Earning six figures and just scraping by
blogs.moneycentral.msn.com
blogs.moneycentral.msn.com
Is it or is it not the case that the higher tax rate is only applied to income over the $250K threshold? So, if you make $260K, then only $10K would be taxed at the higher rate and the rest would be taxed at the lower rate. Or is it that 100% of the income gets taxed at the higher rate? I've heard it argued both ways.
The majority of the people out there seem to think it's the latter, but the people who believe it's the former, though fewer in number, are very passionate. I always tend to believe the few-but-passionate over the general consensus when it comes to issues that are glossed-over in the press.
Your tax rate applies to everything you make.
As a consultant who's salary easily gets into the six figures, and somebody who has to write a check quarterly, I can tell you that the progressive tax system, to me, is a great disincentive to being more productive. I'm just as happy with less billing and no tax worries (except for the startup dream, of course)
I directly control how much I make, so I think I would have some personal insight into how tax rates affect small businesses.
But what do I know? As I understand it from my peers and the article, I should be happy to do all of that extra work to support other causes. I don't know what's wrong with me. I must be terribly selfish, assuming that I should work for me and my family instead of the collective good.
Funny that I don't feel that selfish.
This has the effect of making you very aware of just how much money is going to you and how much money is going to the government. With withholding, people never see the money they're losing -- hard to miss what you've never had.
In general, though, increasing withholding is exactly what I do when I work as a contract employee. But I rarely do that any more. At some point, your rate just doesn't fit into a W-2 kind of pay scale.
I'm in an interesting spot because my income can be zero, nadda, nil, or it can be upper-middle class. It's all up to me and the market. Most of the tax laws, however, are written with joe sixpack the wage earner in mind. So I end up making a lot one year, owing a bunch of taxes, and then when the bill comes I'm making zero. Then I have to choose between paying taxes and feeding the family. Or the flip-side, you borrow money when you're making zero and then you start up a high-rate job and have to spend the first few months paying back loans instead of getting caught up on back taxes.
But like I said, listening to others I'm sure there must be something wrong with me. Maybe I should find a more "normal" job where I could have deductions taken out instead of being so independent entrepreneurial,and self-employed.
You should have the discipline to not go raiding your tax bucket.... it's not your money.
See that's where I have a problem. If I sell you an apple, and you give me five bucks, for some reason I have this feeling that the five bucks really belongs to me.
And yes, I understand the theory of how this should work, after all, I am not an idiot. I'm just explaining to you how it actually works. In reality, when you've got $40K in the bank for taxes and the gig is up and there's no money coming in, you're choosing between taxes and living for a year. Maybe you can sleep better at night paying taxes, but I've got to take care of my family first.
Anyway, come on... you're saying "I'm going to skip paying taxes so I don't have to work for a year"..... how does that make any sense at all, and how is that a defensible position?
How about you take the $100k you made on your job (then put away $40k) and learn to live on it?
I know I sound like a dick, but you're advocating not paying taxes, just because you'd prefer not to. You're obviously a smart guy, posting on hacker news, talking about taxes, you'd have no problem finding a job that keeps your family eating and in a house.
You think that if I have money in the bank that is owed for taxes, I should pay the taxes even if it means not having food on the table. That since I'm "obviously a smart guy" that I should find work at some place based on your criteria (one supposes that criteria would be "make enough to pay taxes, you schmuck") instead of having the freedom to negotiate a contract and situation that is more productive to me and society in the long run? So my obligation on taxes is greater than my obligation both to my family (to find the best job possible and to support them during times of non-work) and to myself? (to have the freedom to spend money I have in the bank in a priority that I set, even if it means risking higher debt and fines later on)
Nobody is skipping taxes. Nobody is advocating not paying taxes. I've yet to have not pay -- eventually. I'm simply describing how easy it is if you are a non-standard wage earner (like a startup entrepreneur) to get hosed up in tax liabilities. People don't fit into the little boxes that tax policy wonks want them to. That's the point.
I grew up with the idea that the people owned the government, not the other way around. It seems that your feeling is that taxes are such an obligation that they should come ahead of personal preferences for work. That folks should take jobs wherever they can find them in order to fulfill their tax obligations.
Ok yes, I've rehashed what I think you're saying and it's true: you sound like a dick.
Care to rethink any of that? Or did I misunderstand?
I'm saying that instead you take a pragmatic view of things, you pay your taxes, avoid jail time, and further ruin later (fines, interest, etc). Build up more of a cushion of savings, since obviously you can't count on your income. And consider the idea that maybe you should get temporary jobs to NOT STARVE if it comes to that.
Basically, our disagreement here is that you think that the money is yours the whole time, and that taxes are a separate bill, which you then don't plan ahead for. I propose that the money you set aside for taxes is no longer yours, it's in your keeping, but you are legally obligated to pay it (probably quarterly) to the government, in order to pay for all the societal benefits taxes provide (whole other argument).
I get annoyed that you make a ton of money (on the order of $100k), have the foresight to put aside the money for taxes, and then ... "whoops, I spent it all", and complain that you don't have enough to pay your taxes. You have a family sure, and a hard to predict job, but come on, you make way more than enough to feed them, and clothe them, and even pay for piano lessons. All while paying taxes.
Yes. As a free and individual sovereign person I feel as if I own the money that I earn and I own the political power that I was born with. I choose to apply both of those assets to the best of my ability. I expect others to do the same.
Our government was founded on a tax revolt. Remember "no taxation without representation"? We, the people, are the original holders of money and power. Nobody else. If we reach a state where, god forbid, we are being taxed for more things we do not allocate our political power for, then -- something will happen. People will leave, new leaders will be elected, there will be a balanced budget amendment -- something. And if everybody had to write out those multi-thousand-dollar checks every quarter, there would be a lot more scrutiny than there is today.
And the day I let the government decide whether/where I should be working, in absence of a war, is the day that I stop being a voluntary citizen.
I find it interesting that your argument basically consists of impeaching your opposition (me). I'd argue that no amount of planning can eliminate the problem I've outlined. If planning could account for all economic conditions, how did the banks get where they are today? How come economists can't predict the economy four years out? I've had gigs that ran week-to-week for over a year and ended suddenly. If you've got some magic pixie dust that lets you plan a year out, I'd love to have some.
So yes, continue slamming me for the failure of your model to include reality. I'm a poor planner, I'm selfish, I have a bad attitude. One imagines the list is endless. Perhaps I am not a patriot as well? Who needs logic when simple ad hominem attacks work so well. (And it is ad hominem for instead of acknowledging that I am simply presenting a case for your consideration, you've focused this conversation on your personal opinion of my finances, morality, and planning -- none of which changes the nature of the debate and the only goal of which is to insulate yourself from thinking through this) Even if you are right, if people are naturally poor planners and selfish, etc, you still have to account for the fact that the system doesn't work. But you don't want to go there. You'd rather talk about how bad the people are.
Since this is where you've taken us, I think it's a good time to bow out.
You're self employed. Let's say you sell services. It's the first week of the year.
The first week you did great. Let's say you made $5,000. Woo hoo! But wait, you say, part of that money isn't really yours. So what do you pay? Do you multiply 5K by 52 weeks in the year to assume an income? That's how most people's payroll taxes are done. So let's say you do that and immediately write a check for 1800 bucks for taxes.
Then you make nothing else the rest of the year. You've lost use of that money and you really needed it. Wrong answer.
Let's try again. Let's say you put it in the bank. Now you make another 5K. And another and another. After a month you've made 20K. 6K of that is in the bank.
Then there's no work for a month or two.
At the end of the quarter, you've got 6K in the bank for taxes. Do you write the check? Well -- what's your income going to be? You haven't made anything in two months. So you don't write the check. Then the next quarter you work every week. Wrong answer.
Or you write the check, and there's no more work for two months. Wrong answer.
Or you write the check and need a new server. Or you don't write the check and need the money. Or you get hit with another large business expense. Or somebody goes to the hospital. The randomness goes on and on, and without knowledge of just how your income is going to work for each week for the next year you're guessing at optimization strategies. Note that some of these unplanned expenses are tax-deductible events -- these are items you would take off from your income before taxes anyway. Some, of course, are not.
Allocating the money immediately doesn't work because there's no set amount to allocate without a predictable tax bill to prorate. Saving the money results in various scenarios where the savings conflict with other business realities and you've still got the prediction problem.
The most reasonable strategy that I can create is to pay some kind of guess and then catch up the following year -- after all, you always know what your taxes are for the previous year. But the fact remains that the tax system is made for people with predictable income where the employer takes the money out of their checks. And as the economy gets more diversified and more and more people run their own businesses, this assumption causes more and more problems.
I think calling all of that "poor planning" is a bit oversimplified.
Also, he's wrong saying that the tax rate applies to the whole income. This isn't that hard people.
EVERYBODY pays the same tax rate on the first chunk of money. Then, a higher tax rate on the second chunk. Then a higher rate on the third chunk, and so on. The last chunk-cutoff is at $250k. So you only pay the higher taxes on anything OVER that amount. So you make $255k per year, you're only getting a tax hike on the last $5k, and a tax cut on the rest (Assuming all of Obama's tax rhetoric on lowering taxes for everybody else is true, haven't looked close personally).
That's not to say that that self employed people (running a business w/ employees, or just a contractor) don't get screwed. There is another tax to cover social security. If you work for an employer, it's split half and half between the employee and the employer. But, since you are your own employer in the case of contracting work, you owe both halves. This is what's called the "Self Employment Tax". Although remember that economics says that the business will just respond to this tax by lowering your salary the same amount, making you pay the whole tax anyway....
Anyway, the tax system really isn't that complicated. There are lots of little details, but the basics of it are fairly well thought through, and are reasonably fair.
You can't be serious.
Let's not even get into double-taxation, not being able to deduct health insurance, all of the crazy tax credits and tax deductions out there.
The income tax code in this country is so complex that there is a multi-billion dollar industry simply explaining it to people and helping them do their taxes. It's so complex that the IRS itself routinely gives out bad advice on it's own hotline -- the agents simply don't understand the very law they're supposed to enforce.
Then there's all the deductions and such that nobody really understands because there is no legal precedent, or because the cases conflict. Good luck with those.
But -- most of that is self-employed stuff. Stuff that's not Joe Sixpack wage earner. I'll grant you that much. However -- this is a board started for people talking about startups, not people working at the local Wal-Mart.
The hard stuff is the tweaking how much of your income really gets taxed (deductions), and then adding or subtracting off the top after taxes are calculated (credits).
I'm happy to share wisdom when it's quick and easy to spread if it saves someone else a couple of hours of work.
But, your suggestion does result in a new acronym: RTFL! :-)
Alice earns $250,001 and Bob earns $249,999 each before taxes. Who has more money after tax?
If the increased tax rate is applied to 100% of the income, then Bob gets more money than Alice and the system is stupid. Easier to calculate, but unfair.
Update: After reading the other link, i believe that the US tax system isn't stupid. Alice still has more money than Bob after taxes.
But if somebody has a real, live explanation from an accountant, I'd love to see that link. Happy to be wrong.
EDIT: Here's the link I was looking for. I stand corrected. http://www.fivecentnickel.com/2008/12/04/how-do-federal-inco...
The tax structure is divided into brackets. As of now (2009), the brackets are 10%, 15%, 25%, 28%, 33%, and 35%. Each bracket has a cap, except for the top one; the caps range from $8,000 for the 10% bracket up to $358,000 for the 33% bracket (for single taxpayers, married taxpayers have different caps). Any income you earn under the cap is taxed at that rate. Any income you earn over the cap spills over into the next bracket, and is taxed at the next rate.
As an example, suppose that last year, you made $100,000, you're single, and you take the standard deduction. The current standard deduction is $5,000, so that reduces your taxable income to $95,000. The first $8,000 dollars that you earn is under the 10% cap, and so it's taxed at a rate of 10%. Since you earned more than that, you spill over into the other brackets; the next $24,000 you earn is taxed at 15%, the next $46,000 after that spills over into the third bracket and is taxed at 25%, and the final $16,000 is taxed at 28%. All together, your taxes are:
$8,000 * 0.10 + $24,000 * 0.15 + $46,000 * 0.25 + $16,000 * 0.28 = $20,380
(The actual figure is $20,578, but I rounded.) Hence, even though the tax rate on the last dollar you earn is 28%, you only pay 20.4% of your total income in taxes.
What Obama wants to do is rearrange the brackets so that, if you earn any income above $250,000, the income that spills over into the top brackets will be taxed at a 3% higher rate. Suppose you made $300,000 last year. $50,000 spills over into the $250,000 bracket, and so you pay 3% of extra tax on $50,000, or $1,500. Which, if you make $300,000 a year, is roughly a day's pay.
Also, the US is one of the few countries that still taxes you even if you don't live in the country.
Unless you make gobs of bucks, this double taxation isn't a problem (other than having to give the IRS and Treasury info about one's finances).
The safety net your country provides you is incredible. If you're so detached from the US and don't want to pay for it, (and are already abroad and settled somewhere else) why don't you give up your US citizenship? You still could visit the US as much as you wanted (as long as you left within 6 months). Ponder that, and then you'll realize the enormous benefits of simply wielding the blue-eagle passport.
Since I come in under the fairly high tax level where you get foreign taxes discounted, it doesn't really affect, me, I just think that it's odd that the US is one of very few countries that lays a claim to your foreign income if you live abroad. Sort of like using inches, feet and yards.
(If you live in a country that taxes marginally less than the US, that ~85k deduction really wipes out the surplus US-rate tax, so unless you earn a lot, this still won't affect you.)