How do high income folks limit their tax liability?

[DeniseNJ]

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?

[ixtap]

As childless renters, we make about the same and pay even more in taxes.

If your income is likely to increase this year, you should also be aware that you are bumping up against the NIIT phase in.

[DeniseNJ]

As childless renters, we make about the same and pay even more in taxes.

If your income is likely to increase this year, you should also be aware that you are bumping up against the NIIT phase in.

Of good grief, what is that?  I'll have to look it up.

I've always been poor so being in this position is really new to me.  It's only recently that we have been making these great salaries and haven't been broke all the time.  Sure it beats the projects I grew up in but I always thought this type of income meant you were rich, and we so aren't.

[Pigeon]

We don't.  We have a similar household income and are also in a state with a relatively high state income tax.  We pay the taxes we owe.  We have a kid in college and we get a tiny break on that, but nowhere near what we pay in tuition.  While you might not feel rich (we don't either), we thank our lucky stars that we are in the 90%+ income bracket in the US.

[therethere]

Be happy you have kids to deduct. We're childless renters with just under 200k salaries. Our state taxes are lower but it still sucks! There's not much way around it unless you quit a w2 job and start up a business and start deducting stuff you would pay for anyway or route everything through a solo-401k. Oh, or have more kids? I really wish you could average your taxes over low income/high income years.

My coworkers with kids are always complaining about how high their taxes. They pay like 1/3-1/2 of what we pay....

[phildonnia]

I've always been poor so being in this position is really new to me.  It's only recently that we have been making these great salaries and haven't been broke all the time.

I've also had the experience of slowly bumping into exciting new tax features as my income has increased.  First it was the high-income estimated tax maximum.  Then it was the Child Tax Credit phase-out.  Then the Roth IRA eligibility.  Next year, I'll probably hit the NIIT threshold, and maybe AMT.

Taxing the rich was such a good idea until it started happening to me.  But as my financial advisor says: these are good problems to have.

You've probably heard stories from class-envious people about how the rich "write everything off" or something.  This is mostly bullshit.  Mainly it comes down to the fact that rich people are in a position to lose a crapload of money now and then, and thus pay little tax.  Carried-over capital losses or business losses are a great way to avoid taxes, but losing a crapload of money is not exactly something you want to strive for.

Other than that, you've probably heard this before:

• Do as much as possible in an IRA (which means contributing as much as possible to an IRA),
• Harvest your losses,
  
• Use FSAs and HSAs when appropriate
• If possible, choose which years to take your income.

Above all, don't let the tax tail wag the dog.  The goal is to take home as much as possible, not to pay as little tax as possible.  Never turn down income or deliberately lose money solely for tax reasons.

  Sure it beats the projects I grew up in but I always thought this type of income meant you were rich, and we so aren't.

If you find yourself living poor, despite your income, then you're in good company on this forum.  If you look at MMM's latest blog post, where he details his cash flow, he and his children are living well below the poverty line.  I'm doing the same.  Which goes to show that income and expense figures are not a very good indicator of wealth or poverty.

[DeniseNJ]

Thanks you guys!  I thought surely there must be some mistake.  But it looks like I'm in good company.

[ixtap]

I've always been poor so being in this position is really new to me.  It's only recently that we have been making these great salaries and haven't been broke all the time.

I've also had the experience of slowly bumping into exciting new tax features as my income has increased.  First it was the high-income estimated tax maximum.  Then it was the Child Tax Credit phase-out.  Then the Roth IRA eligibility.  Next year, I'll probably hit the NIIT threshold, and maybe AMT.

Taxing the rich was such a good idea until it started happening to me.  But as my financial advisor says: these are good problems to have.

You've probably heard stories from class-envious people about how the rich "write everything off" or something.  This is mostly bullshit.  Mainly it comes down to the fact that rich people are in a position to lose a crapload of money now and then, and thus pay little tax.  Carried-over capital losses or business losses are a great way to avoid taxes, but losing a crapload of money is not exactly something you want to strive for.

Other than that, you've probably heard this before:

• Do as much as possible in an IRA (which means contributing as much as possible to an IRA),
• Harvest your losses,
  
• Use FSAs and HSAs when appropriate
• If possible, choose which years to take your income.

Above all, don't let the tax tail wag the dog.  The goal is to take home as much as possible, not to pay as little tax as possible.  Never turn down income or deliberately lose money solely for tax reasons.

  Sure it beats the projects I grew up in but I always thought this type of income meant you were rich, and we so aren't.

If you find yourself living poor, despite your income, then you're in good company on this forum.  If you look at MMM's latest blog post, where he details his cash flow, he and his children are living well below the poverty line.  I'm doing the same.  Which goes to show that income and expense figures are not a very good indicator of wealth or poverty.

Right? It's all "Hey! No FICA," until its all "What was that that just hit me?!"

We don't think we live poor, but the bogleheads tell me it is impossible to live on our budget, especially in a HCOL so maybe we do? Some people think we are poor just because we choose to have a roommate.  Three adults in the place, and I can't tell you the last time someone sat in the living room, so it is still too big. And so, we charge our roommate less than half the rent, even though we gave her the bigger room with the very stupid WC* and half the garage. We see it as providing affordable housing to a lovely young professional who mostly keeps to herself, but does participate in chats and board games.


*Seriously, who decided it was a good idea to put the toilet in a closet without a sink? Why do I need a sink near the shower, rather than the toilet?! It is one thing when they were retrofitting and putting things wherever they could, but then some designer decided this was desirable?!?!?! As for atomizing any crap from the toilet JUST SHUT THE LID! Seat up or seat down? SHUT THE LID!

[terran]

Sounds like you're not rich, you're high income. Sucks to be a high wage earner in this country (can't speak to others). Only worse thing is being a low wage earner, of course.

[JLee]

The SALT cap really screwed us NJ people. 

[index]

21% of our gross income goes to Federal, State, and local taxes not accounting for property tax. Thats after fully funding 2 401ks, an HSA, and some FSA money and we are in a LCOL area. 

[brooklynmoney]

Just be happy you aren't paying NYC local tax on top of all that. And Medicare investment tax. It could actually be much worse.

[JLee]

Just be happy you aren't paying NYC local tax on top of all that. And Medicare investment tax. It could actually be much worse.

I would be much better off with NYC property tax rate (0.9%) + NYC local tax vs my property tax rate (4.62%).

[ctuser1]

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),

You might consider switching to HSA. Use that as a retirement account, i.e. pay all OOP medical expenses from after-tax money and let the HSA account grow. You should also keep receipts for all the after-tax payment you make for medical costs. You can take money out any time from HSA based on those receipts. Of course, you should try not to take money out of HSA and rather let it grow tax-free. However, it can work as an emergency fund of last resort any time you are in a real pickle.

As an example how this *can* be used, I currently have ~$60k in HSA, and about $20k in receipts. As soon as I have $30k in receipts and an account balance of $100, I will try to convince DW to allow me to treat that as our emergency fund and cut our current emergency fund in half. I doubt she will agree, but one can always try!!

Can't deduct med expenses since they are short of the 7% even at many thousands of dollars.

Your health insurance will have an OOP Max. Mine has $8k OOP Max. You will not hit the medical expense deduction even if you hit the typical OOP Max numbers.

But, if you use FSA/HSA, then all these medical spending is tax-free anyway. You can set aside $7k in HSA. Keep receipts and pay out of pocket from after-tax money, and the money will be tax free eventually when you claim it from HSA (in retirement, post growth, based on old receipts).

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?

No. This is normal, and even smell low-ish to me!!

Think about it. $50k taxes on $200k income would only be 25% effective tax rate. That does not sound so high now, does it? Your effective rates are lower. You basically get to keep 80% of your gross income.

As a data point, I and DW pay *more* in absolute $$ taxes AND a higher %.

[secondcor521]

I always heard about rich ppl paying so little in taxes but now that I'm here I'm only getting half my pay.

You might find this article with data in it interesting to read:

https://www.ntu.org/foundation/tax-page/who-pays-income-taxes

Me posting this may touch off a firestorm about various things.  If it does, I don't care - I've heard all the arguments before, and I won't respond.  But the IRS data continues to say that high income people don't pay "so little in taxes"; they pay a larger share even after accounting for the fact that they make a larger share of the income.  Also, anyone can look at the IRS tax brackets and phase outs and figure out that high income people (especially childless people) are taxed more heavily.  Note that high income and rich aren't synonymous, but there is definitely significant overlap between rich people and high income taxpayers.

The good news is you'll probably be focused on reducing your tax bill, and the various ways to do that (401(k), IRAs, HSAs, etc.) generally result in you becoming wealthy over time.  At which point you can quit your job.  At which point you'll look like a "low income" (="poor") person to the IRS, and you'll go from having taxes be one of your highest expense categories on a percentage basis to probably having negative tax liability and the government sending you a check every year.

[DeniseNJ]

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),

You might consider switching to HSA. Use that as a retirement account, i.e. pay all OOP medical expenses from after-tax money and let the HSA account grow. You should also keep receipts for all the after-tax payment you make for medical costs. You can take money out any time from HSA based on those receipts. Of course, you should try not to take money out of HSA and rather let it grow tax-free. However, it can work as an emergency fund of last resort any time you are in a real pickle.

As an example how this *can* be used, I currently have ~$60k in HSA, and about $20k in receipts. As soon as I have $30k in receipts and an account balance of $100, I will try to convince DW to allow me to treat that as our emergency fund and cut our current emergency fund in half. I doubt she will agree, but one can always try!!

Can't deduct med expenses since they are short of the 7% even at many thousands of dollars.

Your health insurance will have an OOP Max. Mine has $8k OOP Max. You will not hit the medical expense deduction even if you hit the typical OOP Max numbers.

But, if you use FSA/HSA, then all these medical spending is tax-free anyway. You can set aside $7k in HSA. Keep receipts and pay out of pocket from after-tax money, and the money will be tax free eventually when you claim it from HSA (in retirement, post growth, based on old receipts).

Thanks. I'm trying to compare the high deductable plans available to the regular plans and then consider the effect of the HSA.  And I have to see what our docs take.  Open season is not until Nov but I think that's the way to go since either way, I'm paying so I may as well have an HSA to save into.

[Trekker]

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?

Most of the articles that you read about the 1% not paying their share of taxes is about the 1% in wealth and not the 1% in income. The truly wealthy work to increase their wealth through unrealized gains (e.g., asset appreciation), and if they're forced to realize the gain, they make sure that it's a capital gain and not ordinary income.

Beyond that, the private equity guys are masters of getting their income categorized as a capital gain. Here's an explanation of how: https://www.investopedia.com/articles/investing/072215/how-private-equity-and-hedge-funds-are-taxed.asp

[Paul der Krake]

Americans have vocal opinions about a complex topic they barely understand, tonight after football.

[ctuser1]

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?

Most of the articles that you read about the 1% not paying their share of taxes is about the 1% in wealth and not the 1% in income. The truly wealthy work to increase their wealth through unrealized gains (e.g., asset appreciation), and if they're forced to realize the gain, they make sure that it's a capital gain and not ordinary income.

Beyond that, the private equity guys are masters of getting their income categorized as a capital gain. Here's an explanation of how: https://www.investopedia.com/articles/investing/072215/how-private-equity-and-hedge-funds-are-taxed.asp

You are just scratching the surface of all the mechanisms available.

A certain President is "rumored"/"known" to have taken out large loans, incurred huge losses, declared multiple bankruptcies, and yet have losses from those bankrupted business available to him for write off against income in future years. That is like magic!! Loans disappear on bankruptcy, but losses don't!!

Yet another presidential candidate is known to have paid "as high as" 14% in tax rates.

You or I can't get away with these types of freeloading or fraudulent activities. You need to be able to buy politicians for that.

[BTDretire]

$227,000 - $45,000 = $179,000, having that much spendable income doesn't generate a lot of sympathy.
I realize where you live can make a difference, but it still a lot of money per year.
The good side is, you get to keep 80%!
 The median US income is around $61,000 per year, half the population lives below that. And worse they probably have another $7,000 taken out in Fed and SS taxes. So more like $54,000 of spendable income.
 I see the problem as you don't think spending $100,000 per year is living rich.
 But of course, I would do what I can to limit my taxes.

[JLee]

$227,000 - $45,000 = $179,000, having that much spendable income doesn't generate a lot of sympathy.
I realize where you live can make a difference, but it still a lot of money per year.
The good side is, you get to keep 80%!
 The median US income is around $61,000 per year, half the population lives below that. And worse they probably have another $7,000 taken out in Fed and SS taxes. So more like $54,000 of spendable income.
 I see the problem as you don't think spending $100,000 per year is living rich.
 But of course, I would do what I can to limit my taxes.

FWIW the median household income in Bergen County NJ is over $100k.  Comparing to the national median in a place where property taxes alone are often more than most people's income tax isn't quite fair :)

[ender]

We give a lot of money which means SALT/mortgage interest/charitable giving, it's easy to hit $24.8k in total that way ;-)

[Dicey]

The SALT cap really screwed us NJ people.

In CA, the feeling is that it was retaliation for voting for the better candidate. We really got screwed by the SALT cap.

[Paul der Krake]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

[SeattleCPA]

A certain President is "rumored"/"known" to have taken out large loans, incurred huge losses, declared multiple bankruptcies, and yet have losses from those bankrupted business available to him for write off against income in future years. That is like magic!! Loans disappear on bankruptcy, but losses don't!!

The statement above misses fact that the cancellation of debt, such as in a bankruptcy, taxable. Detailed discussion here: https://evergreensmallbusiness.com/donald-trumps-net-operating-loss-deduction/

Yet another presidential candidate is known to have paid "as high as" 14% in tax rates.

This is really an incomplete and inaccurate statement. It references only one of the direct income taxes he paid. Not all of the taxes he paid such as indirect income taxes and other taxes like sales taxes, property taxes, and so on.

Another example might make this clearer: When people look at the middle class and see they typically pay no federal income taxes, they say "Geez, these folks don't pay any taxes!" But that's not right, right? They pay lots of other direct taxes (like sales and payroll taxes) and then indirect taxes (like the property taxes on their apartments.)

[SeattleCPA]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

I agree with the above point. It's arguably not fair that, in effect, lower and middle income folks in states that run their state governments on a lean budget indirectly subsidize folks in higher income, higher tax states.

[brooklynmoney]

Just be happy you aren't paying NYC local tax on top of all that. And Medicare investment tax. It could actually be much worse.

I would be much better off with NYC property tax rate (0.9%) + NYC local tax vs my property tax rate (4.62%).

Oh don’t worry our lively mayor is advocating to increase property taxes. Also depending if you have a condo or SFH you are taxed at different rates. I’m in a condo so my rate is higher. Also I paid 10k in NYC income tax last year.

[JLee]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

I agree with the above point. It's arguably not fair that, in effect, lower and middle income folks in states that run their state governments on a lean budget indirectly subsidize folks in higher income, higher tax states.

You have that backwards.

https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/

[ctuser1]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

You are right. They are the right policy in isolation. SALT write-off was a federal subsidy to housing market - something that is not desirable.

Life, however, isn't a simple context-free grammar from my CS coursework. There is a context to it that turns something that is nominally a good thing into a bad thing.

If the money raised/saved by this actually went into any worthwhile cause, then I'd not be pissed off. In effect, money was raised by SALT cap removal + blowing up the deficit, only to primarily flow into the top 1%'s pocket!

https://www.forbes.com/sites/janetnovack/2017/09/29/trump-plan-delivers-massive-tax-cuts-to-the-1-and-sharp-kick-to-upper-middle-class

I am not a big fan of big wealth transfers and social engineering efforts like these!! Are you??

[ctuser1]

The statement above misses fact that the cancellation of debt, such as in a bankruptcy, taxable. Detailed discussion here: https://evergreensmallbusiness.com/donald-trumps-net-operating-loss-deduction/

Your statement misses the fact (likely deliberately, since it is a CPA's job to know about these) that Trump does not run a small family business like a corner dentistry.
Corporate finances work differently from what you stated.

How?

Simple, take any struggling corporation - e.g. GM/Sears/Atlantic City Casinos. Now, separate the "bad book" from the "good book".

In theory, a legitimate money transfer is supposed to happen between the two books to make the activity "valuation neutral". Except, in practice, controllers of the business are often able to siphon value out of the entity going bankrupt - only paying pennies to the dollar. Now, apply whatever tax laws you want to apply on the "bad book" - the good book is isolated!

Old-GM and new-GM did this (in fact, GM did a very similar tax maneuver that our dear leader is "known" to have done: https://www.wsj.com/articles/SB10001424052970203609204574314180298525294).
Eddie Lampart did this via the Sears real estate holdings to eke out a profit while leaving everyone else with losses.
Throw in an offshore component or two, and similar shenanigans were extremely common in the heydays of Leveraged Buyouts a decade+ ago. e.g. Toys-R-Us, where original buyout participants made huge profit only to leave the main street operations stumble along for another decade with a bloated balance sheet.
They still *are* commonly used when there is a business requiring drastic restructuring.

How do I know these? I'm no tax expert, but worked as a strategy consultant long time ago. At a certain point of time way back in history, most re-org projects strategy consultants would work on would be related to LBO's and such!! Let's just say I have had some professional exposure to these types of financial engineering - enough to be aware of the big picture while not being an expert on the details.

Yet another presidential candidate is known to have paid "as high as" 14% in tax rates.

This is really an incomplete and inaccurate statement. It references only one of the direct income taxes he paid. Not all of the taxes he paid such as indirect income taxes and other taxes like sales taxes, property taxes, and so on.

Another example might make this clearer: When people look at the middle class and see they typically pay no federal income taxes, they say "Geez, these folks don't pay any taxes!" But that's not right, right? They pay lots of other direct taxes (like sales and payroll taxes) and then indirect taxes (like the property taxes on their apartments.)

I wasn't trying to obfuscate using irrelevant topics.

e.g. I could have brought up consumption taxes like sales tax, that is highly regressive. e.g. lower 90% pay a much higher % of their income as consumption taxes.

The discussion was about "a certain presidential candidate's freeloading". He paid much lower effective tax rate on his "income" as direct taxes while he should have paid more. Indirect taxation wasn't a topic of discussion anywhere.

Why do you support such freeloading and freeloaders who pay only 14% tax rate on millions of $$ income?

[Paul der Krake]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

You are right. They are the right policy in isolation. SALT write-off was a federal subsidy to housing market - something that is not desirable.

Life, however, isn't a simple context-free grammar from my CS coursework. There is a context to it that turns something that is nominally a good thing into a bad thing.

If the money raised/saved by this actually went into any worthwhile cause, then I'd not be pissed off. In effect, money was raised by SALT cap removal + blowing up the deficit, only to primarily flow into the top 1%'s pocket!

https://www.forbes.com/sites/janetnovack/2017/09/29/trump-plan-delivers-massive-tax-cuts-to-the-1-and-sharp-kick-to-upper-middle-class

I am not a big fan of big wealth transfers and social engineering efforts like these!! Are you??

Oh, I'm with you there! My household received a 5 figure tax windfall from it that we definitely could have done without, and I still think it's a disaster for the country.

I'd rather the ire be directed at the egregiously stupid shit in the law, rather than one of the rare good revenue-raising measures.

[Lucky13]

Move to a state with no income tax. :D  ok I'm joking there but like others above have said, I don't think there's any other "magic bullet" to avoid taxes on your W-2 income, aside from contributing the max to your pre-tax retirement accounts. It's interesting how the idea of a "graduated income tax" often doesn't really sink in until one experiences it, that was the case for me too!

[ctuser1]

Oh, I'm with you there! My household received a 5 figure tax windfall from it that we definitely could have done without, and I still think it's a disaster for the country.

I'd rather the ire be directed at the egregiously stupid shit in the law, rather than one of the rare good revenue-raising measures.

I see it more like wasting a good revenue-raising measure that could have been used to actually do something good.

The group(s) of people it targeted already paid a disproportionate share of taxes to subsidize:
1. billionaires who paid < 15% in taxes
2. "Gimme" states that like to leave regressive state tax structures in place, and likes handouts from the federal government to fill up the gap.

Targeting this group in this context seems morally wrong to me.

Yes, there are other, more egregious and stupid sh*t in there. But I don't feel that my ire at being targeted as a milking cow by the freeloading billionaires and gimme states for further freeloading is unjustified.

I'd have felt 180-degrees-different, if , for example, this tax increase on me was coupled with billionaires starting to pay their fair share and gimme states fixing their regressive tax structures.

[ctuser1]

Just wanted to offer my own high-tax-rant here in solidarity with OP.
I am more p*ssed off at myself, however, than anyone else, for not understanding how tax calculations work years earlier.

DW started working a full-time job in 2015. 2015 tax returns were okay - I think I owed $2k in taxes in total between state + federal.

At this point, I should have anticipated the clusterf*ck that 2016 would be, and adjust the W4s accordingly. I didn't, and that got me. We ended up owing $8k in extra taxes on top of the deductions already taken from our paychecks. I hated the underpayment penalty + I had not budgeted this extra cash outflow, so it was a pain to pay it (I am an irrational "bucketer", so cash-flowed it instead of the rational solution to just take from brokerage).

For 2017, I adjusted my and DW's W4s to withhold $200 each extra from our paychecks, and ended up with a small amount of refund. 2018 was similar.

In 2019, DW's income has significantly increased as she has changed job mid-year, + she bumped up her 401k contribution to almost max it out. For reasons I still don't fully understand, I see a $7.6k refund in TurboTax. My first reaction was obviously to be very happy with the refund - but then I realized the opportunity cost. Had we not extended this interest-free loan to the government and kept it invested in FXAIX (my default in the brokerage account), we'd be up by almost $1.5k for the year!!

2020 would be the first year where DW is likely to earn in six figures by herself. Who knows what kind of a surprise that will bring?

[Dicey]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

I call BS. CA and NY have expensive Real Estate for a variety of reasons, primarily market forces, not "screwy tax policy". Why the hell should they be singled out and taught a lesson? It's not as if individual taxpayers are the creating these so-called "screwy tax policies", yet they are the ones paying the price, all because of someone's vain pettiness. It is bad policy, and 100% wrong.

[Paul der Krake]

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

I call BS. CA and NY have expensive Real Estate for a variety of reasons, primarily market forces, not "screwy tax policy". Why the hell should they be singled out and taught a lesson? It's not as if individual taxpayers are the creating these so-called "screwy tax policies", yet they are the ones paying the price, all because of someone's vain pettiness. It is bad policy, and 100% wrong.

I stand by my statement and will add another unpopular opinion: expensive housing is also consumption. If you have states where paying 10k+ in combined property and income taxes is routine and a deduction that modest taxpayers actually rely on, that's a strong indicator of screwy tax laws.  Texas also screwed itself big time when it went all in on sky-high property taxes at the expense of everything else, and now they're pissed too.

Sure, the messenger is a fucking moron, the delivery is a shit sandwich, it's pretty darn low on the list of priorities , but the policy itself? Looks fine to me.

[SeattleCPA]

You have that backwards.

https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/

No, I don't. You're raising a separate and relevant issue though.

The issue I raised resembles charitable contributions. E.g., should someone get to pay less federal income taxes because they give to charities (house of worship, the school their kids attend, some cause they believe in but which you or I don't)... we're all used to this. But arguably it isn't fair for this person to pay less tax.

BTW, tax law sets of limits on the charitable contributions someone can deduct presumably partly for this reason.

[ctuser1]

I stand by my statement and will add another unpopular opinion: expensive housing is also consumption. If you have states where paying 10k+ in combined property and income taxes is routine and a deduction that modest taxpayers actually rely on, that's a strong indicator of screwy tax laws.

(Note: I have strong reservations about some aspects of the CT state tax codes enacted in 2015 or so, especially regarding global income, but that is another unrelated topic for another day).

1. Expensive housing is a free market thing - indicative of where people actually want to live in. Contrary to popular misconception, tax collection is usually not linked to expensive housing. In my town, the town sets the mill rate based on how much money is required to be raised from property taxes after all other revenues are accounted for in the budget.
2. You jump to conclusion too swiftly when denouncing the screwy tax laws in states with high property taxes. Money is fungible and for all towns I have looked into, there is a general setup of property taxes, state grants, federal grants and other revenue that funds the town budget.

My town has relatively high property taxes. I pay $6k (on the very low end of SFH), and most people pay > $10k. (for me SALT cap hit me more due to state income taxes and not property taxes).

Comparatively higher property tax collection in my town ultimately flows into the hand-out going to the red states, and ultimately the red state municipalities. Out here, I can't see any obvious sign of wastage (sure there are things that can be improved). Our mayor gets a $107k salary - which is rather low for the good job he has been doing for the past 10 years and the cost of living here. The town government doesn't look too bloated to me when I go in for beach parking permits, birth certificate duplicates etc.

So ultimately a lower property tax has to come from somewhere.

In case of red states, they take a two-prong approach - screw the teachers or state employees with below-living wages, and ask for a handout to the federal government. Are any of these examples of the "NOT screwy" tax laws that you suggest for us, the high-property-tax states?

To summarize, I do agree with you that in isolation SALT cap (and indeed removing any tax deduction for state/local taxes paid) would be the right policy. In reality, however, when that leads to higher degree of freeloading by groups that are already freeloaders, doing so without first fixing the other screwy parts is - let's say bass ackwards if I was being charitable. Pointing at "high property taxes" in my state is generally short sighted, and hypocritical if you live in one of the gimme states and rely on that money for your roads and schools.
 

[SeattleCPA]

Corporate finances work differently from what you stated.

I'm not going to argue with your understanding of tax law. But I think Trump's taxes work way different that you think.

BTW, relevant to this comment: I am not Trump supporter...

Here's how someone like Trump's taxes work. He goes out and borrows $500 million to buy a building. The property makes him, say, $10 million a year in cash income. But then what he does, he depreciates the building at the rate of roughly $10 million a year.

So even though he has $10 million of cash income, with the $10 million of depreciation, he reports no taxable income.

Note: You can do this too if you or your spouse qualify as a real estate professional... or if you do short-term rentals... or if your income is less than $100K annually.

If the building turns out not to be such a good investment and ultimately the lender forecloses, probably the lender's seizure of the property looks like a sale where Trump "sells" the property back to the bank for the loan amount. This causes him to have to pay income taxes on all cumulative depreciation.

If Trump in some other venture has venture go south and a bank simply cancels $500 million of debt, Trump counts that cancellation of debt, so the $500 million, as income.

The timing takes a while to work out. But whether it's Trump or some forum member here, in the end stuff trues up.

A final comment? What I think is more noteworthy about all of this is that Trump is losing money (so appears from the one tax return we've seen pages from). I mean, you're not playing the real estate development game right if you only show losses.

[JLee]

You have that backwards.

https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/

No, I don't. You're raising a separate and relevant issue though.

The issue I raised resembles charitable contributions. E.g., should someone get to pay less federal income taxes because they give to charities (house of worship, the school their kids attend, some cause they believe in but which you or I don't)... we're all used to this. But arguably it isn't fair for this person to pay less tax.

BTW, tax law sets of limits on the charitable contributions someone can deduct presumably partly for this reason.

Then eliminate it entirely, don't cap it at a point where you are selectively targeting people who didn't vote for you.

I'd care less if my taxes weren't subsidizing other states.

[Peachtea]

I look at it as we were able put 57k in tax advantaged accounts (401k + HSA + Roth) which is more than DH’s salary and nearly 2/3 of my parents gross joint income. (Plus we got state deduction on our +17k in 529 contributions.) Makes me feel like I sheltered a good chunk of money and maybe not all of it should be sheltered.

OP the federal high deductible plans suck, in that they don’t actually have very high deductibles and so the premiums are not as much of a savings as normal HDHPs.  Don’t rule out your spouse’s plans...we’re on my spouse’s high deductible plan because it’s ridiculously cheap compared anything on FEHB. (We pay $1380 a YEAR in premiums and his employer puts $1800 into our HSA.)

A couple things to look at with federal HDHPs is to realize they include a premium pass through. I.e. with the GEHA HDHP family you get $1800 back into the HSA. Also there are individual deductibles within the family one, which keeps out of pocket costs down if only one person in the family has high medical expenses. So if the deductible is $3000 family total, but $1500 per person, and you have $4000 in medical costs and spouse has $250, then you only pay the $1500 deductible for you and then $250 for spouse (not the $3000 family total). Plus you can use the $1800 HSA premium pass through, rather than pay out of pocket. (This assumes your expenses are coming at same rate or after pass through has had time to accumulate, since it comes on a monthly basis, not lump sum.)

[penguintroopers]

Not so much a limitation to your liability, but  a silver lining is you might be eligible for the Lifetime Learners Credit (might have an issue with the high-income phaseout and eligibility with to what you're studying) and the 20 year old might be eligible for the American Opportunity Credit if they're in college (or additionally lifetime learners credit. Make sure to only claim one of the two for them).

Lifetime Learners credit is 20% of tuition spending, capped at $10k, so a $2k deduction.
Cant remember exactly how the american opportunity credit ends, but its something like $2500.

[Much Fishing to Do]

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 had all of the low/middle/high/very high incomes over the years and as far as earned income I didn't see there were many ways to keep taxes low when the earnings were high.  My highest happen to come with a business so the solo 401k max was very helpful, and I did (long term) greatly increase my ability to give by given a lot to a DAF when I was in the highest tax bracket to then use over the rest of my retired life, but in the end I found when I made $50k taxes are tiny and when making $500k they are quite large and there's not a whole lot to do about it, and both of which seemed about right to me at the times.

Growing wealth thru non-earned income on the other hand is where you tend to have a lot more opportunity to reduce taxes for one that cares to deal with what it takes to do so.  The best simple example I've been able to come up with is a couple one who inherits $4M in a no inheritance tax state.  They can then invest $2M in a way that produces their living expenses keeping QDs and LTCGs low enough to keep taxes at zero if living in a no income tax state (something FIRE folks already know how to do well).  They can invest the other $2M in something like Berkshire Hathaway that is pretty diversified pays no dividends and makes no distributions and leave it alone.  Over a remaining lifetime of say 30 years (a normal time between receiving a parents inheritance and passing away) , the $2M regularly invested keeps a balance at around $2M given the withdraws, and the Berkshire grows to say $20M given its not touched and no taxes are ever due on it.  The couple passes away and leaves the $2M + the $20M to their heirs.  The $22M now fits under the estate tax exemption, and all those Berkshire gains are now reset to zero with the stepped up basis, so if the heirs are in a no inheritance tax state we now have $22M that can all be accessed and spent or whatever, with no tax due.  Here is where we seem to have a "rich people paying little taxes" instance, but its all only possible b/c the income is not earned.  There's a lot of other examples out there but they all seem to revolve around unearned income that I can think of.

[BTDretire]

A certain President is "rumored"/"known" to have taken out large loans, incurred huge losses, declared multiple bankruptcies, and yet have losses from those bankrupted business available to him for write off against income in future years. That is like magic!! Loans disappear on bankruptcy, but losses don't!!

The statement above misses fact that the cancellation of debt, such as in a bankruptcy, taxable. Detailed discussion here: https://evergreensmallbusiness.com/donald-trumps-net-operating-loss-deduction/

Yet another presidential candidate is known to have paid "as high as" 14% in tax rates.

This is really an incomplete and inaccurate statement. It references only one of the direct income taxes he paid. Not all of the taxes he paid such as indirect income taxes and other taxes like sales taxes, property taxes, and so on.

Another example might make this clearer: When people look at the middle class and see they typically pay no federal income taxes, they say "Geez, these folks don't pay any taxes!" But that's not right, right? They pay lots of other direct taxes (like sales and payroll taxes) and then indirect taxes (like the property taxes on their apartments.)

 I don't like seeing payroll in your list, which I'm pretty sure means it SS taxes.
First many middle class get their SS taxes back in SS payments, and some get way more than they paid in. I expect to! Second it also includes a disability policy while they are working. So the SS tax is only for the benefit of the individual that pays it, and their family.  It's a selfish tax.
It's not paying to make the government run.

[SeattleCPA]

A certain President is "rumored"/"known" to have taken out large loans, incurred huge losses, declared multiple bankruptcies, and yet have losses from those bankrupted business available to him for write off against income in future years. That is like magic!! Loans disappear on bankruptcy, but losses don't!!

The statement above misses fact that the cancellation of debt, such as in a bankruptcy, taxable. Detailed discussion here: https://evergreensmallbusiness.com/donald-trumps-net-operating-loss-deduction/

Yet another presidential candidate is known to have paid "as high as" 14% in tax rates.

This is really an incomplete and inaccurate statement. It references only one of the direct income taxes he paid. Not all of the taxes he paid such as indirect income taxes and other taxes like sales taxes, property taxes, and so on.

Another example might make this clearer: When people look at the middle class and see they typically pay no federal income taxes, they say "Geez, these folks don't pay any taxes!" But that's not right, right? They pay lots of other direct taxes (like sales and payroll taxes) and then indirect taxes (like the property taxes on their apartments.)

 I don't like seeing payroll, which I'm pretty sure means SS taxes, into this.
First many middle class get their SS taxes back in SS payments, and some get way more than they paid in. I expect to! Second it also includes a disability policy while they are working. So the SS tax is only for the benefit of the individual that pays it, and their family.
It's not paying to make the government run.

FWIW, I did mean Social Security and Medicare taxes when I used the label, "payroll." And for the record, I think you're right that you want to adjust the payroll tax burden for the benefits received. But I'm not sure this changes the strength or weakness of my "argument" ... I don't believe you or I will get back from SS what we put in. (My grandparents did..)

Here's the actual benefit formula from the SSA.GOV website:

PIA formula
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2020, or who dies in 2020 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $960 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $960 and through $5,785, plus
(c) 15 percent of his/her average indexed monthly earnings over $5,785.
We round this amount to the next lower multiple of $.10 if it is not already a multiple of $.10.

And the actual ROI on your taxes is often very modest. Here's one description that says you're earning about 1% if you're an average household.

https://www.heritage.org/social-security/report/social-securitys-rate-return

[BTDretire]

FWIW, I did mean Social Security and Medicare taxes when I used the label, "payroll." And for the record, I think you're right that you want to adjust the payroll tax burden for the benefits received. But I'm not sure this changes the strength or weakness of my "argument" ... I don't believe you or I will get back from SS what we put in. (My grandparents did..)


And the actual ROI on your taxes is often very modest. Here's one description that says you're earning about 1% if you're an average household.

https://www.heritage.org/social-security/report/social-securitys-rate-return

 It's to late tonight for me to pull out my numbers, but for most of my earning years I was not a high earner. I have looked at what I paid in and what I will receive, I don't have to live real long to collect all I paid in. Now, I don't include any ROI, so ya, there will be losses there.

[ctuser1]

First many middle class get their SS taxes back in SS payments, and some get way more than they paid in. I expect to! Second it also includes a disability policy while they are working. So the SS tax is only for the benefit of the individual that pays it, and their family.  It's a selfish tax.
It's not paying to make the government run.

First - Minor quibble on the detail:
I don't see how the first bolded statement follows from anything you, or anybody else said. The second bolded statement is also directly contradicted by many many things FDR, and the congress-people who enacted it, said.

Social security was not enacted as an "individual insurance". It has always been a "social insurance", a.k.a. welfare!

Ida May Fuller did not get her social security checks because she paid in her actuarial risk premiums. She got it because she was a participant in the social welfare program, as all Americans since then has been.

You pay taxes, not because you will get benefits, but because the current crop of retirees will get their welfare!!

That is how it always has been. I, of course, expect and would even strongly advise/demand (with "moral", but not "legal" arguments) that our kids generation provide the same welfare to us when we are old and infirm.

[ctuser1]

Second - to your broader point (agreeing to it assuming I understood the drift of your argument):

As soon as we clear up the misconception that claims that social security is some sort of actuarially determined insurance program rather than the welfare program it is, and that payroll taxes are just taxes meant to run the welfare and not an actuarial insurance premium, it easily follows that payroll taxes are quite regressive.

My payroll taxes stop at $132k. The presidential candidate who paid as high as 14% tax of course earned orders of magnitudes more. He of course did not pay much payroll taxes, or any taxes for that matter, on those earnings because he was rich enough to structure all those earnings appropriately.

[tooqk4u22]

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?

Most of the articles that you read about the 1% not paying their share of taxes is about the 1% in wealth and not the 1% in income. The truly wealthy work to increase their wealth through unrealized gains (e.g., asset appreciation), and if they're forced to realize the gain, they make sure that it's a capital gain and not ordinary income.

Beyond that, the private equity guys are masters of getting their income categorized as a capital gain. Here's an explanation of how: https://www.investopedia.com/articles/investing/072215/how-private-equity-and-hedge-funds-are-taxed.asp

You are just scratching the surface of all the mechanisms available.

A certain President is "rumored"/"known" to have taken out large loans, incurred huge losses, declared multiple bankruptcies, and yet have losses from those bankrupted business available to him for write off against income in future years. That is like magic!! Loans disappear on bankruptcy, but losses don't!!

Yet another presidential candidate is known to have paid "as high as" 14% in tax rates.

You or I can't get away with these types of freeloading or fraudulent activities. You need to be able to buy politicians for that.

If you took out a loan and it was discharged in bankruptcy or forgiven, it would be taxable.  If you make an investment and lose money you too can deduct it and apply carry forwards to your taxes.   If you worked in private equity (Carried interest) or had business that permits depreciation and amortization of certain assets or retains (as opposed to distributes earnings) you too could pay as high as 14%.  Their numbers may be larger and may suck relative to our 25% but its not magic, its not fraud, its the tax code.   Warren Buffet pays low tax rate bc it comes from selling shares with capital gains. 

Real estate is one of the greatest tax havens/shelters bc partly bc of depreciation related to the initial investment and future capital improvements, but also specifically of the ability to be able to take out loans as the property's income rises and value appreciates.  These loan proceeds are then distributed out to partners but it is not taxable.  Only the income is taxable.  How is this ok, bc the distribution lowers the tax basis of the property which then results in a higher capital gain when the property is sold.....except that this is usually avoided through 1031 exchanges, stepped up basis upon death, etc.

But this is all available to the masses as every company and REIT that we hold through our index funds works hard to maximize the tax code.

[tooqk4u22]

The SALT cap really screwed us NJ people.

In CA, the feeling is that it was retaliation for voting for the better candidate. We really got screwed by the SALT cap.

Unpopular opinion: the SALT cap was clearly Trump & McConnell sticking it to Californians and New Yorkers, but that doesn't make it a bad policy. If that can nudge high tax states to have a less screwy tax policy in the first place, I'm all for it.

It was 100% retaliatory against blue states (coastal elite) but these states have absolutely no discipline when it comes to spending and financial management whatsoever.  I am in NJ and I still can't figure out (says sarcastically) how the most densely populated states, with the 3rd highest incomes, highest property taxes, and among the highest (top 5) in personal and corporate income taxes be so f'ing broke.  That math should equate to being flush....it's a spending problem, not a tax problem.   And yet here we are still trying to raise taxes. 

NJ sucks balls fiscally.