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Saturday, March 19, 2005

Pericles: 'My taxes are obscenely low.'

Pericles is lucky enough to live largely on dividend and capital gains income — which, as he explains in a great essay, means that he's taxed at 15% (1040, Schedule D, Line 24). Like me, though, you probably have to work for your income, which means that you're taxed at a much higher rate. In fact, your wages have to be really low to be taxed at a mere 15%:

If you’re married filing jointly, like me, it happens when your taxable income reaches $14,300. At that point you pay $1,434 in taxes, and at $14,400 you pay $1,449 – $15 more. If you’re single, you hit the 15% marginal rate at $7,150 when you pay $719 – an extra $100 in tips raises your tax $15 to $734. A Bill Gates or a Warren Buffett could toss that extra Benjamin on the table without even noticing, and the waitress would pay the same tax on it that he did.

Maybe more. A wage-earning married couple is up to a 25% marginal rate at $59,000, and a single person at $29,050.

Let’s flesh that out. Suppose you’re single, live alone, and have $29,050 in taxable income (line 42). Working backwards, the $3,100 personal exemption (line 41) and the $4,850 standard deduction (line 39) give you an adjusted gross income (line 36) of $37,000. Let’s say you didn’t have any income other than wages, and that you didn’t manage to set anything aside for your IRA last year – fairly typical at this income level. That means line 36 comes straight from line 7 – the wages, salaries, and tips number on your W-2.

A person who works full-time puts in about 2,000 hours a year (40 hours times 50 weeks, assuming two weeks of vacation). So $37,000 on your W-2 means you make $18.50 an hour, on average. That’s not bad. You earn more than triple the minimum wage ($5.15), so you might work in a unionized factory, do bookkeeping or some other skilled office work, sell something on commission, or manage a handful of people at WalMart or McDonalds. You might even be a poorly-paid professional like a teacher.

So if that’s who you are, the next $100 you make by working overtime or taking a second job will cost you $25 in federal income tax. That’s $10 more than Bill and Warren and I pay on our next $100 of dividends.

A married couple’s total rate reaches 15% at $65,200, when they pay $9,781. A single person hits 15% at $32,600. So a wage-earning married couple with $66,000 of taxable income pays a higher total tax rate than Bill Gates. And not because Bill hires an army of accountants to do something fancy with his money. (He may, but he wouldn’t have to.) Bill and Warren and I pay that little because the government doesn’t even try to get any more out of us. Our uncle loves us.

("My Taxes Are Obscene," Doug Muder, Pericles [Daily Kos] 3.15.05)

Copyright © 2005 by Philocrites | Posted 19 March 2005 at 1:31 PM

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2 comments:

Philocrites:

March 19, 2005 10:11 PM | Permalink for this comment

Sorry! For some reason there were duplicate versions of this post with mildly different headlines up all afternoon. I've deleted the duplicate post.

Peacebang:

March 21, 2005 09:37 PM | Permalink for this comment

After having spent the afternoon with friends who cheerily commented on how much easier it is to save money as a couple, I was wondering if someone might want to marry me for the tax benefit of it.

I'm a pretty good cook, and I keep a nice house. You can come over for dinner occasionally. And since we're in Massachusetts, you don't even have to be a man!! (I LOVE this place!)



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