Are we taxed too much? Let me tell you about Bill from Arlington, VA (premium, Obama)
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Imaginary Bill lives in Arlington VA with his wife and two kids. He has a job where he earns $100,000 per year. Bill has a house worth $500,000 and a mortgage with a balance of roughly $250,000 and a rate of 4%. Bill also contributes about $10,000 each year to his company 401K.
Federal Gross Income: $100,000
401K Deduction: -$10,000
Mortgage Interest Deduction: -$10,000
State Income Tax Deduction: -$5,335
Standard Exemptions (4 x $3800): -$15,200
Federal Taxable Income: $59,465.00
Federal Income Tax: -$8,920
VA State Income Tax: -$5,335
Payroll Tax: -$6,235
State Sales Tax: -$2,030
Property Tax: -$2,395
Total Taxes that Imaginary Bill has to pay: -$24,915
Money Imaginary Bill has after paying his taxes: $75,086
IMO, Imaginary Bill needs to put more money into his 401K. I also believe that his state sales tax of $2,030 is probably overstated in the original example and his property tax is understated in the original example.
Imaginary Bill is paying about 25% of his income in taxes, about 15% incurred at the federal level and about 10% incurred at the state/local level.
So how much should Imaginary Bill be paying in taxes? What is the "correct" rate? And what makes it the correct rate?
I agree with you man. Even with all those deductions and exemtions, he's still working 3 months out of the year (instead of 4), to pay the goverment taxes. Plus he has 3 more mouths to feed. It really is a shame.
I WOULD have included the Virginia car tax as well, but I decided against it for the sake of understating the tax burden as much as possible.
Now I have seen on this board time and again that compared to Western European powers, that we have a low effective tax rate as a nation and that's justification that we aren't taxed enough. Let me tell you a story about Bill from Arlington, VA. Now Arlington is an expensive place to live, but taxation wise, I do not find it to be outrageous since Virginia tends to be a tax-friendly state. I'm going to show you just how overtaxed we are.
Bill makes $100,000 per year, he owns a house worth $500,000. Note that these calculations aren't exact, but I feel they are good approximations.
Step 1
Federal Income Tax: $18,493. (90k in taxable income after standard deduction and personal exemption).
Remaining Salary: $81,507
Step 2
Payroll Taxes: 7.65% x $100,000 gross income wages = $6,235 Remaining Salary: $75,272
Step 3:
State Income Taxes: Virginia- $5,335. 5.5% of gross income less $3,000 state personal exemption Remaining Salary: $69,937
Step 4
State Sales tax: $2,030 (35,000 x .058)Bill basically has $70,000 in take home pay after withholdings as we saw in steps 1-3. I am going to assume that Bill spends 1/2 of his money on items subject to Virginia's 5.8% sales tax. In the US, consumption as a percentage of GDP is generally 2/3, so I feel like this is a good assumption.
Remaining Salary: $67,907
Step 5
Property Taxes: $2,395. I assumed that Bill's house is assessed at 250k just to be conservative in my analysis. Arlington County's personal property tax is .958/$100 of assessed value I believe Remaining Salary: $65,512.
Bill pays a lot more in taxes to the government than this, but for simplicity sake, I used these common 5 tax items. I think we're apt to ignore all the other taxes one pays and focus squarely on how low effective income tax rates are, and say that we aren't taxed that high, but in reality we are.
What's my point? It's that we're over taxed.
A single person using a standard deduction will obviously have higher taxes than someone who is married, itemizes and has kids....
Gas Tax, Tax on cell phone, tax on hotel stays, tax on TV, tax on toll highways and bridges, property tax, your employers payroll matching tax that would be in your pocket otherwise, taxes on entertainment, cigarettes (don't do) and alcohol, etc..
A single person using a standard deduction will obviously have higher taxes than someone who is married, itemizes and has kids....
Yes, that was posted further on in the thread when a poster married him and gave him 2 kids and a mortgage which resulted in an additional $25,200 to deduct.
You changed it up from the OP post. Bill isn't married nor has any children.
What are the 4 deductions you list above ?
Also doesn't say if he has a mortgage or owns his home outright.
Right there that's $25,200 in assumptions.
VTHokie pulled numbers out of the air for his example...and so did I. I simply fleshed out the example to make it more real world.
The 4 deductions are because Imaginary Bill has a wife and 2 children. It's not unreasonable to suppose that Bill has an average family. Of course, I could make Bill divorced and a deadbeat dad, but I wouldn't know how that would affect his tax situation. But I can figure out the situation for Bill being married with children. That put's a 4 in Box 6d on the 1040 tax form, which translates into 4 x $3,800 = $15,200 on Line 42 of the 1040, reducing Imaginary Bill's taxable income and reducing his tax paid.
I also gave Imaginary Bill a mortgage because it's not realistic to believe that he has his house free and clear - most people who own a house have a mortgage, so Imaginary Bill is paying interest and gets the mortgage interest deduction on his Schedule A.
Are these assumptions? Well, yes...but they are realistic assumptions for our imaginary taxpayer.
Frankly, if Imaginary Bill didn't have a wife and 2 kids and owned his $500,000 house free and clear then he's probably investing a lot of money into his 401K and/or IRA - which reduces BOTH his income AND his payroll taxes. And if he can't stuff the entire $25K into the retirement funds, then Imaginary Bill probably is investing the remaining $10,000 per year in investments...but the OP didn't show any additional income in capital gains or dividends.
Just what part of Imaginary Bill's made up life isn't believable?
Imaginary Bill lives in Arlington VA with his wife and two kids. He has a job where he earns $100,000 per year. Bill has a house worth $500,000 and a mortgage with a balance of roughly $250,000 and a rate of 4%. Bill also contributes about $10,000 each year to his company 401K.
Federal Gross Income: $100,000
401K Deduction: -$10,000
Mortgage Interest Deduction: -$10,000
State Income Tax Deduction: -$5,335
Standard Exemptions (4 x $3800): -$15,200
Federal Taxable Income: $59,465.00
Federal Income Tax: -$8,920
VA State Income Tax: -$5,335 Payroll Tax: -$6,235
State Sales Tax: -$2,030
Property Tax: -$2,395
Total Taxes that Imaginary Bill has to pay: -$24,915
Money Imaginary Bill has after paying his taxes: $75,086
IMO, Imaginary Bill needs to put more money into his 401K. I also believe that his state sales tax of $2,030 is probably overstated in the original example and his property tax is understated in the original example.
Imaginary Bill is paying about 25% of his income in taxes, about 15% incurred at the federal level and about 10% incurred at the state/local level.
So how much should Imaginary Bill be paying in taxes? What is the "correct" rate? And what makes it the correct rate?
In theory -- is Bill's payroll tax not double? When the company hires Bill, they know that their cost of hiring Bill includes the 6.2% Payroll tax match and factor it in to the result of less pay when figuring out how much they can afford to pay Bill. If this business expense did not exist, they would be able to compensate Bill more.
I would argue that Bill really pays closer to ~12.4% for Social Security not 6.2%.
Put it this way. If the government said tomorrow that companies are forced to pay an additional 5% into social security for each employee -- does anyone seriously think that it would not effect worker compensation and future raises?
I agree with you man. Even with all those deductions and exemtions, he's still working 3 months out of the year (instead of 4), to pay the goverment taxes. Plus he has 3 more mouths to feed. It really is a shame.
So how many months a year should one work to pay government taxes? Two months? Only one month? Can it be broken down, say only one week for federal and two weeks for state and local?
Quote:
I WOULD have included the Virginia car tax as well, but I decided against it for the sake of understating the tax burden as much as possible.
Seriously? You thought that was a heavy tax burden?
Did you know that after the tax cuts took effect in the early 2000's the tax burden on the American citizenry has been the lightest it's been since the 1930's?
VTHokie pulled numbers out of the air for his example...and so did I. I simply fleshed out the example to make it more real world.
The 4 deductions are because Imaginary Bill has a wife and 2 children. It's not unreasonable to suppose that Bill has an average family. Of course, I could make Bill divorced and a deadbeat dad, but I wouldn't know how that would affect his tax situation. But I can figure out the situation for Bill being married with children. That put's a 4 in Box 6d on the 1040 tax form, which translates into 4 x $3,800 = $15,200 on Line 42 of the 1040, reducing Imaginary Bill's taxable income and reducing his tax paid.
I also gave Imaginary Bill a mortgage because it's not realistic to believe that he has his house free and clear - most people who own a house have a mortgage, so Imaginary Bill is paying interest and gets the mortgage interest deduction on his Schedule A.
Are these assumptions? Well, yes...but they are realistic assumptions for our imaginary taxpayer.
Frankly, if Imaginary Bill didn't have a wife and 2 kids and owned his $500,000 house free and clear then he's probably investing a lot of money into his 401K and/or IRA - which reduces BOTH his income AND his payroll taxes. And if he can't stuff the entire $25K into the retirement funds, then Imaginary Bill probably is investing the remaining $10,000 per year in investments...but the OP didn't show any additional income in capital gains or dividends.
Just what part of Imaginary Bill's made up life isn't believable?
It's also not unreasonable for Bill to be single and working in DC making that kind of money as well.
And any IRA he funds is not tax deductible at his income. Unless you want to change around some tax laws.
401Ks have yearly limits on contributions. $17,000 is the max for 2012.
The OP was showing how much comes out in taxes.
How you can reduce them is another story. 401K is pretax and that's about it.
The rest is deductions/credits on your filing.
The amount one pays in total taxes to all entities has been in the rise for decades.
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