Monday, April 25, 2011

Miscellaneous Tax Notes on a Lucky Day

Why is today lucky? I found a $20 bill on the street this morning while on my way to the gym.

A commenter on this recent post asked about my tax refund, noting that she made less money than I did yet did not get a refund. Of course, as another commenter pointed out, whether or not you get a refund depends not only on how much money you make and how much you can deduct, but how much you had withheld. If you don't have enough withheld from your paycheck, you'll owe money when tax time rolls around.

Another commenter took me to task for having too much withheld, noting that I'm giving the government a free loan. Yeah, that's kind of true but I really don't think it's a big deal. First of all, the interest I'm losing is not significant-- if my $2307 Federal refund had been sitting in a savings account all year, I'd be lucky to earn $35 in interest on it. Also, I think there's a psychological benefit to getting that money in a lump sum-- it's easier to just sock it away and not spend it, somehow. (Though some people might feel differently, seeing it as a windfall that can be spent on something fun.)
Also, I'd rather not take the risk of underwithholding-- if you owe a lot of Federal taxes at the end of the year, the IRS can assess a penalty which would work out to more than the interest you'd earn on that money while it sat in the bank.

As for my actual taxes paid, I always like to look back at what I paid in taxes via withholding minus my refund received, to see what my net taxes were for the previous year, as a percentage of my income by various measures:

I paid $16,308 in federal taxes via withholding in 2010. Minus $2,307 refunded, my net Federal taxes paid were $14,001.
My total salary plus bonus was $116,661, so my Federal taxes were 12.00% of that. But that's just my work salary, it doesn't include other things I pay tax on, like interest, dividends and income from blogging.
My adjusted gross income includes all those things, but it doesn't include things paid for out of pre-tax dollars, such as my 401k contributions of $16,500, FSA, medical and dental insurance costs and subway metrocard costs deducted from my pay. My AGI ended up being $101,095, so my Federal taxes were 13.85% of that.
But my Federal taxes aren't calculated as a percentage of my AGI-- all my various tax deductions are subtracted from that to get my taxable income. So after taking out my mortgage interest, charitable deductions and various other unreimbursed expenses that relate to my day job and the freelance income from blogging, my taxable income was only $71,532. My Federal taxes were 19.57% of that.
Interesting to note that Warren Buffett has said that in 2006, his taxes came to 17.7% of his taxable income (I'm not sure if he was counting just Federal taxes or also state taxes). Yes, of course his total taxes paid work out to about 58 times more than what I paid since his taxable income was over $46 million... the sad thing is that there are plenty of people who make less money than me who probably pay an even higher percentage of their gross income than I do.

It's also worth noting that my taxable income is less than 60% of my total gross income, and only about 71% of my adjusted gross income. When the media talks about whether or not taxes should be raised on "people who make over $250,000," that usually refers to a household adjusted gross income of $250,000-- their gross salary is probably more, and their taxable income is probably a lot less.

How about you? Have you ever done the math this way on your taxes? I'd be interested to hear from others about your gross income vs. taxable income and what you pay in taxes...

16 comments:

ITIN said...

I am tired of reading about the ills of "giving" the government a free loan with your money. I like that you pointed out it really doesn't amount to that much lost. I enjoy a large tax return and also like the lump sum type of opportunities it presents for building up savings, taking a small trip, etc.

Anonymous said...

I 'do the math' every year to see what percentage we really pay in taxes. 2010 was our best year yet. Of our gross income, we paid a total of 7.5% in taxes - 3.5% to Federal, 3% to state, and 1% to local for income taxes. The deductions really help us - we own property, have several kids, contribute to 401ks and 529s, and give to charity.

Anonymous said...

My federal taxable income was 64.5% of my gross income, my federal tax wound up at 12.8% of my gross and 19.8% of my taxable. Add another 4-5% for state on top of that. I make the most of the deductions that I can take, but I don't have any investment property like you all - sounds like I need to look into that to get my rates down...

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Anonymous said...

I am not going to comment on the numbers as I think anything less than your percentage is nice for the tax payer, but sucks for the citizens of the US in general. All these loopholes make it so people can get out of paying the taxes they are required by law to pay (set by rates by congress). Don't get me wrong - I don't want to pay more taxes, but I want a flat rate, a simple "you made this, here is your tax rate, done" type thing. All these deductions just make it so that people will do what ever they can to stick it to the government, and not pay their fair share.

As for the tax free loan. I agree that I hate doing it, but it is a necessary evil since at the end of the day the government is not happy when you underpay (and makes you pay penalties). One of the biggest crocks to me is mutual funds and investments who know all year what they have earned, but don't let the owners know until after January 31st the following year. I have to wait on pins and needles to see what kind of money position I am in. In 2007 I earned $25k in mutual fund profits, dividends, etc. and none of that was reported until after the year was done. I had the same amount I have always had taken out of my checks and had to owe, with penalty. The following year, I lost $10k, and I got an $8k refund. What can I do? Talk about a $10k swing in tax bills. This year, I am getting back $3k and made a tidy profit of about $10k in the market. *Please note: This is all realized gains.

So what is the moral of the story? It all depends on your income type, and what you can do to help buffer against the government and their taxes. You can plan - and hope - and pray - but at the end of the day, you can only do what you can do and take what ever consequences that come.

Laura said...

My taxable income was 86% of my gross, and my tax rate was 16.79%. HATE paying that much, but unless I move to another country, not much I can do about it!

Single Ma said...

Yep, I run the numbers every year. The taxes I pay are about 8% of my gross income.

Shooter said...

To be brutally honest I do not think it is of importance how much tax you pay.

Assuming intelligently enough, you refund what ever you could. It is just wind that blows. You can not do anything about.

Much more interesting is saves vs. net income. This can tell you about what you do and how you do it.

Perhaps I misunderstood the intentions of the post.

ross said...

I got a great refund this year, plus i finally got my home buyers credit 2 years after i bought my house. Things have been slow lately and it helped a ton.
I did a direct deposit and an e-file. I got the money wired in 10 days, which i thought was really fast.

Anonymous said...

I'm normally a pretty low-on-the-ladder programmer, but this year was very unusual for me because I sold a bunch of stock options worth about 3x my normal salary. This year was easily the worst for me in terms of tax rates, but I guess it's an OK problem to have.

Looking at federal numbers only, my AGI was 96% of my gross. My taxable income was 79% of my gross, and taxes were 23% of my gross (29% of my taxable). I did hit the AMT, which doesn't help the rates - if I hadn't, taxes would have been 20% of my gross (26% of my taxable). State taxes add on another 8% of my gross (10% of my taxable).

For comparison, last year's federal taxes were 13% of my gross (17% of my taxable).

I don't have many deductions (the biggest ones were state taxes and my mortgage). If I had known I would be selling options, I would have donated more to charity, but I wasn't expecting to go through this.

@Anonymous commenter #5: You don't get at least quarterly reports? That sounds weird to me. What general things are you invested in, if you don't mind me asking?

fdx said...

i know this is comparing apples and oranges, but i live in another country and my taxes are in the region of 45% of my income. i get lots of other stuff back for that but the mind boggles abit. am busily daydreaming now what i would do if it was closer to 20% with what's left over...

Robert said...

There are much beter ways to put the 2k to work than a savings account, like your 401k.. Its not just one year its year after year until retirement. You suggest that you save it anyway why not get the compound effect. You seem like your prob maxed in your 401k but smart enough to find a way to earn more than $35 on that money in a year

Real Estate Attorney Miami said...

Tax season may be over, but FBAR season is here. That ugly, universally used acronym stands for foreign bank account report." It refers to.

No Debt MBA said...

I don't usually run the numbers on the % I pay in taxes. I know I've done all I can to minimize it so I try to forget about it.

Congrats on the $20. I mostly find pennies ;)

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Anonymous said...

I have run some of these numbers . . . it's too painful. We are a DINK couple (double income no kids) in a high state income tax state (CA) so we seem to hit the AMT every year. We has get no major deductions after state income taxes and charitable deductions (we rent an apt. and make too much money to deduct IRA contributions or student loan interest). For 2010, we ended up paying right about 25% of our gross in federal taxes and 10% of our gross in state taxes. When you add social security and Medicare payments to that, we're paying out nearly 45% of our income in taxes. It truly sucks.

(Yes, we are an over $250K household -- or at least we were for 2010 -- but once you deduct
401k contributions from our gross amount, you pretty much get our AGI, and with all the limitations on itemized deductions plus the AMT hit, our taxable income number was very very close to the AGI number.)