50% pay no income taxes

[Joe Public]

After reading something on another forum about the rich not paying taxes and the tax burden being borne mainly by the middle class, I was thinking about how to make it a bit more fair. In other words, how could we get the wealthy to pay something reasonable instead of being able to write off enough stuff to pay no taxes at all.

My idea is to make a new a rule that 25% of your gross income gets taxed at a fixed rate and the rest can be subject to all of the deductions that cut our taxes back. Things like charitable contributions, home interest, dependents, and the other stuff that has helped me out in the past would only count on 75% of my gross income.

Please feel free to agree or disagree with this idea. I would appreciate having someone shoot holes in the theory.



Full disclosure: I paid zero income tax for 2016 and 2017, but that was because I had pretty much zero income those years. I'll be paying big taxes for 2018 after selling a California house.

AMT?

[cowboy]

Help me out here. Like maybe explaining that I've missed and what would be better.

People will do anything to solve a problem but math (Edit: I'm speaking of Americans collectively, and don't mean that as a shot at you, SRN). I have attached the IRS data from 2016 to show that the wealthy do pay "their fair share." Taking their total earnings, before deductions and before any losses associated with pass-through entities, they pay a progressively higher effective tax rate. Less than 5% of returns have adjusted gross incomes above $200k. They earn 27% of all the income reported on tax returns before deductions, yet they shoulder 57% of the tax burden. Further, their unadjusted earnings have far fewer deductions, proportionally, than lower income brackets. Somehow we've come to believe this line that the rich are getting a great deal, when they are the people paying our way - well, them and China. We resent the rich, because we aren't them, when we should hope like hell that more people become them.

[Paperback Writer]

It won't run out before you collect a penny. At current levels it is projected to run out around 2044 (or something like that). It will be adjusted (increased taxes or decreased benefits...probably a little of both) before it runs out. It will be there, just not as much as you paid in or hoped for.

That being said, I'm currently saving for my own retirement based on the presumption that I won't need SS benefits. If SS is there when I retire, that will be just icing on the cake (however a thin layer of icing as the gov will take 85% of it but icing nonetheless but hey....at least I'll have cake and not every person will be able to say that).

Maybe I'm not understanding the tax code correctly as it relates to social security, it has changed since I studied it as part of my required course work. Like you, I'm a MACC graduate. But I think 85% of social security payments are subject to taxation, not that SS payments are taxed at an 85% rate. In other words, for married filing jointly with two people receiving a combined $40K in SS annually, $37,400 is counted as income and taxed at a marginal tax rate (10%, 12%, 22%, 24%, etc.). So in retirement, if a married couple has an AGI of $100K due to withdraws from 401K/IRA plans, the taxable base is $137,400 and taxes would be about $22K without factoring in standard deduction/itemization. If SS is taxed at 85%, taxes on SS payments alone would be $34K along with about $13,800 of taxes on the $100K of AGI on other income for a total tax bill of $47.8K. That is more than double the $22K calculated with the assumption that it is 85% of SS payments subject to taxation. So it's kind of a big deal with understanding how SS payments are taxed.

[Scott R Nelson]

But I think 85% of social security payments are subject to taxation...

If your total earnings are low enough, SS payments are taxed at 50%. But even one dollar over the magic number and it bumps up to 85%. I'm trying to figure out how to set the level of income from IRA vs. income from other investments that won't be taxed so that I get the lower tax rate on SS payments. It will require a spreadsheet to keep it straight. And it might not even be possible in my case anyway.

[chrisrenrut]

If your total earnings are low enough, SS payments are taxed at 50%. But even one dollar over the magic number and it bumps up to 85%. I'm trying to figure out how to set the level of income from IRA vs. income from other investments that won't be taxed so that I get the lower tax rate on SS payments. It will require a spreadsheet to keep it straight. And it might not even be possible in my case anyway.

With taxes, precise wording is important. SS payments aren’t “taxed at” a 50% or 85% “rate”. It’s the amount of the SS payments they are subject to being taxed. The rate they are taxed at is going to be much less than 50 or 85%

[Paperback Writer]

With taxes, precise wording is important. SS payments aren’t “taxed at” a 50% or 85% “rate”. It’s the amount of the SS payments they are subject to being taxed. The rate they are taxed at is going to be much less than 50 or 85%

That is what I was thinking. For many retirees, the marginal tax rate will be 12% or 22%; far from 50% or 85%. In other words, with 85% of SS being subject to taxation, 15% of SS payments are not taxed at all with the rest being taxed along with other income like withdraws from regular 401K/IRAs. An interesting note: withdrawals from Roth IRAs are not considered income by the IRS so if the majority of one's retirement savings is in a Roth IRA, there's a good chance SS payments will never be taxed.

[Pelado]

That is what I was thinking. For many retirees, the marginal tax rate will be 12% or 22%; far from 50% or 85%. In other words, with 85% of SS being subject to taxation, 15% of SS payments are not taxed at all with the rest being taxed along with other income like withdraws from regular 401K/IRAs. An interesting note: withdrawals from Roth IRAs are not considered income by the IRS so if the majority of one's retirement savings is in a Roth IRA, there's a good chance SS payments will never be taxed.

Yip.

[Scott R Nelson]

Figuring tax estimates = confusion

Beginning in 2019 I started collecting Social Security. I also have a couple of small pensions kicking in. It's way less income than when I was employed, but it looks like enough to live on without taking anything out of my IRA until I'm forced to by RMD.

I haven't had anything deducted for taxes, so I thought maybe I should figure out if I need to start making some estimated tax payments. The only thing I could come up with to figure that out is to put the numbers into one of the free income tax calculators to see what I would owe at the end of the year. Then hope I don't get hit with a penalty for not paying anything for the first six months.

The first attempt was with the H&R Block. I put in all of the main numbers and it came out showing that I owed $0 Federal and $10 State. I figured that can't be right. So I tried TurboTax and it came out showing that I owed $0 Federal and should get a $240 refund from State. How do you get a refund when you don't pay anything? That can't be right.

So my next attempt will be to acquire some paper forms from the IRS and fill in all the numbers there and see what it says.

You would think that the two different tax software companies would at least get the same answer for the same numbers used for input. Who can you trust?


And for the record, I paid no income taxes in 2016 and 2017 - had no income those years. Maybe I'll get away with paying no income tax for 2019 even though my income will be over $50K. Income taxes might not be fair after all.

[BlueK]

Beginning in 2019 I started collecting Social Security. I also have a couple of small pensions kicking in. It's way less income than when I was employed, but it looks like enough to live on without taking anything out of my IRA until I'm forced to by RMD.

I haven't had anything deducted for taxes, so I thought maybe I should figure out if I need to start making some estimated tax payments. The only thing I could come up with to figure that out is to put the numbers into one of the free income tax calculators to see what I would owe at the end of the year. Then hope I don't get hit with a penalty for not paying anything for the first six months.

The first attempt was with the H&R Block. I put in all of the main numbers and it came out showing that I owed $0 Federal and $10 State. I figured that can't be right. So I tried TurboTax and it came out showing that I owed $0 Federal and should get a $240 refund from State. How do you get a refund when you don't pay anything? That can't be right.

So my next attempt will be to acquire some paper forms from the IRS and fill in all the numbers there and see what it says.

You would think that the two different tax software companies would at least get the same answer for the same numbers used for input. Who can you trust?


And for the record, I paid no income taxes in 2016 and 2017 - had no income those years. Maybe I'll get away with paying no income tax for 2019 even though my income will be over $50K. Income taxes might not be fair after all.

it makes so much more sense to tax on what we chew up in resources (consumption) instead of what we produce (income).

[Joe Public]

Beginning in 2019 I started collecting Social Security. I also have a couple of small pensions kicking in. It's way less income than when I was employed, but it looks like enough to live on without taking anything out of my IRA until I'm forced to by RMD.

I haven't had anything deducted for taxes, so I thought maybe I should figure out if I need to start making some estimated tax payments. The only thing I could come up with to figure that out is to put the numbers into one of the free income tax calculators to see what I would owe at the end of the year. Then hope I don't get hit with a penalty for not paying anything for the first six months.

The first attempt was with the H&R Block. I put in all of the main numbers and it came out showing that I owed $0 Federal and $10 State. I figured that can't be right. So I tried TurboTax and it came out showing that I owed $0 Federal and should get a $240 refund from State. How do you get a refund when you don't pay anything? That can't be right.

So my next attempt will be to acquire some paper forms from the IRS and fill in all the numbers there and see what it says.

You would think that the two different tax software companies would at least get the same answer for the same numbers used for input. Who can you trust?


And for the record, I paid no income taxes in 2016 and 2017 - had no income those years. Maybe I'll get away with paying no income tax for 2019 even though my income will be over $50K. Income taxes might not be fair after all.

If you haven't already, you might try the withholding calculator on the IRS website.

https://www.irs.gov/individuals/irs-...ing-calculator

[Pelado]

Beginning in 2019 I started collecting Social Security. I also have a couple of small pensions kicking in. It's way less income than when I was employed, but it looks like enough to live on without taking anything out of my IRA until I'm forced to by RMD.

I haven't had anything deducted for taxes, so I thought maybe I should figure out if I need to start making some estimated tax payments. The only thing I could come up with to figure that out is to put the numbers into one of the free income tax calculators to see what I would owe at the end of the year. Then hope I don't get hit with a penalty for not paying anything for the first six months.

The first attempt was with the H&R Block. I put in all of the main numbers and it came out showing that I owed $0 Federal and $10 State. I figured that can't be right. So I tried TurboTax and it came out showing that I owed $0 Federal and should get a $240 refund from State. How do you get a refund when you don't pay anything? That can't be right.

So my next attempt will be to acquire some paper forms from the IRS and fill in all the numbers there and see what it says.

You would think that the two different tax software companies would at least get the same answer for the same numbers used for input. Who can you trust?


And for the record, I paid no income taxes in 2016 and 2017 - had no income those years. Maybe I'll get away with paying no income tax for 2019 even though my income will be over $50K. Income taxes might not be fair after all.

Social Security income is taxable on a sliding scale based on how much other income you have. If you have little to no other income, little to none of the Social Security income will be taxable. Based on what you described, I'm not surprised that you would have no federal tax.

Idaho starts with your federal taxable income but makes a few modifications, including subtracting any Social Security income that was taxed by the feds. Idaho has a $10 Permanent Building Fund tax charged on pretty much every return. There is also a refundable Grocery Credit based on how many months you and the members of your household were residents of Idaho. The idea behind the Grocery Credit is to offset the sales tax paid during the year on food items. As such, getting an Idaho refund without having paid any Idaho income tax is also not surprising.

[Bo Diddley]

Yeah, I think Mitt might have something to say...something about 47%.

[Scott R Nelson]

If you haven't already, you might try the withholding calculator on the IRS website.

https://www.irs.gov/individuals/irs-...ing-calculator

Thank you. I'll run the numbers through that one next.

[Scott R Nelson]

Okay, IRS withholding calculator says I'll owe zero, so I guess I can ignore it from here on.

I found this part interesting from the results:

Based on the information you previously entered, your anticipated income tax for 2019 is $0.

If you do not change your withholding arrangement, your withholding for 2019 will approximately equal your tax, and any balance due should be less than $0.

Less than zero, really?

I guess I have about five months to figure out what I can take out of my IRA this year and still pay minimal taxes. Theoretically you want to pay taxes on that when you're in a lower tax bracket so that you pay less later on when you're in a higher tax bracket. You then put that in a Roth IRA and any earnings it gets isn't taxable. I wish this stuff wasn't so complicated.

[Paperback Writer]

Okay, IRS withholding calculator says I'll owe zero, so I guess I can ignore it from here on.

I found this part interesting from the results:
Less than zero, really?

I guess I have about five months to figure out what I can take out of my IRA this year and still pay minimal taxes. Theoretically you want to pay taxes on that when you're in a lower tax bracket so that you pay less later on when you're in a higher tax bracket. You then put that in a Roth IRA and any earnings it gets isn't taxable. I wish this stuff wasn't so complicated.

While you are in a low tax bracket, I recommend you do Roth conversions from traditional IRA to Roth IRA instead of waiting until 70.5 and RMDs kick in. On the IRS web site, there are tables to determine your RMD based on IRA balance (or expected/estimated balance) and age. You are correct in wanting to pay taxes while in a low, predictable tax bracket. Especially if you fall into the 10% or 12% tax brackets. I doubt tax rates get lower than that.