donating to charity, how does a family of 4 in Northern NJ making 227,000 limit their tax liability to something below 30K federal and at least 15 state?  I mean, is paying $45,000 in taxes normal for this income or am I missing something?  I know i'm whining, but I'm seriously asking are any "high" earners out there paying a lot less than this or is this about normal?

We make close to what your income is and pay a bit less in federal taxes.  I believe you are married from a quick look at your past posts, but I don't see a retirement deduction for your spouse.  That seems to be the biggest difference between your taxes and ours (although once the second earner retirement is factored in I think we are eligible for a tuition deduction so the tax savings cascades a bit).

We are renters now so the $24K standard deduction is a great deal larger than we would have been able to deduct if we were itemizing. I understand your emotions somewhat though, before we sold our clown house our itemized deductions were over 45K a year and the SALT limits would have sunk us.

[DeniseNJ]

We make close to what your income is and pay a bit less in federal taxes.  I believe you are married from a quick look at your past posts, but I don't see a retirement deduction for your spouse.  That seems to be the biggest difference between your taxes and ours (although once the second earner retirement is factored in I think we are eligible for a tuition deduction so the tax savings cascades a bit).

We are renters now so the $24K standard deduction is a great deal larger than we would have been able to deduct if we were itemizing. I understand your emotions somewhat though, before we sold our clown house our itemized deductions were over 45K a year and the SALT limits would have sunk us.

True, as a teacher he could do a 403b but they have no match and the investment options are horrible with a list of fees a mile long.  It never mattered too much but it would work to reduce the tax.  It's just anything involving his school is such a pain.  They make things as difficult as possible.

Can't wait to sell the house and rent for the amount we're paying in property taxes.  Good for you!

[Car Jack]

Denise,

Your numbers are not out of line.  I paid an effective 16% federal and 5% state in Mass.  My kids are both in college and 19/23, so no child deduction.  We have a health care flex spending account which helps.  I've also started moving from index funds in taxable to BRK/b, which spills no dividends...so no tax on them.  We don't have a mortgage, so the prop taxes really don't matter.  We're standard deduction.  The income is almost all mine and around $180k plus the wife at about $15k so I get a little bit of the year maxed on SS, so zero SS tax near the end of the year.  I max our 401k (I'm over 50, so also catch up).  Wife doesn't have one.  If you're a 2 income family with 2 401k (403b), then max them and you get your income lowered.  It's small, but you can reduce taxable interest by buying US Savings Bonds.  $10k per person plus you can get $5k in paper bonds as a Federal refund.  I only do the paper as I've dealt with TD before.

What else can you do?....  Add solar?  Buy electric cars?  I don't do either for my own reasons.

[SeattleCPA]

The super-rich have accountants who can set up offshore trusts or other tax shenanigans of dubious legality ...

We work with foreign trusts. I would not categorize them as either killer tax shelters or as things of dubious legality. IRS really, really, really, strictly monitors this stuff. The penalties for breaking the law are, well, essentially confiscation.

[better late]

We make close to what your income is and pay a bit less in federal taxes.  I believe you are married from a quick look at your past posts, but I don't see a retirement deduction for your spouse.  That seems to be the biggest difference between your taxes and ours (although once the second earner retirement is factored in I think we are eligible for a tuition deduction so the tax savings cascades a bit).

We are renters now so the $24K standard deduction is a great deal larger than we would have been able to deduct if we were itemizing. I understand your emotions somewhat though, before we sold our clown house our itemized deductions were over 45K a year and the SALT limits would have sunk us.

True, as a teacher he could do a 403b but they have no match and the investment options are horrible with a list of fees a mile long.  It never mattered too much but it would work to reduce the tax.  It's just anything involving his school is such a pain.  They make things as difficult as possible.

Can't wait to sell the house and rent for the amount we're paying in property taxes.  Good for you!

Does the 403b work the same way as 401k for tax purposes? If he had invested the maximum for 2019 would your taxes have been reduced by 24% (I’m guessing that’s your top bracket) of that $19k?  That’s a lot of fed tax savings and likely worth some fees/frustration. And would that additional retirement savings have put your agi  below the threshold where you can take the tuition deduction? (Edited to add: the tuition threshold seems to be lower than I remember so this point may be moot)

I know it’s hard to pay for tuition and also fund retirement... we’re just finishing all that up this semester so I know all too well having limited resources for competing demands.

[trollwithamustache]

At the risk of getting back on OP's question!,

This is one of the reasons I became an independent contractor.  I like being an engineer and didn't particularly want to climb the management ladder, so I try to position myself as a technical expert in a handful of areas.  As a staff engineer, I would probably change jobs every couple years anyways so I don't view it as particularly more risky. YMMV.

Now as a in independent contractor I have lots of legitimate business deductions. I really do work from my home office a lot so it really is a dedicated space. I can also mustache away massive amounts of retirement assets when I want to.  In some ways, being an independent contractor is unmustachian as it sort of encourages some types of consumption. For example, did I really need a new computer this year? it was nice, and with pretax dollars it was "cheap".  The year you buy a a vehicle may even push your income low enough to qualify for some regular people deductions that you had phased out of!

[DeniseNJ]

We make close to what your income is and pay a bit less in federal taxes.  I believe you are married from a quick look at your past posts, but I don't see a retirement deduction for your spouse.  That seems to be the biggest difference between your taxes and ours (although once the second earner retirement is factored in I think we are eligible for a tuition deduction so the tax savings cascades a bit).

We are renters now so the $24K standard deduction is a great deal larger than we would have been able to deduct if we were itemizing. I understand your emotions somewhat though, before we sold our clown house our itemized deductions were over 45K a year and the SALT limits would have sunk us.

True, as a teacher he could do a 403b but they have no match and the investment options are horrible with a list of fees a mile long.  It never mattered too much but it would work to reduce the tax.  It's just anything involving his school is such a pain.  They make things as difficult as possible.

Can't wait to sell the house and rent for the amount we're paying in property taxes.  Good for you!

Does the 403b work the same way as 401k for tax purposes? If he had invested the maximum for 2019 would your taxes have been reduced by 24% (I’m guessing that’s your top bracket) of that $19k?  That’s a lot of fed tax savings and likely worth some fees/frustration. And would that additional retirement savings have put your agi  below the threshold where you can take the tuition deduction? (Edited to add: the tuition threshold seems to be lower than I remember so this point may be moot)

I know it’s hard to pay for tuition and also fund retirement... we’re just finishing all that up this semester so I know all too well having limited resources for competing demands.

I had thought that funding IRAs  would be better but now I think we need the reduction of the 403b so I'll be looking into that right away

[redhead84]

Two DINKS here. We max out all tax advantaged savings options - two 401Ks and an HSA for us. Our AGI was around $195K last year which includes some qualified dividend income.

I looked at the final figures yesterday, and we paid about 25% all in (fed, state, SS). I don't know how to bring this down unless we have a child, move to a state that doesn't have income tax, and reduce our W-2 income.

[SanDiegoFIhopeful]

DINK household in SoCal, similar situation here. We max both 401s and I max my HSA, but are paying north of 23% in tax. Our mortgage interest plus state income tax goes over the standard deduction by a bit, and we have held on to ESPP plan purchases until hitting long term cap gain tax rates, but there's not much else to be done.

I am likely adding solar in 2020 - payback is less than 5 years in our region and the environmental benefits make it a win-win IMO, but YMMV in NJ. Other than that, we will just fork the tax money over and count ourselves lucky.

[JLee]

DINK household in SoCal, similar situation here. We max both 401s and I max my HSA, but are paying north of 23% in tax. Our mortgage interest plus state income tax goes over the standard deduction by a bit, and we have held on to ESPP plan purchases until hitting long term cap gain tax rates, but there's not much else to be done.

I am likely adding solar in 2020 - payback is less than 5 years in our region and the environmental benefits make it a win-win IMO, but YMMV in NJ. Other than that, we will just fork the tax money over and count ourselves lucky.

Full payback for my $47k solar array is 6.5 years in NJ.

[ctuser1]

Tangential, but possibly off topic question.

How do you guys get these payback numbers?

I pay an electricity bill of ~$3k every year (has been within + or - 200 of that for 3 years now). Assuming the entire electric bill is now gone after solar, a 5 year payback implies a $15k cost for Solar. A 6.5 year implies $20k.

The after-tax-deduction cost (and remember that tax deduction is reduced from this year) is usually significantly higher than $20k.

Do you guys have a much higher electricity bill? Does net-metering actually pay you back for electricity generated (AFAIK it doesn't in CT)?

Every time I try to calculate the returns from Solar, the numbers don't seem to pencil out for me. I'd go solar quickly if I got a 5 year payback.

What am I missing?

[SanDiegoFIhopeful]

Tangential, but possibly off topic question.

How do you guys get these payback numbers?

I pay an electricity bill of ~$3k every year (has been within + or - 200 of that for 3 years now). Assuming the entire electric bill is now gone after solar, a 5 year payback implies a $15k cost for Solar. A 6.5 year implies $20k.

The after-tax-deduction cost (and remember that tax deduction is reduced from this year) is usually significantly higher than $20k.

Do you guys have a much higher electricity bill? Does net-metering actually pay you back for electricity generated (AFAIK it doesn't in CT)?

Every time I try to calculate the returns from Solar, the numbers don't seem to pencil out for me. I'd go solar quickly if I got a 5 year payback.

What am I missing?

Net metering doesn't pay cash but the credits carry forward. I will be buying ~4KW, my electric panel does not need to be updated, and I'm not getting a power wall battery or new roof, so those may all factor into your cost being higher, but I expect my out the door costs after the 26% tax credit (down from 30%) to be below $7,000, vs my electric bill of $1,500/yr.

[JLee]

Tangential, but possibly off topic question.

How do you guys get these payback numbers?

I pay an electricity bill of ~$3k every year (has been within + or - 200 of that for 3 years now). Assuming the entire electric bill is now gone after solar, a 5 year payback implies a $15k cost for Solar. A 6.5 year implies $20k.

The after-tax-deduction cost (and remember that tax deduction is reduced from this year) is usually significantly higher than $20k.

Do you guys have a much higher electricity bill? Does net-metering actually pay you back for electricity generated (AFAIK it doesn't in CT)?

Every time I try to calculate the returns from Solar, the numbers don't seem to pencil out for me. I'd go solar quickly if I got a 5 year payback.

What am I missing?

I thought I replied to this already - oops!

I had a 13.26kW system installed for $47,200 (NJ).  After the 30% tax credit, I'm at $33,040.  My array is projected to produce about 14,500 kWh per year, which is 14-15 SRECs (NJ solar production credit, one per 1000 kWh). SRECs have been trading for about $220/each, so unless something changes drastically there's about $3200/year for ten years (SREC program's guaranteed duration at the time I signed up). It'll generate about $2400 in power annually as well, for a net of approximately $5600/year.  Due to the utility bill offset and SRECs, it's cash flow positive out of the gate ($33k financed for 10 years @ 3.99%) and the loan will be paid off when the SREC program expires (10 years), at which point I have another 15 years of warrantied power output. I will likely pay it off early (3.99% is just barely worth paying IMO) regardless.

My house is weird - three kitchens (roommates ftw!) with two central AC units and we have one EV, which will be two (or potentially three) in 1-2 years.  I fully expect to use every bit of power I generate.

If electricity costs increase, the value will increase as well. If electricity costs decrease, well...I will be surprised. :)

[Reynold]

If its any comfort, in Europe people are paying those kinds of effective tax rates (25%+) at income levels of $30k or so, by the income level of the OP it is probably more like 50%.  Plus a VAT (sales) tax of 20% or so. 

The best bet to reduce taxable income is to have both wage income and a business where you can deduct some expenses.  Business income, for example, lets you deduct health insurance premiums, whereas wage income doesn't.  While most employers pay most of health insurance premiums, larger portions of them are being shifted directly to workers. 

[Heywood57]

I don't believe you or I will get back from SS what we put in. (My grandparents did..)

Can you detail that a bit?

SSA.gov shows I will have paid ~$470k in FICA (employer and employee) by my full retirement age .
Given the projected SSA payment, it will take ~12 years to get ~$470k in payments.
and ~8 years if I include half of mine for my non-working spouse.

I would much prefer to have had that ~$470k paid into my IRA account
where it could have been compounding.

[simonsez]

I had thought that funding IRAs  would be better but now I think we need the reduction of the 403b so I'll be looking into that right away

Take off 19.5k for the 403b and another 19.5k for the 457b plan?  That 39k reduction would be a nice dent in taxable income.

https://www.nj.gov/treasury/pensions/documents/pdf/dc_info_statement.pdf
https://www.bogleheads.org/forum/viewtopic.php?t=252074

If you think the 403b fees are too high...
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=175295

Also, IRA contribution limits are separate from 401k/403b and 457.  You can do all 3.

[SeattleCPA]

I don't believe you or I will get back from SS what we put in. (My grandparents did..)

Can you detail that a bit?

SSA.gov shows I will have paid ~$470k in FICA (employer and employee) by my full retirement age .
Given the projected SSA payment, it will take ~12 years to get ~$470k in payments.
and ~8 years if I include half of mine for my non-working spouse.

I would much prefer to have had that ~$470k paid into my IRA account
where it could have been compounding.

That statement doesn't stand very well on its own, does it? Sorry.

But to explain, the comment responded to discussion about looking at all the taxes someone pays when assessing whether their tax burden is high or low. I'd said payroll taxes did burden people working in jobs. Someone else understandably asked, "but what about the benefits?"... that sentence above was part of a response that said people today don't really get a true benefit. At the end of the response the above sentence was copied from, for example, I pointed to a study that says average person gets a 1% return on her or his Social Security taxes... obviously, that's way less than these folks would have gotten from something like an IRA invested in something like a 60%/40% portfolio.

So there's no misunderstanding:  I think Social Security program is a good thing. (See here for example: https://evergreensmallbusiness.com/delay-social-security-benefits-to-bump-withdrawals/ ) Absolutely not arguing it's a bad social policy. My position is, it's a tax.

[Michael in ABQ]

I'll break the $100k income mark for the first time in 2020, but only a small fraction of that will be taxable since I'm in a combat zone.

I've got a good friend who is an executive at a tech company in the Bay Area and his wife is a Nurse Practitioner, no kids. They will probably pay more in taxes in one year than I will pay in 10-20 years. But they're probably making $400k+ so while I'm making $80k with six kids. Then again their one-bedroom apartment rent is three times what I pay for rent on a 5-bedroom house.

[DeniseNJ]

I'm going off on NJ one last time. While they don't tax 401k contributions, they DO tax TSP contributions!  Huh?  How are they different?  I guess they know I'm getting out asap and want my money now.  I

They don't tax TSP distributions but I'll be long gone by then.

[ysette9]

I don't believe you or I will get back from SS what we put in. (My grandparents did..)

Can you detail that a bit?

SSA.gov shows I will have paid ~$470k in FICA (employer and employee) by my full retirement age .
Given the projected SSA payment, it will take ~12 years to get ~$470k in payments.
and ~8 years if I include half of mine for my non-working spouse.

I would much prefer to have had that ~$470k paid into my IRA account
where it could have been compounding.

That statement doesn't stand very well on its own, does it? Sorry.

But to explain, the comment responded to discussion about looking at all the taxes someone pays when assessing whether their tax burden is high or low. I'd said payroll taxes did burden people working in jobs. Someone else understandably asked, "but what about the benefits?"... that sentence above was part of a response that said people today don't really get a true benefit. At the end of the response the above sentence was copied from, for example, I pointed to a study that says average person gets a 1% return on her or his Social Security taxes... obviously, that's way less than these folks would have gotten from something like an IRA invested in something like a 60%/40% portfolio.

So there's no misunderstanding:  I think Social Security program is a good thing. (See here for example: https://evergreensmallbusiness.com/delay-social-security-benefits-to-bump-withdrawals/ ) Absolutely not arguing it's a bad social policy. My position is, it's a tax.

I’m sure many or even most would get a better return investing separately. But SS isn’t supposed to be a great investment for the financially savvy, it is supposed to be a backstop to ensure seniors aren’t living in dire poverty when they are too old to work. It isn’t a big part of my retirement plan because I am fortunate enough to not need it. I’m okay with not making out well on what I paid into SS if it means fewer seniors dying on the streets for lack of food and shelter.

[ctuser1]

I don't believe you or I will get back from SS what we put in. (My grandparents did..)

Can you detail that a bit?

SSA.gov shows I will have paid ~$470k in FICA (employer and employee) by my full retirement age .
Given the projected SSA payment, it will take ~12 years to get ~$470k in payments.
and ~8 years if I include half of mine for my non-working spouse.

I would much prefer to have had that ~$470k paid into my IRA account
where it could have been compounding.

That statement doesn't stand very well on its own, does it? Sorry.

But to explain, the comment responded to discussion about looking at all the taxes someone pays when assessing whether their tax burden is high or low. I'd said payroll taxes did burden people working in jobs. Someone else understandably asked, "but what about the benefits?"... that sentence above was part of a response that said people today don't really get a true benefit. At the end of the response the above sentence was copied from, for example, I pointed to a study that says average person gets a 1% return on her or his Social Security taxes... obviously, that's way less than these folks would have gotten from something like an IRA invested in something like a 60%/40% portfolio.

So there's no misunderstanding:  I think Social Security program is a good thing. (See here for example: https://evergreensmallbusiness.com/delay-social-security-benefits-to-bump-withdrawals/ ) Absolutely not arguing it's a bad social policy. My position is, it's a tax.

I’m sure many or even most would get a better return investing separately. But SS isn’t supposed to be a great investment for the financially savvy, it is supposed to be a backstop to ensure seniors aren’t living in dire poverty when they are too old to work. It isn’t a big part of my retirement plan because I am fortunate enough to not need it. I’m okay with not making out well on what I paid into SS if it means fewer seniors dying on the streets for lack of food and shelter.

You aren't supposed to get a personal return from a welfare program. So the discussion about "great investment", or "1% return" is quite irrelevant.

https://www.forbes.com/sites/patrickwwatson/2018/07/09/you-havent-earned-your-social-security-its-welfare/

It would be ridiculous to count on X% return from Food Stamps, Y% return from Section 8 and Z% return from medicare.

It's equally ridiculous to try to calculate "return" on the social welfare program for old people known as social security.

If the portion of my income taxes that go into funding section 8/medicaid/food-stamps/roads-in-moocher-"rightwing"-states etc were instead put into a Vanguard index fund - I am quite sure it would appear I'd be a lot better off financially!! But that is not the point. I am not sure I'd want to live in such a society!! There is a reason why people pay ridiculous prices to live in high-tax-homeless-heaven SF (and high-tax-but-too-cold-to-be-homeless-friendly NYC) than any random pick-your-rightwing-midwest-heaven.

Everyone in 40s and 50s understood Social security to be a welfare program. The narrative from conservatives opposing it denounced it as such. It's only when conservatives found it useful to co-opt it, that they engaged in the Orwellian whitewashing and termed social security "not welfare".

[Michael in ABQ]

I don't believe you or I will get back from SS what we put in. (My grandparents did..)

Can you detail that a bit?

SSA.gov shows I will have paid ~$470k in FICA (employer and employee) by my full retirement age .
Given the projected SSA payment, it will take ~12 years to get ~$470k in payments.
and ~8 years if I include half of mine for my non-working spouse.

I would much prefer to have had that ~$470k paid into my IRA account
where it could have been compounding.

That statement doesn't stand very well on its own, does it? Sorry.

But to explain, the comment responded to discussion about looking at all the taxes someone pays when assessing whether their tax burden is high or low. I'd said payroll taxes did burden people working in jobs. Someone else understandably asked, "but what about the benefits?"... that sentence above was part of a response that said people today don't really get a true benefit. At the end of the response the above sentence was copied from, for example, I pointed to a study that says average person gets a 1% return on her or his Social Security taxes... obviously, that's way less than these folks would have gotten from something like an IRA invested in something like a 60%/40% portfolio.

So there's no misunderstanding:  I think Social Security program is a good thing. (See here for example: https://evergreensmallbusiness.com/delay-social-security-benefits-to-bump-withdrawals/ ) Absolutely not arguing it's a bad social policy. My position is, it's a tax.

I’m sure many or even most would get a better return investing separately. But SS isn’t supposed to be a great investment for the financially savvy, it is supposed to be a backstop to ensure seniors aren’t living in dire poverty when they are too old to work. It isn’t a big part of my retirement plan because I am fortunate enough to not need it. I’m okay with not making out well on what I paid into SS if it means fewer seniors dying on the streets for lack of food and shelter.

You aren't supposed to get a personal return from a welfare program. So the discussion about "great investment", or "1% return" is quite irrelevant.

https://www.forbes.com/sites/patrickwwatson/2018/07/09/you-havent-earned-your-social-security-its-welfare/

It would be ridiculous to count on X% return from Food Stamps, Y% return from Section 8 and Z% return from medicare.

It's equally ridiculous to try to calculate "return" on the social welfare program for old people known as social security.

If the portion of my income taxes that go into funding section 8/medicaid/food-stamps/roads-in-moocher-"rightwing"-states etc were instead put into a Vanguard index fund - I am quite sure it would appear I'd be a lot better off financially!! But that is not the point. I am not sure I'd want to live in such a society!! There is a reason why people pay ridiculous prices to live in high-tax-homeless-heaven SF (and high-tax-but-too-cold-to-be-homeless-friendly NYC) than any random pick-your-rightwing-midwest-heaven.

Everyone in 40s and 50s understood Social security to be a welfare program. The narrative from conservatives opposing it denounced it as such. It's only when conservatives found it useful to co-opt it, that they engaged in the Orwellian whitewashing and termed social security "not welfare".

Social Security feels different than food stamps or Section 8 housing, or other forms of welfare because you have to pay into it, and your benefits are based on what you've paid into it. Also, virtually everyone receives it unlike most forms of welfare. At least the OA portion of the OASDI (Old-Age, Survivors, Disability Insurance).

[SeattleCPA]

It isn’t a big part of my retirement plan because I am fortunate enough to not need it. I’m okay with not making out well on what I paid into SS if it means fewer seniors dying on the streets for lack of food and shelter.

Yes, me too.

Again my point is, it's a tax. Or if you want, you can call it mandatory insurance.

As a note, my point was you can't look at one of the taxes someone pays (like someone with a high income because of a business they own) and conclude that means they have a low tax burden. You have to look at all the taxes.

And here's another real-life, small business-y example. So yesterday a small business owner during her tax appointment expressed deep frustration. She hears about this 21% corporate tax rate... she's operating as an S corporation... she wants to know how she gets that nice low tax rate.

So I have the talk...

I explain that if your small business makes $100,000 in profits, yes, as a C corporation you would "only" pay $21,000 in C corporate taxes...

But when you want to take out the remaining $79,000, you're going to pay taxes again. Maybe only a 15% qualified dividends tax. Or maybe a higher 20% qualified dividends tax.

Maybe you'll pay the 3.8% Obamatax (aka "net investment income tax"). Or maybe not.

But you can't look at just one tax in a set of taxes someone pays.

End meeting, she understands.

I have this conversation a dozen times over tax season... always happy to do it btw... because this is a really common mistake folks make when they think about taxes.

[SeattleCPA]

BTW, if people want to declare that Social Security isn't a tax, that means that low income and middle folks pay no or nearly no federal taxes...

We might want to start another thread entitled, "How can I pay no or nearly no federal income taxes like low income and middle income folks?"

[ctuser1]

BTW, if people want to declare that Social Security isn't a tax, that means that low income and middle folks pay no or nearly no federal taxes...

We might want to start another thread entitled, "How can I pay no or nearly no federal income taxes like low income and middle income folks?"

You missed the billionaires in that list of people who freeload. Is that intentional?

[ctuser1]

Social Security feels different than food stamps or Section 8 housing, or other forms of welfare because you have to pay into it, and your benefits are based on what you've paid into it. Also, virtually everyone receives it unlike most forms of welfare. At least the OA portion of the OASDI (Old-Age, Survivors, Disability Insurance).

As far as I could read into old history, FDR made compromises in how social security is seemingly "earned" to appease the Hoover gang. So it is slightly different from other forms of welfare.

All of that "earning" is only in the calculation, however, and not in the actual funding. Your money is not seating into an account to be disbursed to you. You contribute taxes - and get some tokens in the form of PIA. Your money is gone to pay for the current crop of retirees.

When it is your time to receive the benefits, the next generation will fund it or pay for it.

The funding of social security is like welfare, and the benefit calculation is partially like an individual account like 401k. So claiming social security is "absolutely not welfare" is probably more incorrect than claiming it is "completely earned".

[ysette9]

Social Security feels different than food stamps or Section 8 housing, or other forms of welfare because you have to pay into it, and your benefits are based on what you've paid into it. Also, virtually everyone receives it unlike most forms of welfare. At least the OA portion of the OASDI (Old-Age, Survivors, Disability Insurance).

As far as I could read into old history, FDR made compromises in how social security is seemingly "earned" to appease the Hoover gang. So it is slightly different from other forms of welfare.

All of that "earning" is only in the calculation, however, and not in the actual funding. Your money is not seating into an account to be disbursed to you. You contribute taxes - and get some tokens in the form of PIA. Your money is gone to pay for the current crop of retirees.

When it is your time to receive the benefits, the next generation will fund it or pay for it.

The funding of social security is like welfare, and the benefit calculation is partially like an individual account like 401k. So claiming social security is "absolutely not welfare" is probably more incorrect than claiming it is "completely earned".

Really interesting explanation and history lesson. Thanks for sharing.