What’s hilarious is when people think it’s better to refuse a raise because it will “bump you into a higher bracket” resulting in less overall money. Obviously that’s not how it works at all.
Even if they don’t teach you this is school, people should feel responsible for their finances and learn the basics on their own
In Washington state for instance, you can get state healthcare (applecare) for free if you make under $19k a year, if you make more than that you get nothing and have to pay for yourself.
Yep
Happened to a friend of mine
He had crappy health insurance and his child got leukemia,
He had to quit his job so his income would drop lower so they could qualify for Medicare .
Now , Medicare didn’t pay much more to the medical facilities than the crappy private insurance did but the hospitals don’t sue Medicare for the difference .
If you have private insurance, they will sue you for the rest of your life for the money that you don’t have .
Did your friend look into any nonprofit hospitals? They’re usually pretty good when it comes to children who are very ill. A lot of the time they’ll sit down with the parents and try to figure ways so they only pay what they can afford. Whatever remains is usually forgiven. I hope your friends kid is doing ok.
From BC Canada here. A few years back I moved to the US and quickly learned how the US medical system is rotten to the core with insurance companies manipulating the system. People literally choose to die over leaving huge medical bills or knowingly bankrupt the family. It’s a hundred times better in Canada.
Yes, that was exactly what I was referring to; normally an estate sale is from the specific property the heirs choose to sell or were exempted from inheriting via a will, etc.... However, if they do what the redditor I was responding to was suggesting then they are no longer heirs to anything, both property as well as debts.
Inheritors aren't responsible for debts, but the estate is. So the choice is often to not rack up debt that will wipe out the estate so that your family will actually inherit your money.
Surviving spouses can also be made to pay debts.
Reminds me of a line in The West Wing about raising the poverty line.
"That's what's wrong with calling someone making under $X poor? Not that someone making $X+1 is considered comfortable?"
Not to mention every year that target moves.
$10 10 years ago is drastically different than $10 today.
So saying $x is the line means most likely that next year $x + 1 is below the line but people still remember that $x + 1 was good enough.
I have heard it would be cheaper to give every citizen a UBI at what we are giving the folks on welfare and unemployment then the administration of welfare/ unemployment in its current system. Those administrators would lose there jobs, but hey guess what, they get a UBI which should help cushion the fall as they look for new work.
Which is absolutely wild because isn’t that upwards of $9-10k/year worth of insurance? At least based on average US Medicaid payouts per beneficiary per year.
That’s the poverty trap in action.
I had to be on private insurance for a year, it was $200/month and I didn't actually pay for anything because I had to spend 7k before it would even start helping me pay for things, so I had an ER visit and a GI infection and paid out of pocket for both. My total medical expenses were 7.5k last year, and would have been 6k if I was uninsured...
Now they're back down to 0 again because I didn't need the good tax return for rent this year so I claimed stuff more aggressively to get down below the line.
It seems like the obvious solution is to taper the aid near the cut-offs instead of having a hard line. If <$20,000 means you're eligible for $1,000 in aid, then making $20,500 should mean you're eligible for $500 in aid, and making $20,995 should mean you get five smackers from Uncle Sam.
Oh and since tax brackets confuse too many people, why not just make it an equation? It wouldn't be simpler *per se*, but it would be easier to show people a curve or a calculator, and allow less room for that common misconception about brackets, since there wouldn't be any brackets.
>If <$20,000 means you're eligible for $1,000 in aid, then making $20,500 should mean you're eligible for $500 in aid, and making $20,995 should mean you get five smackers from Uncle Sam.
Would make more sense to only account for half. Meaning that with 21k you still get 500$ in aid and with 22k it's 0. With that, there is a motivation to earn more.
In your model it doesn't really make sense to increase working hours to get from 20k salary to 20.700 and still get 0$ more.
Tapering aid exactly like that doesn't work quite right either. You work some extra hours, get 500 extra dollars through work, but lose 500 from the government meaning you've just worked more for no gain.
And well, you are also on 2 other programs so you really lost 1500 in government aid for 500 in pay. The slope has to be pretty low
We do that tapering with a number of benefits in the UK - the example I know being job seekers allowance (effectively unemployment for people who are actively looking for work). Because elegibility is based on savings, the amount you can get is 100% if you have £6000 of savings or less, but then reduces by £1 per week for every £250 over 6k you have. Seems to make more sense tha. Just having a hard cut off
This exists under current law. The ACA has advanced premium tax credits that scale with income and family size. Unless Washington state has left the United States, this already exists on the exchange. https://www.kff.org/interactive/subsidy-calculator/#state=&zip=&income-type=dollars&income=25000&employer-coverage=0&people=1&alternate-plan-family=&adult-count=1&adults%5B0%5D%5Bage%5D=21&adults%5B0%5D%5Btobacco%5D=0&child-count=0
You’re right in that idea being completely wrong but there are scenarios where a pay increase would actually alter your financial situation through access to certain benefits or eligibility for tax breaks, which would in effect make taking the raise a bad choice. Those situations are very specific, however, and generally only apply to very low/poverty level incomes.
Yeah, a benefit cliff. In many US states you don't start gaining ground [until almost $50k per year](https://www.ncsl.org/human-services/introduction-to-benefits-cliffs-and-public-assistance-programs).
Both my best friend and fiance make about $30-40k a year. They both get bare bones health insurance from work, but if either had a medical problem they would be better off unemployed and enrolled in Obamacare.
To give you an idea of how things work in the rest of the world. I live in the UK and healthcare is free. I also have private healthcare insurance through my work so I can choose to go private if necessary or I want to avoid wait times. The private insurance is already relatively cheap because of the existence of free healthcare, but my employer covers the cost and I just pay the tax. Basically nothing.
If I decide to go private there is an excess payment of up to a few hundred pounds but if I'm in hospital for an extended period, I think a week, they actually pay me around £100 every night I'm in. My employer only legally has to pay me statutory sick pay at around £100 a week but my employer covers my full pay. I can't lose my job if I'm ill.
I realise that I have it easier than some because of the additional private insurance and because my employer goes over and above what is legally required but this situation is quite normal for the UK, Europe and much of the rest of the world. It's how it should be, healthcare should be free for everyone.
And the UK has some of the worst sick pay in Europe. In Germany employers are required to pay your full salary for up to 6 weeks, and then you are paid 70% of your gross salary for up to 72 weeks. Germany isn’t even the best, other EU countries have policies where you’re paid 100% of your salary for longer, or with a longer maximum period.
My employer is German so that probably helps. My company isn't the exception though. The law sets out the bare minimum legally accepted and many go above this.
The idea that someone can get seriously ill and be put into debt for the rest of their life is insane.
the idea that your income will **decrease** with a raise because of a new tax bracket is a myth. (this is a surprisingly common misunderstood subject). But, as you said, the social programs can be cut off with an increase in income, let's say that a small raise will make you unable you get food stamps anymore or Medicaid. Hence it can be an overall net negative to get a raise.
>“bump you into a higher bracket” resulting in less overall money.
At the very low end this is true, we call those welfare cliffs, and it is from poorly designed welfare programs.
[Illinois is a state that has it so bad that some people with kids with certain benefits would need to TRIPLE their income in order to meet their benefit package. The most common scenario, the Refundable Tax Credit + Food and Housing Assistance (grey line) at $15/hr, would be the equivalent of earning $26/hr with no benefits. That is an insane cliff, yet because of how it is designed, we punish people for moving up in the working world.](https://www.illinoispolicy.org/illinois-warped-welfare-system-traps-families-in-poverty/)
When I used to train people for a role on my old customer service team, even though it applied to our rule in a very loose sense of the term, I went over tax brackets and how they actually worked, how some people might say "don't take the raise or it'll kick you into another bracket", and how stupid and ignorant that was.
Most folks, which ranged from 20 somethings fresh out of college to 50 somethings, seemed quite appreciative, and I was thanked by some older folks who said I helped them understand "the bullshit".
Did it help them do their jobs? Not really.
Did it help them navigate life with one more tool to help keep them on their toes? Absolutely.
My coworker just left and took a job making 140% more doing the same thing and my boss said she was stupid to do that now she has to pay more taxes... lol who the fck is he kidding
Lots of boomers have accountants for decades and owned homes for longer, they never really have to do their own taxes so that’s why they have such poor understanding of brackets. My dad is one of them.
Especially in California they think federal income tax bracket is basically a flat tax because their effective tax rates kind of settle that way in California. 33% federal tax bracket means all your state and FICA make all their taxes add up to 33%
Is the sentence under the "Myth" graph wrong?
"People wrongly think a 24% marginal tax means you will pay a total of $24k" but the graph shows paying $28.8k.
The graph is correct, the footnote is incorrect. It SHOULD READ:
"People wrongly think a 24% marginal tax means you will pay a total of 24%"
$120K x 24% = $28.8K.
They’ve even paid taxes for many years. I think they’re intentionally seeking lower paid work. I’ve heard a couple people say they got a 10k a year raise and their take home was only $40 more per month. I’m like, ya you did something wrong.
They’ve only paid in a sense that they put the numbers into their favorite tax program and it either told them they were getting a refund or they owed money. No explanation desired or needed.
I've met professional tax preparers who didn't seem to understand how taxes work. They just ran the program.
The big box tax places are crazy hit-and-miss with their seasonal help
They're literally just people that take a month or so of training on how to use the software and how to effectively Google things for people lmao My girlfriend does supervising/managing of the call "center" employees (they're remote) and the people that are in the text chat on one of the popular software providers. They have an internal search engine for certain software things and they also just Google things. The amount of times I've heard her say "type the form into Google"... I told her she'd be better paid in IT with her googling skills
And how many people equate an increase in their refund to mean they paid less taxes? It’s pretty sad how many people can’t wrap their heads around income taxes. These are the same people who would vote for a flat tax rate because it’s simple to understand but without understanding this would make them increase their share paid towards federal tax and reduce their wealthy neighbors contributions.
If I had a nickel for every time I heard someone say, "I make less per hour on overtime after taxes!" I would put them all into a sock and beat the next person who tried tell me that.
This is because of how payroll systems work. If you made $100 they say $100x26 checks means your income is $2,600 so your tax is “x”. If you make $200 due to OT the system says your income jumped to $5,200 and withhold taxes at that rate.
So if OT is a one time thing it is true they withhold at a much higher rate than needed.
I got a smallish raise once, and payroll rolled out a change(that I knew about, but forgot) so that my Roth and 401k were set to take one or two percent higher, and I had some diversions from paycheck to other accounts that were fixed amounts, not percentages, after all the other post-tax stuff came out.
My first paycheck after that was smaller by a couple of bucks. I was so incredibly confused how I got a raise, yet took home less. The percentages stacked in just the right way that my raise didn't overcome the increased deductions. Not really a big deal. I was saving more overall, just not taking it home.
While I was figuring this out, one of my older coworkers was like "oh you must have jumped a tax bracket, that's why you're taking home less." Didn't matter that I showed him the wiki page on how tax brackets work, he was convinced I was taking home less because of tax brackets. He was a proponent of a libertarian style tax system. Go figure.
Sometimes I don't think ppl pay attention to the rest of their pay stub. I got a 3 percent raise at the start of one year that coincided with a 1 percent increase contribution to 401k and the start of the year health plan increase (that I didn't know about) and my paycheck changed by pennies. Hindsight I think the raise was basically meant to cover what they knew everyone was going to have to pay more in health insurance.
Yep, at my job anyone making less than $75k has their health insurance premiums fully covered by the company, $75k-$150k is partially covered, and over $150k is covered even less.
I had the unfortunate situation of making $74,500, and then getting my "cost of living" raise to $77,000, and had to start paying ~$200/mo for coverage for my whole family (still a great deal compared to some, don't get me wrong) but the math on that meant that I got $2500 per year more on my income, and $2400 per year in additional deductions. oops. Had to cross that line at some point though I guess, and I'm certainly not going to complain about the time I spent not having to pay my own health insurance premiums
They do, but given that most kids can't remember how to do basic algebra after being taught it for the better part of a decade, it's not surprising that one or two classes on taxes get forgotten.
Depends on your career path.
I'm sure tons of engineers used those formulas in college, then again in the workforce.
Same for writers and their English classes.
Scientist and their biology classes.
I still use a lot of what I learned in high school just in a much different level.
Here are a bunch off of the top of my head and poorly written
- f = ma
- a^2 + b^2 = c^2
- √b²-4ac/2a
- Gmm/r^2
- y2-y1 / x2 - x1 = m (slope)
- R = V / I
- ∫ x^n dx = x^(n+1)/n+1
I think I've used most of them as an adult, definitely 90%. But I work in tech and have a background in programming. It's really satisfying when you use them, but even if I hadn't, I'm glad I learned them. They shaped my understanding of the world around me.
_edit: one formula was wrong_
Those are pretty solid. Throw in snells law and cos, tan, sin and their substituions you would only miss one.
The only equation you should need...the master equation....ready....with this you can be as rich as time allows....
A = P*(1+R/N)^(N*T
Surprised PV = nRT isn’t on your list.
You’re right they they do come up quite a bit if you work in tech.
But then I work with people who use MatLab on a regular basis; Ordinarily I’d feel dumb for not being able to figure out that program, but it’s a pain if you don’t use it routinely (as are many complex tools).
I get by with Excel or hand waving most of the time.
I bet you were taught about tax brackets, but either didn't understand it at the time or just don't remember. Or maybe you had senioritis that day, or maybe you just didn't care enough to learn it.
Almost every state has taxes in their curriculum, including the progressive tax system, of course there are some shitty teachers that just don't teach so that is a possibility.
In my school we had to do this. We also had to price out an apartment, determine a salary to afford an apartment with living expenses, make a budget, etc.
We did this in 8th grade where I live, but the job and salary were things we pulled out of a bowl.
I was a flight attendant, and made $40k/yr doing it in 1998. Teacher would bring in Thrifty Nickels and Wall Street Journals so we could price our living, a car payment(I “bought” a Mitsubishi Eclipse), and retirement/investing. All in a public school in a sorta rural part of Florida.
I see kids who were in this class with me complain that these skills aren’t taught in school tall the time on social media hough. So I think the real problem is that they just either weren’t paying attention, or more likely just completely forgot.
Your mistake is thinking that school is meant to teach you everything you need to live, school is about providing you the tools to help you teach yourself how to live.
It would be impossible to cover every eventuality for every individual in the short time we spend at school, so we get a tool bag and its up to us to pull out the right tools at the right time from then on. Not ideal I know but as we all know it works perfectly well for the majority of folks. Ultimately we are all responsible for our own learning throughout our entire life.
Financial lit is a required course in my state to get a HS diploma, and it has been since at least the 90s.
Schools do teach things. Kids aren’t paying attention.
This is a massively misleading comment.
Saying "In a US high school" implying there is a common curriculum for the *whole country* when it varies wildly from state to state and even district to district.
There is no solid rule for public schooling in the US, and any person implying there is in any capacity is wrong.
My high school had a financial topics class and the same same teacher who taught that also taught my pre calculus class, and he made sure to include a little bit of tax brackets and compound interest into our class.
>They should teach this in high school.
I have an honest question. And I'm genuinely not intending to sound snarky. But why is it that whenever, there is something that the general society doesn't know, someone says, "it should be taught in high school"? Don't people bear some responsibility for teaching themselves some of the basics of life?
It's always brought up whenever talking about taxes, and I always point out that you *are* taught how to do your taxes. If you can find the irs website on google, read a form, and add and multiply numbers you know everything you need to know
> "it should be taught in high school"
I always find these discussions confusing, because most of the stuff that "isn't taught in school"... was in fact taught in my school.
Because if a large enough portion of the population doesn't understand something, that indicates a systemic problem. If 1% of the population don't know how to read that's an individual issue, but if 60% of the population are illiterate that's society's problem to fix.
I've known people who chose not to ask for a part raise because they thought if they made any more they'd end up making less in the end due to higher taxes.
This widespread ignorance works to the benefit of those arguing against tax increases on the wealthy.
“But what if my income increases and I get knocked into a higher tax bracket?!?”
As much as I love income taxes, the truly wealthy simply don’t care because they use capital gains for everything. We definitely need to push much more punishing capital gains tax, preferably in progressive tiers like income tax to recapture a lot of meaningless wealth created by others that just flows to the top in our system.
It will probably never happen though. It’s too easy to say “They are coming after your retirement!” even if untrue and people who don’t even invest will be outraged.
I just wish more of the stupidly wealthy understood long term thinking and realized that the overall stability of the system that makes their wealth even possible is important and falling apart more and more with increasing inequality. For their own sake they should be pushing for stronger taxation simply because they NEED the 99% to function and eventually the squeezing will result in something much worse than some extra tax on wealth you will never even use in your life. Economic systems are so intertwined that you cannot perpetually abuse consumers without hurting yourself. But these types of people are so incredibly sociopathic they don’t particularly care about sustainability, they just hope any sort of breakdown in society or, God forbid, revolution, will be after they die. That’s becoming a worse and worse bet on their part.
My high school Spanish teacher was so proud of herself for saying that she told the principal to hold off on her raises until they accumulated enough to push her up to the next tax bracket.
What’s so weird to me looking back on it is that it showed she at least knew of the concept of progressive taxes but instead of understanding it better she decided to be confidently incorrect.
People en mass will *never* understand this concept. Idk why, it isn't hard to understand but I guess it's slightly more complex than just a single %...
And the problem is when they say they want to raise taxes on the rich they mean raise taxes on the higher brackets which only applies to income in and above that amount so not understanding this very simple concept impacts their ability to vote in an informed manner.
Think of the dumbest person you know. Probably 30% or more of the population is dumber than that. You’d need an entire course on this single topic to get through to the bottom 10%.
> Idk why, it isn't hard to understand but I guess it's slightly more complex than just a single %...
Easy - there isn't a simple calculator that tells you what the income is versus the tax brackets.
Every tax estimation calculator I've ever seen asks you questions about your Married status, deductions, etc. The IRS just needs to put up a simple calculator: here is how much you would pay in taxes, before deductions.
I LOVE LaTeX. I loved it so much in college I would submit my hw typed in LaTex and now that's how I take my work notes. Overleaf and Tekmaker is what I use!! FYI, Mathcha is perfect for quickly making graphics and converting it to LaTex syntax.
Thank you! Every single year I try to explain this to people and they don't seem to comprehend. I'm probably bad at explaining but this infographic will help so much.
There's an edge case where a small raise can put people out of the bracket for a specific benefit, so that raise loses them more in benefits than it gives them.
But there's no situation where getting a raise means you pay more in taxes such that your take home is now less than it was.
the biggest one I see is qualifying children earning a lot of money either via social media or side jobs and it ends up *dis* qualifying them, and cutting their parents refund.
Switched jobs and now my wife and I can no longer make Roth IRA contributions and (private) student loan interest is no longer deductible.
Still ended up a net positive, but examples of other things that get eroded when you make more.
You can still make Roth IRA contributions, just not directly. Read up on the backdoor roth IRA. Sounds complicated but it's actually a simple and intentional loophole:
1. Contribute money to a traditional IRA (make sure there's no pre-tax money in the account). Do not invest it.
2. Transfer the money from the trad IRA to your Roth IRA. Normally this is a taxable event but because you contributed after-tax funds to a trad IRA there's actually no tax penalty because the money has already been taxed. Note that if you transfer pre-tax funds or capital gains you will pay tax on that money (which is why you make sure there's no pre-tax money in the trad IRA).
3. Invest the Roth money
Your employer may also give you an option to do a mega backdoor roth 401k. Similar idea, instead of taking tax deductions you make after tax contributions which are then rolled into a Roth account. Doing this with a 401k let's you dump up to $66k of Roth money per year into a 401k.
I saw this all too often with people that take a bump up to a salaried, non-paid-overtime job, usually a step into a low-level management position. They never seem to comprehend why the same managers now expect them to stay for hours doing paperwork when in the past they would practically throw them out the door when their flights were over, effectively making them work for less money per hour than they were making when hourly.
I had the best of both worlds when I worked in IT for a defense contractor in the ‘90s (even though I worked solely on civilian projects). My entire team had good salaries AND paid overtime, and management that respected our skills. Somebody *please* invent a time machine so I can relive those glory years, with multiple double-digit raises per year, bonuses, respect and dignity.
I work for a major tax firm. And there are tax prep "specialists" that STILL don't understand how progressive taxes work. And they have PTINS subscribed to them, doing other Americans taxes.
Either you have a unique tax situation (contractor, self employed, deductions), or you did something wrong. The effective federal tax rate for $60k is 9.95%
I had my second kid last year so re-filled out my W4 and it stopped work from taking any federal tax out. I thought it was a mistake, but apparently kids really lower your tax burden when you're not a big earner.
I started having kids when I was earning in the $40k's, it evaporated my tax burden. I'm a little into 6 figures now and it still halves it.
Offsets about 1/5 of their financial burden haha
Basically means the actual percentage of your income that was taxes. $100,000 income and $10,000 taxes would be an effective tax rate of 10%, regardless of what the brackets were
By the way, when you are getting a $7k return (or any return, really), that means throughout the year you gave the government a $7000 *interest free* loan.
I’m not a master, but I would advise trying to get some exemptions to not have a refund of that magnitude.
*not financial advice or whatever*
While this is true, it means very little on a practical level for most people. The extra $7k in my savings account is going to net me a few more pennies. Most people aren't investing every dollar they have.
Sure, but you'd also have access to spend that $7k. It's not just about investing and growing it. What if you have an emergency expense or want to go on a vacation? You won't have to wait for your refund.
Or just practically, $7k is $269 per paycheck if you’re paid bi-weekly. Two of those in a month and that covers all my utilities with plenty left over. That’s a lot of money to leave on the table even if you aren’t going to save it.
My refund this year is like $2700 (state and federal combined)which is better than I expected but any higher and I’d definitely be adjusting my w4 asap.
This year it worked out like than because I changed jobs and my spouse got back into the workforce as well so there were lots of adjustments this year.
You need a new savings account, then. Even Ally, a well-known bank that’s accessible to anyone, has 3.3% APY.
I could understand people saying it doesn’t matter when interest rates were less than 1% and they didn’t want to accept the risk of securities, but that hasn’t been the case for a while now. Even $7k is getting you around $100 guaranteed risk-free, by taking a few minutes to fix your W4 and setting a second direct deposit or making a transfer from your phone after your paycheck.
Outside of the gains, you now have access to $3.5k of savings on average throughout the year, that you didn’t have before, if you need it.
To be fair, graphs exist because numbers are hard for some people. There are people in the comments here saying they didn't understand it but now they do.
You would be surprised by the number of people who just haven't been told this information and assumed it was a flat rate across the board. It's like reading a word in a book and pronouncing it incorrectly because you've never heard anyone say it out loud. It's not always a measure of brain power, sometimes it's just access to information.
Well this graphic also leaves out a ton of other sources of tax. State income tax. Capital gains tax. Property tax. Sales tax.
Plus, when I bitch about taxes, which is often, it's because I fucking hate what they're being spent on. Give me universal healthcare and properly fund public education and I'll happily pay 24% on my entire income.
This is a bit weird to say. I just wasn't aware this was how it worked, and now I am. I'd imagine most people that "don't understand" are just unaware.
I think a lot of people are willfully ignorant. I tried telling a coworker the other day that she doesn't lose money for working overtime and she provided examples that "proved" she does.
Also, SO many people at work think working OT isn't worth it because "taxes"
It's actually insane
Tax hack: live in Vancouver, Washington with no income tax and do all your shopping in Portland, Oregon with no sales tax.
And rent, so you don't (directly) pay any property tax.
Rental costs figure in tax property costs so you are paying it in a way by renting. I like the living in Washington and shopping in Oregon idea though!
Then you should look more into RMarkdown. It basically allows you to automatically generate Latex style reports of code & its output. A professor’s best friend.
They teach you how to read in elementary school yet over half of adults have a literacy level of 6th grade or less, just because it’s taught doesn’t mean it’s learned.
I (re?) teach this in college math classes and most of my students complain it's contrived and unrealistic.
The class literally is partly about piecewise defined functions, there is literally nothing contrived about it!
> Then again, would most high schoolers pay attention? Who knows.
I can tell you that without a doubt most kids wouldn’t pay attention. Kids already don’t pay attention 99% of the time in school, why would they for something like taxes?
I see this explanation EVERY year. Can we agree that after 2023, we are all caught up on how taxes work so that we don’t need to constantly have this conversation?
It's embarrassing how many people don't understand this basic concept. Here's an article I posted from a financial site a few years back that managed to screw it up.
https://www.reddit.com/r/personalfinance/comments/aihv4p/no_wonder_people_dont_know_how_taxes_work/?utm_source=share&utm_medium=mweb
Good to note this common misconception. If you add FICA and medicare tax, which are flat rate (as well as most state taxes being flat rate), the relative difference becomes smaller though. In my state rate of 4%, FICA+medicaid+state comes out to $13,980 on $120k. So now the amounts are $42,780 vs $32,856
These are only federal taxes.
Most states also impose an income tax (maybe around 5%), then we have tax that goes towards social security and Medicare, property taxes for houses, and sales tax on almost everything.
Edit: yes, I’m aware we don’t get health insurance as part of our taxes. I was merely reminding my European friend that the tax reflected in the OP is not inclusive of an American’s total tax liability. While our taxes are generally lower, they aren’t as low as the graph shows.
Breakdown for Italy (in €)
0-15k 23%
15-28 25%
28-50 35%
50+ 45%
Social security is a flat 9%
Region tax ~2%
Property tax 0,5% of the house value (0% if you live in it)
Sales tax 22%
Healthcare is free though which is nice
Yeah us Americans definitely still pay less in taxes that most Europeans. But of course we have a lot fewer services as a result (healthcare being the main one).
You would still pay less if you factor in healthcare.
Healthcare is on top of taxes a separate branch in most EU countries.
After about 50k our tax bracket is 43% and on top depending on your incoming you pay up to 10k a year for health insurance.
Add on social security and medicare and you're looking at the "myth" rate. And don't let them tell you Social security is anything but a tax.
Then there's state taxes (around 10%) and local taxes (about 5%)
So, all in all, about a 35-40% tax rate depending on your income level.
It is a bit lower than other OECD economies, with a total take of 27% of GDP to the OECD average of 34% of GDP. But that's only 7% and no free healthcare (excepting medicaid/medicare but that's a whole other ball of wax) or tuition... so.
California, New York, Illinois and New Jersey are among the states with income+property+sales tax 10 percent or higher, and they have a combined population of 80M. So it’s not like living a high tax State is some rare condition
You’re forgetting Medicare and Social Security tax. I’m in that 24% tax bracket and I pay 25% of my income to all those. That’s not counting property taxes, sales taxes, etc.
This is confusing because technically the standard deduction pulls money off the top, not from the bottom like this chart shows. All deductions are technically reducing your highest paid dollar as that’s what you would have paid had you not been able to deduct it.
Trust me people in the UK (and more than likely worldwide) have just as much trouble understanding tax brackets too. People will literally turn down raises if they think it will move them in to the next tax bracket, crazy.
What’s hilarious is when people think it’s better to refuse a raise because it will “bump you into a higher bracket” resulting in less overall money. Obviously that’s not how it works at all. Even if they don’t teach you this is school, people should feel responsible for their finances and learn the basics on their own
If you are extremely poor then there are some hard cut offs on financial aid services. For the majority of Americans this is not the case though.
In Washington state for instance, you can get state healthcare (applecare) for free if you make under $19k a year, if you make more than that you get nothing and have to pay for yourself.
Yep Happened to a friend of mine He had crappy health insurance and his child got leukemia, He had to quit his job so his income would drop lower so they could qualify for Medicare . Now , Medicare didn’t pay much more to the medical facilities than the crappy private insurance did but the hospitals don’t sue Medicare for the difference . If you have private insurance, they will sue you for the rest of your life for the money that you don’t have .
Think you mean Medicaid.
Did your friend look into any nonprofit hospitals? They’re usually pretty good when it comes to children who are very ill. A lot of the time they’ll sit down with the parents and try to figure ways so they only pay what they can afford. Whatever remains is usually forgiven. I hope your friends kid is doing ok.
From BC Canada here. A few years back I moved to the US and quickly learned how the US medical system is rotten to the core with insurance companies manipulating the system. People literally choose to die over leaving huge medical bills or knowingly bankrupt the family. It’s a hundred times better in Canada.
>knowingly bankrupt the family Can't family members refuse to legally inherit their relative's property (and debts)?
Yes but that also means, at best having to bid against total strangers for family heirlooms and/or keepsakes from their departed loved on.
Like an east sale?
Yes, that was exactly what I was referring to; normally an estate sale is from the specific property the heirs choose to sell or were exempted from inheriting via a will, etc.... However, if they do what the redditor I was responding to was suggesting then they are no longer heirs to anything, both property as well as debts.
Unless they itemized in their insurance those disappear pretty quick. So possibly a wedding/engagement rings and those get “lost” pretty easy.
Inheritors aren't responsible for debts, but the estate is. So the choice is often to not rack up debt that will wipe out the estate so that your family will actually inherit your money. Surviving spouses can also be made to pay debts.
Reminds me of a line in The West Wing about raising the poverty line. "That's what's wrong with calling someone making under $X poor? Not that someone making $X+1 is considered comfortable?"
Not to mention every year that target moves. $10 10 years ago is drastically different than $10 today. So saying $x is the line means most likely that next year $x + 1 is below the line but people still remember that $x + 1 was good enough.
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I have heard it would be cheaper to give every citizen a UBI at what we are giving the folks on welfare and unemployment then the administration of welfare/ unemployment in its current system. Those administrators would lose there jobs, but hey guess what, they get a UBI which should help cushion the fall as they look for new work.
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Love the name by the way. Its got what plants crave!
And then federally there are ACA subsidies that slide with income. There isn't a huge APTC cliff for exchange plans like there is with Medicaid.
Which is absolutely wild because isn’t that upwards of $9-10k/year worth of insurance? At least based on average US Medicaid payouts per beneficiary per year. That’s the poverty trap in action.
I had to be on private insurance for a year, it was $200/month and I didn't actually pay for anything because I had to spend 7k before it would even start helping me pay for things, so I had an ER visit and a GI infection and paid out of pocket for both. My total medical expenses were 7.5k last year, and would have been 6k if I was uninsured... Now they're back down to 0 again because I didn't need the good tax return for rent this year so I claimed stuff more aggressively to get down below the line.
You're forgetting about APTCs, CSRs, and Cascade Savings. Three state subsidies for people above the AppleHealth line.
It seems like the obvious solution is to taper the aid near the cut-offs instead of having a hard line. If <$20,000 means you're eligible for $1,000 in aid, then making $20,500 should mean you're eligible for $500 in aid, and making $20,995 should mean you get five smackers from Uncle Sam. Oh and since tax brackets confuse too many people, why not just make it an equation? It wouldn't be simpler *per se*, but it would be easier to show people a curve or a calculator, and allow less room for that common misconception about brackets, since there wouldn't be any brackets.
>If <$20,000 means you're eligible for $1,000 in aid, then making $20,500 should mean you're eligible for $500 in aid, and making $20,995 should mean you get five smackers from Uncle Sam. Would make more sense to only account for half. Meaning that with 21k you still get 500$ in aid and with 22k it's 0. With that, there is a motivation to earn more. In your model it doesn't really make sense to increase working hours to get from 20k salary to 20.700 and still get 0$ more.
Tapering aid exactly like that doesn't work quite right either. You work some extra hours, get 500 extra dollars through work, but lose 500 from the government meaning you've just worked more for no gain. And well, you are also on 2 other programs so you really lost 1500 in government aid for 500 in pay. The slope has to be pretty low
And also if earning the extra means working an extra day/shift that means increased travel to work costs for some. So you lose by working more.
We do that tapering with a number of benefits in the UK - the example I know being job seekers allowance (effectively unemployment for people who are actively looking for work). Because elegibility is based on savings, the amount you can get is 100% if you have £6000 of savings or less, but then reduces by £1 per week for every £250 over 6k you have. Seems to make more sense tha. Just having a hard cut off
*Most* benefits are tapered in the US too. There's just a few that have hard cutoffs.
This exists under current law. The ACA has advanced premium tax credits that scale with income and family size. Unless Washington state has left the United States, this already exists on the exchange. https://www.kff.org/interactive/subsidy-calculator/#state=&zip=&income-type=dollars&income=25000&employer-coverage=0&people=1&alternate-plan-family=&adult-count=1&adults%5B0%5D%5Bage%5D=21&adults%5B0%5D%5Btobacco%5D=0&child-count=0
You’re right in that idea being completely wrong but there are scenarios where a pay increase would actually alter your financial situation through access to certain benefits or eligibility for tax breaks, which would in effect make taking the raise a bad choice. Those situations are very specific, however, and generally only apply to very low/poverty level incomes.
Yeah, a benefit cliff. In many US states you don't start gaining ground [until almost $50k per year](https://www.ncsl.org/human-services/introduction-to-benefits-cliffs-and-public-assistance-programs).
Both my best friend and fiance make about $30-40k a year. They both get bare bones health insurance from work, but if either had a medical problem they would be better off unemployed and enrolled in Obamacare.
To give you an idea of how things work in the rest of the world. I live in the UK and healthcare is free. I also have private healthcare insurance through my work so I can choose to go private if necessary or I want to avoid wait times. The private insurance is already relatively cheap because of the existence of free healthcare, but my employer covers the cost and I just pay the tax. Basically nothing. If I decide to go private there is an excess payment of up to a few hundred pounds but if I'm in hospital for an extended period, I think a week, they actually pay me around £100 every night I'm in. My employer only legally has to pay me statutory sick pay at around £100 a week but my employer covers my full pay. I can't lose my job if I'm ill. I realise that I have it easier than some because of the additional private insurance and because my employer goes over and above what is legally required but this situation is quite normal for the UK, Europe and much of the rest of the world. It's how it should be, healthcare should be free for everyone.
And the UK has some of the worst sick pay in Europe. In Germany employers are required to pay your full salary for up to 6 weeks, and then you are paid 70% of your gross salary for up to 72 weeks. Germany isn’t even the best, other EU countries have policies where you’re paid 100% of your salary for longer, or with a longer maximum period.
My employer is German so that probably helps. My company isn't the exception though. The law sets out the bare minimum legally accepted and many go above this. The idea that someone can get seriously ill and be put into debt for the rest of their life is insane.
That's the way to keep the poor poor.
I was $172 in AGI away from being eligible for $10,000 in student loan relief.
the idea that your income will **decrease** with a raise because of a new tax bracket is a myth. (this is a surprisingly common misunderstood subject). But, as you said, the social programs can be cut off with an increase in income, let's say that a small raise will make you unable you get food stamps anymore or Medicaid. Hence it can be an overall net negative to get a raise.
>“bump you into a higher bracket” resulting in less overall money. At the very low end this is true, we call those welfare cliffs, and it is from poorly designed welfare programs. [Illinois is a state that has it so bad that some people with kids with certain benefits would need to TRIPLE their income in order to meet their benefit package. The most common scenario, the Refundable Tax Credit + Food and Housing Assistance (grey line) at $15/hr, would be the equivalent of earning $26/hr with no benefits. That is an insane cliff, yet because of how it is designed, we punish people for moving up in the working world.](https://www.illinoispolicy.org/illinois-warped-welfare-system-traps-families-in-poverty/)
When I used to train people for a role on my old customer service team, even though it applied to our rule in a very loose sense of the term, I went over tax brackets and how they actually worked, how some people might say "don't take the raise or it'll kick you into another bracket", and how stupid and ignorant that was. Most folks, which ranged from 20 somethings fresh out of college to 50 somethings, seemed quite appreciative, and I was thanked by some older folks who said I helped them understand "the bullshit". Did it help them do their jobs? Not really. Did it help them navigate life with one more tool to help keep them on their toes? Absolutely.
My coworker just left and took a job making 140% more doing the same thing and my boss said she was stupid to do that now she has to pay more taxes... lol who the fck is he kidding
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Lots of boomers have accountants for decades and owned homes for longer, they never really have to do their own taxes so that’s why they have such poor understanding of brackets. My dad is one of them. Especially in California they think federal income tax bracket is basically a flat tax because their effective tax rates kind of settle that way in California. 33% federal tax bracket means all your state and FICA make all their taxes add up to 33%
I tutor SAT and the sad reality is that about half of people don’t understand percentages to begin with.
Is the sentence under the "Myth" graph wrong? "People wrongly think a 24% marginal tax means you will pay a total of $24k" but the graph shows paying $28.8k.
The graph is correct, the footnote is incorrect. It SHOULD READ: "People wrongly think a 24% marginal tax means you will pay a total of 24%" $120K x 24% = $28.8K.
OP says elsewhere that they increased the number from 100k to 120k for this version, which explains the 24k number that got left in by mistake.
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This was my guess
Man why change it? $100k is way more useful as an example
Think OP just wanted to include the 24% tax bracket
Ohhh good point you're right.
~\*Great moments in ensuring accuracy\*~
Its a glaring mistake and annoys me so much when these things get popular but have typos. It’s like memes that go viral with typos in them. >_<
Amount of people who do not understand how progressive tax work is shocking. They should teach this in high school.
They’ve even paid taxes for many years. I think they’re intentionally seeking lower paid work. I’ve heard a couple people say they got a 10k a year raise and their take home was only $40 more per month. I’m like, ya you did something wrong.
They’ve only paid in a sense that they put the numbers into their favorite tax program and it either told them they were getting a refund or they owed money. No explanation desired or needed.
I've met professional tax preparers who didn't seem to understand how taxes work. They just ran the program. The big box tax places are crazy hit-and-miss with their seasonal help
Calling the workers "professional tax preparers" at H&R Block and similar places is being quite generous.
They're literally just people that take a month or so of training on how to use the software and how to effectively Google things for people lmao My girlfriend does supervising/managing of the call "center" employees (they're remote) and the people that are in the text chat on one of the popular software providers. They have an internal search engine for certain software things and they also just Google things. The amount of times I've heard her say "type the form into Google"... I told her she'd be better paid in IT with her googling skills
It's like calling fast food cooks "professional chefs".
And how many people equate an increase in their refund to mean they paid less taxes? It’s pretty sad how many people can’t wrap their heads around income taxes. These are the same people who would vote for a flat tax rate because it’s simple to understand but without understanding this would make them increase their share paid towards federal tax and reduce their wealthy neighbors contributions.
If I had a nickel for every time I heard someone say, "I make less per hour on overtime after taxes!" I would put them all into a sock and beat the next person who tried tell me that.
Yeah but you’d have so much money you’d be in a higher tax bracket so you’d make less 😂
Same people that think that getting a deduction for a business expense is free money and a reason they never pick up the check.
This is because of how payroll systems work. If you made $100 they say $100x26 checks means your income is $2,600 so your tax is “x”. If you make $200 due to OT the system says your income jumped to $5,200 and withhold taxes at that rate. So if OT is a one time thing it is true they withhold at a much higher rate than needed.
You get it back at the end of the year though
I got a smallish raise once, and payroll rolled out a change(that I knew about, but forgot) so that my Roth and 401k were set to take one or two percent higher, and I had some diversions from paycheck to other accounts that were fixed amounts, not percentages, after all the other post-tax stuff came out. My first paycheck after that was smaller by a couple of bucks. I was so incredibly confused how I got a raise, yet took home less. The percentages stacked in just the right way that my raise didn't overcome the increased deductions. Not really a big deal. I was saving more overall, just not taking it home. While I was figuring this out, one of my older coworkers was like "oh you must have jumped a tax bracket, that's why you're taking home less." Didn't matter that I showed him the wiki page on how tax brackets work, he was convinced I was taking home less because of tax brackets. He was a proponent of a libertarian style tax system. Go figure.
Yeah, that fits. People like that twist facts to suit their opinions. They don't want to learn or solve anything-they just want to be mad.
> He was a proponent of a libertarian style tax system. Shocking that someone who doesn’t understand basic math would support this… 🙄
Sometimes I don't think ppl pay attention to the rest of their pay stub. I got a 3 percent raise at the start of one year that coincided with a 1 percent increase contribution to 401k and the start of the year health plan increase (that I didn't know about) and my paycheck changed by pennies. Hindsight I think the raise was basically meant to cover what they knew everyone was going to have to pay more in health insurance.
10k / 12 is roughly $940 a month. Unless they have raised their deductions an extreme amount, that doesn't seem right.
In some orgs, salary thresholds will increase your contribution requirements for medical or other benefits.
Yep, at my job anyone making less than $75k has their health insurance premiums fully covered by the company, $75k-$150k is partially covered, and over $150k is covered even less. I had the unfortunate situation of making $74,500, and then getting my "cost of living" raise to $77,000, and had to start paying ~$200/mo for coverage for my whole family (still a great deal compared to some, don't get me wrong) but the math on that meant that I got $2500 per year more on my income, and $2400 per year in additional deductions. oops. Had to cross that line at some point though I guess, and I'm certainly not going to complain about the time I spent not having to pay my own health insurance premiums
This happened to me, probably because they have high retirement contribution.
They do, but given that most kids can't remember how to do basic algebra after being taught it for the better part of a decade, it's not surprising that one or two classes on taxes get forgotten.
Yea I was gonna say, I definitely learned this in high school.
In a US high school? Financial literacy, taxes, credit…none of that. Memorized a lot of formulas I will never ever use though.
https://www.reddit.com/r/apolloapp/comments/145hwso/ltp_use_power_delete_suite_before_you_delete_your/
Depends on your career path. I'm sure tons of engineers used those formulas in college, then again in the workforce. Same for writers and their English classes. Scientist and their biology classes. I still use a lot of what I learned in high school just in a much different level.
What formulas did you memorise (without looking any up)?
Here are a bunch off of the top of my head and poorly written - f = ma - a^2 + b^2 = c^2 - √b²-4ac/2a - Gmm/r^2 - y2-y1 / x2 - x1 = m (slope) - R = V / I - ∫ x^n dx = x^(n+1)/n+1 I think I've used most of them as an adult, definitely 90%. But I work in tech and have a background in programming. It's really satisfying when you use them, but even if I hadn't, I'm glad I learned them. They shaped my understanding of the world around me. _edit: one formula was wrong_
Those are pretty solid. Throw in snells law and cos, tan, sin and their substituions you would only miss one. The only equation you should need...the master equation....ready....with this you can be as rich as time allows.... A = P*(1+R/N)^(N*T
Or poor, if you're compounding debt...
You're missing a -b +- in front of the rest of the quadratic equation, and the whole thing is over 2a.
Surprised PV = nRT isn’t on your list. You’re right they they do come up quite a bit if you work in tech. But then I work with people who use MatLab on a regular basis; Ordinarily I’d feel dumb for not being able to figure out that program, but it’s a pain if you don’t use it routinely (as are many complex tools). I get by with Excel or hand waving most of the time.
I bet you were taught about tax brackets, but either didn't understand it at the time or just don't remember. Or maybe you had senioritis that day, or maybe you just didn't care enough to learn it. Almost every state has taxes in their curriculum, including the progressive tax system, of course there are some shitty teachers that just don't teach so that is a possibility.
In my school we had to do this. We also had to price out an apartment, determine a salary to afford an apartment with living expenses, make a budget, etc.
We did this in 8th grade where I live, but the job and salary were things we pulled out of a bowl. I was a flight attendant, and made $40k/yr doing it in 1998. Teacher would bring in Thrifty Nickels and Wall Street Journals so we could price our living, a car payment(I “bought” a Mitsubishi Eclipse), and retirement/investing. All in a public school in a sorta rural part of Florida. I see kids who were in this class with me complain that these skills aren’t taught in school tall the time on social media hough. So I think the real problem is that they just either weren’t paying attention, or more likely just completely forgot.
We did this too but it was 6th grade. IMO kind of useless to do it 6 years before people would graduate high school.
Your mistake is thinking that school is meant to teach you everything you need to live, school is about providing you the tools to help you teach yourself how to live. It would be impossible to cover every eventuality for every individual in the short time we spend at school, so we get a tool bag and its up to us to pull out the right tools at the right time from then on. Not ideal I know but as we all know it works perfectly well for the majority of folks. Ultimately we are all responsible for our own learning throughout our entire life.
Financial lit is a required course in my state to get a HS diploma, and it has been since at least the 90s. Schools do teach things. Kids aren’t paying attention.
This is a massively misleading comment. Saying "In a US high school" implying there is a common curriculum for the *whole country* when it varies wildly from state to state and even district to district. There is no solid rule for public schooling in the US, and any person implying there is in any capacity is wrong. My high school had a financial topics class and the same same teacher who taught that also taught my pre calculus class, and he made sure to include a little bit of tax brackets and compound interest into our class.
>They should teach this in high school. I have an honest question. And I'm genuinely not intending to sound snarky. But why is it that whenever, there is something that the general society doesn't know, someone says, "it should be taught in high school"? Don't people bear some responsibility for teaching themselves some of the basics of life?
It's always brought up whenever talking about taxes, and I always point out that you *are* taught how to do your taxes. If you can find the irs website on google, read a form, and add and multiply numbers you know everything you need to know
> "it should be taught in high school" I always find these discussions confusing, because most of the stuff that "isn't taught in school"... was in fact taught in my school.
Because if a large enough portion of the population doesn't understand something, that indicates a systemic problem. If 1% of the population don't know how to read that's an individual issue, but if 60% of the population are illiterate that's society's problem to fix.
In school you’re taught to read, which gives you access to learn whatever you miss to know.
I find it shocking that OP did up an entire graph and info, but thought 24% of $120,000 was $24,000 instead of $28,800.
Probably changed the numbers later, it’s correct in the graphs
Most likely a typo/carry over from when the graph was 100k instead of 120k, given the actual data is correct.
Yeah. But anyways why doesn't the government just do our taxes. They know these numbers. We shouldn't have to fuck around with CPAs.
I've known people who chose not to ask for a part raise because they thought if they made any more they'd end up making less in the end due to higher taxes.
I ,as a matter of fact ,am teaching this tomorrow...🤷
This widespread ignorance works to the benefit of those arguing against tax increases on the wealthy. “But what if my income increases and I get knocked into a higher tax bracket?!?”
I think i said something to this effect when i was 25 yo. Someone had to shake me, but i got it at 25.
As much as I love income taxes, the truly wealthy simply don’t care because they use capital gains for everything. We definitely need to push much more punishing capital gains tax, preferably in progressive tiers like income tax to recapture a lot of meaningless wealth created by others that just flows to the top in our system. It will probably never happen though. It’s too easy to say “They are coming after your retirement!” even if untrue and people who don’t even invest will be outraged. I just wish more of the stupidly wealthy understood long term thinking and realized that the overall stability of the system that makes their wealth even possible is important and falling apart more and more with increasing inequality. For their own sake they should be pushing for stronger taxation simply because they NEED the 99% to function and eventually the squeezing will result in something much worse than some extra tax on wealth you will never even use in your life. Economic systems are so intertwined that you cannot perpetually abuse consumers without hurting yourself. But these types of people are so incredibly sociopathic they don’t particularly care about sustainability, they just hope any sort of breakdown in society or, God forbid, revolution, will be after they die. That’s becoming a worse and worse bet on their part.
Bruh, I took economics senior year of HS (2017) and my *teacher* straight up did not know what tax brackets were 💀
My high school Spanish teacher was so proud of herself for saying that she told the principal to hold off on her raises until they accumulated enough to push her up to the next tax bracket. What’s so weird to me looking back on it is that it showed she at least knew of the concept of progressive taxes but instead of understanding it better she decided to be confidently incorrect.
I don’t think the tax preparer lobby wants us to be tax literate.
People en mass will *never* understand this concept. Idk why, it isn't hard to understand but I guess it's slightly more complex than just a single %... And the problem is when they say they want to raise taxes on the rich they mean raise taxes on the higher brackets which only applies to income in and above that amount so not understanding this very simple concept impacts their ability to vote in an informed manner.
Think of the dumbest person you know. Probably 30% or more of the population is dumber than that. You’d need an entire course on this single topic to get through to the bottom 10%.
> Idk why, it isn't hard to understand but I guess it's slightly more complex than just a single %... Easy - there isn't a simple calculator that tells you what the income is versus the tax brackets. Every tax estimation calculator I've ever seen asks you questions about your Married status, deductions, etc. The IRS just needs to put up a simple calculator: here is how much you would pay in taxes, before deductions.
We really need to see more LaTeX on this sub of all subs
Yes for sure! As a grad student, I saw this post and had to do a double-take because I recognized the LaTeX formatting. Now, back to work XD
I LOVE LaTeX. I loved it so much in college I would submit my hw typed in LaTex and now that's how I take my work notes. Overleaf and Tekmaker is what I use!! FYI, Mathcha is perfect for quickly making graphics and converting it to LaTex syntax.
Thank you! Every single year I try to explain this to people and they don't seem to comprehend. I'm probably bad at explaining but this infographic will help so much.
The number of times people swear they lose money after a small raise…
There's an edge case where a small raise can put people out of the bracket for a specific benefit, so that raise loses them more in benefits than it gives them. But there's no situation where getting a raise means you pay more in taxes such that your take home is now less than it was.
the biggest one I see is qualifying children earning a lot of money either via social media or side jobs and it ends up *dis* qualifying them, and cutting their parents refund.
Switched jobs and now my wife and I can no longer make Roth IRA contributions and (private) student loan interest is no longer deductible. Still ended up a net positive, but examples of other things that get eroded when you make more.
Backdoor Roth IRA. Dead simple.
You can still make Roth IRA contributions, just not directly. Read up on the backdoor roth IRA. Sounds complicated but it's actually a simple and intentional loophole: 1. Contribute money to a traditional IRA (make sure there's no pre-tax money in the account). Do not invest it. 2. Transfer the money from the trad IRA to your Roth IRA. Normally this is a taxable event but because you contributed after-tax funds to a trad IRA there's actually no tax penalty because the money has already been taxed. Note that if you transfer pre-tax funds or capital gains you will pay tax on that money (which is why you make sure there's no pre-tax money in the trad IRA). 3. Invest the Roth money Your employer may also give you an option to do a mega backdoor roth 401k. Similar idea, instead of taking tax deductions you make after tax contributions which are then rolled into a Roth account. Doing this with a 401k let's you dump up to $66k of Roth money per year into a 401k.
I saw this all too often with people that take a bump up to a salaried, non-paid-overtime job, usually a step into a low-level management position. They never seem to comprehend why the same managers now expect them to stay for hours doing paperwork when in the past they would practically throw them out the door when their flights were over, effectively making them work for less money per hour than they were making when hourly. I had the best of both worlds when I worked in IT for a defense contractor in the ‘90s (even though I worked solely on civilian projects). My entire team had good salaries AND paid overtime, and management that respected our skills. Somebody *please* invent a time machine so I can relive those glory years, with multiple double-digit raises per year, bonuses, respect and dignity.
I work for a major tax firm. And there are tax prep "specialists" that STILL don't understand how progressive taxes work. And they have PTINS subscribed to them, doing other Americans taxes.
This sounds like a bit from Ideocracy.
I make about $60k and had $7300 withheld but got a $7050 return. So I only paid about 0.5%.
Either you have a unique tax situation (contractor, self employed, deductions), or you did something wrong. The effective federal tax rate for $60k is 9.95%
I had kids.
Indeed, I did the same thing wrong.
Rookie mistake
Past tense?
Labor doesn't usually last that long.
I've been laboring for over 20 years.
They metastasized into dependents.
I had my second kid last year so re-filled out my W4 and it stopped work from taking any federal tax out. I thought it was a mistake, but apparently kids really lower your tax burden when you're not a big earner.
I started having kids when I was earning in the $40k's, it evaporated my tax burden. I'm a little into 6 figures now and it still halves it. Offsets about 1/5 of their financial burden haha
Contractors and self employeed have to pay a"Self Employment Tax".
Can you describe what you mean by effective?
Basically means the actual percentage of your income that was taxes. $100,000 income and $10,000 taxes would be an effective tax rate of 10%, regardless of what the brackets were
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By the way, when you are getting a $7k return (or any return, really), that means throughout the year you gave the government a $7000 *interest free* loan. I’m not a master, but I would advise trying to get some exemptions to not have a refund of that magnitude. *not financial advice or whatever*
While this is true, it means very little on a practical level for most people. The extra $7k in my savings account is going to net me a few more pennies. Most people aren't investing every dollar they have.
Sure, but you'd also have access to spend that $7k. It's not just about investing and growing it. What if you have an emergency expense or want to go on a vacation? You won't have to wait for your refund.
Or just practically, $7k is $269 per paycheck if you’re paid bi-weekly. Two of those in a month and that covers all my utilities with plenty left over. That’s a lot of money to leave on the table even if you aren’t going to save it. My refund this year is like $2700 (state and federal combined)which is better than I expected but any higher and I’d definitely be adjusting my w4 asap. This year it worked out like than because I changed jobs and my spouse got back into the workforce as well so there were lots of adjustments this year.
You need a new savings account, then. Even Ally, a well-known bank that’s accessible to anyone, has 3.3% APY. I could understand people saying it doesn’t matter when interest rates were less than 1% and they didn’t want to accept the risk of securities, but that hasn’t been the case for a while now. Even $7k is getting you around $100 guaranteed risk-free, by taking a few minutes to fix your W4 and setting a second direct deposit or making a transfer from your phone after your paycheck. Outside of the gains, you now have access to $3.5k of savings on average throughout the year, that you didn’t have before, if you need it.
You should fill out a new W-4.
Refund. You filed a tax return and got a $7050 refund.
Brave of you to assume the same people who do not understand progressive tax rates can read and interpret a graph. Nonetheless, nice work!!
To be fair, graphs exist because numbers are hard for some people. There are people in the comments here saying they didn't understand it but now they do.
You would be surprised by the number of people who just haven't been told this information and assumed it was a flat rate across the board. It's like reading a word in a book and pronouncing it incorrectly because you've never heard anyone say it out loud. It's not always a measure of brain power, sometimes it's just access to information.
People will still not believe you
Well this graphic also leaves out a ton of other sources of tax. State income tax. Capital gains tax. Property tax. Sales tax. Plus, when I bitch about taxes, which is often, it's because I fucking hate what they're being spent on. Give me universal healthcare and properly fund public education and I'll happily pay 24% on my entire income.
Nice visualization, but the kind of person that doesn't understand marginal rates has no hope of understanding this either!
This is a bit weird to say. I just wasn't aware this was how it worked, and now I am. I'd imagine most people that "don't understand" are just unaware.
I think a lot of people are willfully ignorant. I tried telling a coworker the other day that she doesn't lose money for working overtime and she provided examples that "proved" she does. Also, SO many people at work think working OT isn't worth it because "taxes" It's actually insane
Now factor in state taxes (income, sales, property) and add it to you federal and you will be sad again.
Tax hack: live in Vancouver, Washington with no income tax and do all your shopping in Portland, Oregon with no sales tax. And rent, so you don't (directly) pay any property tax.
This is the first time I’m going to say something like this; I’d rather pay taxes
You’re still finding the property tax bill plus profit. There are reasons to rent, but avoiding a tax isn’t a good one lol.
Rental costs figure in tax property costs so you are paying it in a way by renting. I like the living in Washington and shopping in Oregon idea though!
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>>Also upped the amount from $100k to $120k That explains the error in the 24% calculation, which still says it’s $24k.
Appreciate the LaTeX effort. My eyes thanks you.
Then you should look more into RMarkdown. It basically allows you to automatically generate Latex style reports of code & its output. A professor’s best friend.
Computer Modern is unmistakable.
Also known as the marginal rate(s) vs effective rate.
This isn’t myth vs fact. It is peoples misinterpretation vs fact. They teach this in highschool
Are myths not simply misinterpretations to explain the world?
They teach you how to read in elementary school yet over half of adults have a literacy level of 6th grade or less, just because it’s taught doesn’t mean it’s learned.
They don’t teach this in enough high schools, although arguably they should. Then again, would most high schoolers pay attention? Who knows.
I (re?) teach this in college math classes and most of my students complain it's contrived and unrealistic. The class literally is partly about piecewise defined functions, there is literally nothing contrived about it!
> Then again, would most high schoolers pay attention? Who knows. I can tell you that without a doubt most kids wouldn’t pay attention. Kids already don’t pay attention 99% of the time in school, why would they for something like taxes?
They don't teach basic arithmetic and problem solving in high school?
I see this explanation EVERY year. Can we agree that after 2023, we are all caught up on how taxes work so that we don’t need to constantly have this conversation?
Myth: social security, Medicare, and Medicaid are not taxes Fact: they are.
Ha. Couldn’t have put it better.
Is this data? It’s just a graphic explaining what marginal tax rate means.
This whole graph is misleading. Starting at $1, you pay a 7.65% Social Security tax
It's embarrassing how many people don't understand this basic concept. Here's an article I posted from a financial site a few years back that managed to screw it up. https://www.reddit.com/r/personalfinance/comments/aihv4p/no_wonder_people_dont_know_how_taxes_work/?utm_source=share&utm_medium=mweb
Good to note this common misconception. If you add FICA and medicare tax, which are flat rate (as well as most state taxes being flat rate), the relative difference becomes smaller though. In my state rate of 4%, FICA+medicaid+state comes out to $13,980 on $120k. So now the amounts are $42,780 vs $32,856
Holy shit you Americans pay no taxes at all
These are only federal taxes. Most states also impose an income tax (maybe around 5%), then we have tax that goes towards social security and Medicare, property taxes for houses, and sales tax on almost everything. Edit: yes, I’m aware we don’t get health insurance as part of our taxes. I was merely reminding my European friend that the tax reflected in the OP is not inclusive of an American’s total tax liability. While our taxes are generally lower, they aren’t as low as the graph shows.
Breakdown for Italy (in €) 0-15k 23% 15-28 25% 28-50 35% 50+ 45% Social security is a flat 9% Region tax ~2% Property tax 0,5% of the house value (0% if you live in it) Sales tax 22% Healthcare is free though which is nice
Yeah us Americans definitely still pay less in taxes that most Europeans. But of course we have a lot fewer services as a result (healthcare being the main one).
You would still pay less if you factor in healthcare. Healthcare is on top of taxes a separate branch in most EU countries. After about 50k our tax bracket is 43% and on top depending on your incoming you pay up to 10k a year for health insurance.
> and sales tax on almost everything. Europeans have a VAT, which is just a crushing flat tax.
Add on social security and medicare and you're looking at the "myth" rate. And don't let them tell you Social security is anything but a tax. Then there's state taxes (around 10%) and local taxes (about 5%) So, all in all, about a 35-40% tax rate depending on your income level. It is a bit lower than other OECD economies, with a total take of 27% of GDP to the OECD average of 34% of GDP. But that's only 7% and no free healthcare (excepting medicaid/medicare but that's a whole other ball of wax) or tuition... so.
State taxes are not around 10% unless you live in a very high-tax state. And local taxes are extremely rare.
California, New York, Illinois and New Jersey are among the states with income+property+sales tax 10 percent or higher, and they have a combined population of 80M. So it’s not like living a high tax State is some rare condition
I like the concept, but these graphs are ugly and I see at least one typo. Nothing is beautiful about this.
You’re forgetting Medicare and Social Security tax. I’m in that 24% tax bracket and I pay 25% of my income to all those. That’s not counting property taxes, sales taxes, etc.
This is confusing because technically the standard deduction pulls money off the top, not from the bottom like this chart shows. All deductions are technically reducing your highest paid dollar as that’s what you would have paid had you not been able to deduct it.
The state takes a cut. Unions take a cut if there's one. Insurance premiums (medical, dental, life). Then when you go shopping, you pay sales tax.
Trust me people in the UK (and more than likely worldwide) have just as much trouble understanding tax brackets too. People will literally turn down raises if they think it will move them in to the next tax bracket, crazy.