Taxing the rich - what is the cutoff?

[Schneed10]

Originally Posted by onlydarksets

I'll be the first to admit that I am awful with taxes, but I'm trying to understand the chart, because I think it's a useful framework for this discussion. Are you saying that the total federal income tax liability for a couple making $250k is about $40k? I'm seeing a $61k federal tax expense and a $21k federal tax return.

Yes that's exactly right, you've got it.

If you take the federal tax bracket tables, if you make $250,000 in TAXABLE income, your liability comes out to $61K.

But not all of your $250K income is taxable. On your tax return, you'd deduct mortgage interest, healthcare premiums if they weren't already reflected on your W-2 (as is the case here), take the deductions for your dependents, and retirement savings (assuming you're ineligible for Roth benefits because you make too much).

In the end, the $250K in pretax income comes down to about $138K in Taxable income, so their tax return would be $35K. But then the AMT kicks in, because the government says this couple needs to pay their fair share, so they reduce the tax return down by about $14K in this example, to help balance things out. So the tax return comes out to $21K.

So the $61K liability, minus the $21K tax return, means they pay $40K in federal taxes.

[dmek25]

schneed, im not sure how long it took, but we agree on this subject

[Schneed10]

And may I add that the $250K budget I drew up was for a family living in the DC area, one of the highest cost of living locations in the US.

If you live here in Philly, $250K takes you further. In places like Charlotte NC and other cities all across the land, it takes you much much further.

[onlydarksets]

Originally Posted by Schneed10

And may I add that the $250K budget I drew up was for a family living in the DC area, one of the highest cost of living locations in the US.

If you live here in Philly, $250K takes you further. In places like Charlotte NC and other cities all across the land, it takes you much much further.

True, but it also doesn't account for student loans, which can exceed $100k easily for law/medical school. That can add an extra $15k-20k/year.

If you have at most one kid in daycare and no student loans, I agree.

If you have young kids requiring daycare and student loans, this budget goes out the window, and the 3% is going to be felt.

Your budget is a useful discussion point, but you haven't proved the $250k cutoff is optimal.

I still agree that it is affordable, though. The point of the article (and one that I agree with and I think you agree with) is that Obama has labeled this income bracket as "wealthy", which is not likely true for most of the demographic. That's fine to increase it 3% now, but it's not a well you can keep going back to.

[Schneed10]

Originally Posted by onlydarksets

True, but it also doesn't account for student loans, which can exceed $100k easily for law/medical school. That can add an extra $15k-20k/year.

If you have at most one kid in daycare and no student loans, I agree.

If you have young kids requiring daycare and student loans, this budget goes out the window, and the 3% is going to be felt.

Your budget is a useful discussion point, but you haven't proved the $250k cutoff is optimal.

I still agree that it is affordable, though. The point of the article (and one that I agree with and I think you agree with) is that Obama has labeled this income bracket as "wealthy", which is not likely true for most of the demographic. That's fine to increase it 3% now, but it's not a well you can keep going back to.

Major student loans definitely throw a wrench in the works. But few have to rack up the kind of debt that SGG did. Usually, you either get grants or aid, or go to a state school in college to keep the debt lower in undergrad. Law school or med school will undoubtedly be expensive.

As for kids in daycare, I still maintain that there are so few people making $250K who also have 2 or more kids in daycare that it's not even worth discussing. Not too many late 20s/early 30 somethings make that much money, it takes a while to work up to $250K for most folks.

[onlydarksets]

Originally Posted by Schneed10

Major student loans definitely throw a wrench in the works. But few have to rack up the kind of debt that SGG did. Usually, you either get grants or aid, or go to a state school in college to keep the debt lower in undergrad. Law school or med school will undoubtedly be expensive.

As for kids in daycare, I still maintain that there are so few people making $250K who also have 2 or more kids in daycare that it's not even worth discussing. Not too many late 20s/early 30 somethings make that much money, it takes a while to work up to $250K for most folks.

I can't speak for the general population, but in the DC area, with so many attorneys and IT professionals, you would be surprised how many 30 year olds with 2 kids and a household income of around $250k there are. As I mentioned, starting salary for a 25-year old is $160k at the major firms, which is thousands of people in this area.

[Schneed10]

Originally Posted by onlydarksets

I can't speak for the general population, but in the DC area, with so many attorneys and IT professionals, you would be surprised how many 30 year olds with 2 kids and a household income of around $250k there are. As I mentioned, starting salary for a 25-year old is $160k at the major firms, which is thousands of people in this area.

I should run that lawyer salary by my lawyer friends around here in Philly. They start out at $60K. Must not be "major" firms.

[Schneed10]

Originally Posted by onlydarksets

If you have young kids requiring daycare and student loans, this budget goes out the window, and the 3% is going to be felt.

Not for a couple making exactly $250K. They would not be affected at all. They make 0 in excess of $250K. 3% of 0 is 0. Me = good at math.

A couple making $300K would pay an extra 3% on the $50,000 in excess of $250K. 3% of $50,000 is $1500 per year.

The extra $50K a year in income would allow someone to cover the student loans you mention, the daycare, and the $1500 extra in taxes, and still fit just fine into the budget I laid out.

[onlydarksets]

Originally Posted by Schneed10

Not for a couple making exactly $250K. They would not be affected at all. They make 0 in excess of $250K. 3% of 0 is 0. Me = good at math.

A couple making $300K would pay an extra 3% on the $50,000 in excess of $250K. 3% of $50,000 is $1500 per year.

The extra $50K a year in income would allow someone to cover the student loans you mention, the daycare, and the $1500 extra in taxes, and still fit just fine into the budget I laid out.

Yes, you are correct on the 3% - my bad. I still disagree on the budget, though.

[Sheriff Gonna Getcha]

I racked up $240,000 in student loans (excluding interest) between undergrad and law school. My monthly payments are north of $1,000 per month and I'll be paying them until I am about ready to retire. If I wanted to pay them off quickly (which would make sense for the private loans, but not for the subsidized ones), I'd be looking at $2,400+ per month. If you are a similarly situated couple, have fun paying up to $5,000 combined in student loan payments per month.

[saden1]

Excellent posts Schneed10...praise lord...hallelujah.

[saden1]

Originally Posted by Sheriff Gonna Getcha

I racked up $240,000 in student loans (excluding interest) between undergrad and law school. My monthly payments are north of $1,000 per month and I'll be paying them until I am about ready to retire. If I wanted to pay them off quickly (which would make sense for the private loans, but not for the subsidized ones), I'd be looking at $2,400+ per month. If you are a similarly situated couple, have fun paying up to $5,000 combined in student loan payments per month.

Look on the bright side, it' an investment in yourself and potential earning. Plus your interest is tax deductible, and I'm not sure about this one but couldn't you deduct your loan payment as an educational expense as well?

[Sheriff Gonna Getcha]

Originally Posted by saden1

Look on the bright side, it' an investment in yourself and potential earning. Plus your interest is tax deductible, and I'm not sure about this one but couldn't you deduct your loan payment as an educational expense as well?

The interest is deductible, but I still take a huge hit on the interest for my student loans. The student loans are, to my knowledge, not deductible as an educational expense (e.g., a Hope of Lifetime Learning Credit) because I am no longer a student.

[Schneed10]

Originally Posted by Sheriff Gonna Getcha

I racked up $240,000 in student loans (excluding interest) between undergrad and law school. My monthly payments are north of $1,000 per month and I'll be paying them until I am about ready to retire. If I wanted to pay them off quickly (which would make sense for the private loans, but not for the subsidized ones), I'd be looking at $2,400+ per month. If you are a similarly situated couple, have fun paying up to $5,000 combined in student loan payments per month.

Holy shit, that's a friggin huge amount of debt. Keep in mind that student loans like that would deduct your taxes like crazy, reducing your tax liability by quite a lot, but still, in that case you're not comfortable even at $250K.

Which makes one question the logic of racking up that much debt. You'd have to make partner by your 40s to break even on the investment in schooling. That's not to question your decision to go to law school on your own dime, which I commend, but it's an indictment of the insane expenses (and growth rates) tied to higher education.

[firstdown]

Also how many people making around 250,000 will decide that it does pay to make the 250,000 and instaed make 245,000 and still bring home more money then if they make $250,000. Heres the math. If a person makes 250,000 their additional tax is $7,000 which drops their pay to 243,000 and if they made $245,000 they do not have this additional tax. For people who have their own business they would just change how they pay themself. For the person who said they only work 2 months to pay taxes here is the math. Their tax bracket is around 33% and 33% of 12 months is 3.96 months or around $82,500 if making 250,000. If we jump that an additional 3% now they are working 4.32 months to pay taxes. I just feel thats not fair.