patrick.net

I would say show me your 1040. It's possible. If you trip AMT it's 26% then 28%. With a state tax like CA top rate of 12%, plus 15.3% FICA for self employed added in It's possible. But it would take a really bad accountant to actually pay 50 or 60%. Anyone smart enough to earn that kind of money should certainly be smart enough to minimize their taxes.

How can someone have a couple of jobs and a sole proprietorship and be in a very high tax bracket?

That's what I'm saying too. They claimed 2-3 jobs and small biz, but if they were in that high of a wage, their % on FICA would be very low, as it is regressive.

I suspect most add in their top marginal rate as what they think they pay.

Aside from AMT, it seems nearly impossible. Do we know how many taxpayers pay over 50% in total taxes?

Thanks!

I'd say they need to find some tax shelters, LOL.

When I was working in the bay area I was paying 40% easily.

Put somebody at the FICA cap $118,500:

They're grossing nearly $10,000/mo but paying:

20% federal income tax ($2000)
7% state income tax ($670)
12% SSA ($1200 -- employer pays half but it all comes out of the workers' checks)
3% Medicare ($300, ditto)

There a 40% marginal rate right there before the effects of 401ks and IRAs kick in.

Somebody with a $400,000 house, if such a thing existed in the bay area any more, would be paying another 3% ($300/mo) on the 1.2% property tax (27% MID taken).

California sales tax is 8% so they'd need to spend their entire gross on taxable stuff to get to 50% marginal rate tho.

Sole proprietors making six figures really need to max out all the retirement savings accounts they can.

Bellingham Bill says

Put somebody at the FICA cap $118,500:

They're grossing nearly $10,000/mo but paying:

20% federal income tax ($2000)

7% state income tax ($670)

12% SSA ($1200 -- employer pays half but it all comes out of the workers' checks)

3% Medicare ($300, ditto)

There a 40% marginal rate right there before the effects of 401ks and IRAs kick in.

At 118k you are well below amt so state income tax, interest on mortgage, and property taxes are deductible against federal taxes.

yeah my above is garbled a bit. I discounted the 1.2% property tax by the 27% marginal rate -- that's not the MID.

MID on a $400,000 loan at 3.5% would be another 3% ($300/mo) deduction.

The state income tax deduction is just a 20% rate reduction essentially, knocking it from 7% to 5.6%

So . . . 20% Fed + 5.6% State + 15% FICA + 3% property tax - 3% MID = 38% tax rate.

High-tax arguers are certainly better off leaving real property ownership out of the discussion since real estate is a great tax shelter.

bob2356 says

At 118k you are well below amt so state income tax, interest on mortgage, and property taxes are deductible against federal taxes.

That's what I was thinking too. And don't most taxpayers pay far less than 20% FIT? Thought the effective rate was closer to 10%?

And can't you deduct sales tax, if it exceeds your other deductions and have receipts?

By the way, these people I'm confident aren't wealthy, and live in Indiana.

Pretty sure no one pays close to 50% taxes. Worst I think is s single individual in CA making $120-150kish and hasn't bought a house.

In LA that means you are paying a lot in federal and state tax, Max in SS, and have few deductions.

In reality I think most of these individuals are maxing retirement accounts thereby reducing taxable income.

Figure a single filer at $250,000, not filing schedule A, just taking standard deduction and exemptions, with no above-the-line exemptions (moving, HSA contributions, etc). I would bet that fewer than 5% of those earning this much are in this situation - it might be fewer than a dozen. But we'll punish this person as much as possible through these assumptions.

Take $6300 (standard deduction) + $4000 (exemption) = $10,400 of income which won't be taxed.

Taxable income is $250,000 - $10,400 = $239,600.

From a table of current tax brackets:

* 10% up to $9275 = $927.50
* 15% from $9276 to $37,650 = $4256.25
* 25% from $37,651 to $91,150 = $13,375
* 28% from $91,151 to $190,150 = $27,720
* 33% from $190,151 to $239,600 = $16,318.50

Total tax = $62,597.25

Percentage of income paid as federal tax = 25%

Adding in state an local income taxes, even assuming this earner lives in NJ or CA, and it's hard to see how anyone earning $250,000 could pay more than 35% of income in taxes.

Beyond $250,000, income tends to come from non-wage sources, which means either capital gains or all sorts of deductions due to depreciation, etc. You'd have to be a professional athlete or movie star with no investment income and wretched accountants to pay more than 40% of your income in income taxes.

Sales and property taxes are deductible, which means that you can cut down your income taxes by 33% of what you pay for those other taxes. If you have property taxes that are more than 15% of your income, either you were dropped on your head so many times in childhood that you are a ward of the state anyway, or that property is making you tons of passive income, with attending deductions for depreciation and maintenance.

If they're not carrying health insurance, don't they also incur another 2.5% penalty tax on the entire household income?

errc says

If they're not carrying health insurance, don't they also incur another 2.5% penalty tax on the entire household income?

But you'd pay out of pocket for major surgeries, such as hernia or getting a lot of bones set after a major car wreck - statistically, these happen to you no matter your diet - and you'd be able to take some juicy deductions for $25,000 spent here, $70,000 spent there, once every 15-20 years. This would erase or significantly reduce your overall tax liability for not carrying insurance.

I'm not joking: if you look at how often people require non-lifestyle-related surgeries which run into the middle five figures, and you pay for these yourself, you can deduct beaucoup for the year in which the surgery occurs, which would erase most or all of your accumulated annual penalties over the previous decade or two.

People making six figures can afford the ~$400/mo catastrophic insurance.

High-deductible insurance was designed for rich people.

I would also suppose that if these people had 2 wages and SB income to the extent they were taxed that heavily, you'd just go with the most lucrative of the 3 and devote your time to that.

errc says

If they're not carrying health insurance, don't they also incur another 2.5% penalty tax on the entire household income?

That or a head tax, whichever is greater: median household income is around $40k, and a family of 4 at that level would pay more than 5% Obamneycare tax/penalty.

Add Social Security (both halves), Medicare, workers' comp, business operating tax, and licensing, which total probably around 20%. Property tax might be $2k/year, i.e. around 5% of median income. If they sacrifice their standard deduction, then they may deduct the property tax and either the state income tax (7%) OR sales tax (maybe around the same), but not both. If they have paid for their house already then they have no MID; even if they are paying mortgage interest, then deducting it would require sacrificing the standard deduction, and at their applicable marginal rate, it doesn't make a huge difference in their overall tax burden.

CL says

I would also suppose that if these people had 2 wages and SB income to the extent they were taxed that heavily, you'd just go with the most lucrative of the 3 and devote your time to that.

It's funny how when you suppose you begin to sound like a Republican economist or a dot-con-artist.

Most businesses and independent contractor jobs have limited growth potential. If they're plowing driveways, they'll be limited by weather and geographic range. If they're cutting hair or lawns, they'll be limited by local growth and competing against DIY. Likewise if they're driving people to the airport, and they may face higher mandatory insurance or vehicle tax. They can't necessarily put all their eggs in one basket, and attempting to do so might make them more vulnerable to a downturn in one sector.

BTW, they may also face licensing requirements and mandatory continuing education, a plague of many fields; CA is even considering requiring bartenders to pay for ongoing classes to recognize what a drunk person looks like. Mandatory continuing education requirements go over really well with the lobbying and Obamneycare crowd, because they're so revenue-intensive and superficial. Let me translate it into codespeak for you: if you're a Linux consultant, mandatory continuing education would require you to pay Microsoft so you can maintain Microsoft developer certification, and pay Apple to be listed as an iTunes store developer, because education is a wonderful thing and should be mandatory according to the lobbyists who sell it. Whether you count those costs as a tax is a matter of semantics, but somebody pays; in medicine, you can get your mandatory continuing "education" comped if you skew your prescribing patterns in a profitable direction for the drug companies.

Anyhoo, as they say in the midwest, here's a possible approximation:

20% FICA/Social Security/Medicare/licensing/workers' comp etc.
10% federal income tax (allowing for deductions etc.)
10% combined state income & sales tax, only half of which would be deductible
5% Obamneycare tax penalty
5% property tax
The total can exceed 50% depending on location and what they bought during the year. For example, if they had to replace a vehicle, that might generate $2k in sales and registration and property tax, which would be another 5% of income, plus the mandatory car insurance, which they might count as a tax because government requires them to pay it. Also gasoline and telephone service are taxed at higher rates than ordinary sales.

So, before you call them ignorant liars, ask politely about the numbers.

HydroCabron says

I'm not joking:

If you're having that many injurious car wrecks, you should really lay off the psychotropic prescriptions, and/or quit driving. When the warning labels say not to operate heavy machinery, that includes cars, SUVs, etc.

curious2 says

So, before you call them ignorant liars, ask politely about the numbers.

I agree with Aspergers, although I would give you the benefit of the doubt and assume you haven't actually called the guy a liar. The three income sources might also be all in a related field. I've done that myself. Or he might just like two fields and want to do both.

While it is useful to go over the various ways someone could end up with a high effective tax, it's pointless to try to figure out how this particular person's tax calculation got so high. Ask, and let us know.

But you'd pay out of pocket for major surgeries, such as hernia or getting a lot of bones set after a major car wreck

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Why wouldn't their bodily injury portion of their automobile insurance cover that?

I wasn't looking to argue the merits of carrying health insurance. I was trying to answer OP question as to how could someone claim to pay so much in taxes