Taxes on a family with $200,000 gross income

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livesoft
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Taxes on a family with $200,000 gross income

Post by livesoft » Mon Aug 01, 2011 6:25 pm

Folks keep asking me how a family can have $200,000 of income and not pay much tax. Hence I present this thread where we can argue, I mean discuss, this.

I'll start with this example.

Married couple, both age 50. Two kids ages 15 and 18.

Wife makes $168,000
Husband makes $22,000
They make $10,000 in qualified dividends from tax-efficient index funds and some of those dividends are foreign, so they get a $600 foreign tax credit.
They have a $3000 capital loss from tax-loss harvesting.
Both are age 50; both contribute $22,000 to their 401(k) plans.
$200,000 - $44,000 - $3,000 = $153,000

They live in a state like Texas where there are no state income taxes.
They pay FICA and medicare taxes of $4486 and $924 or total $5410.
They pay Medicare taxes of $2581 and $319 or total $2900.

They have a kid in college so they get a tuition credit.

They pay $12,000 in mortgage interest, $8.000 in property taxes and donate $8,000 to charity.

So with $200,000 of gross income, Intuit Taxcastersays this family will owe $15,723 in income taxes without the foreign tax credit, so $15,123 with the foreign tax credit applied.

Add in SS/medicare of $5410 + $2900 and the taxes are $23,433 on that $200,000 of income without property tax.

Bottom line:
$200,000 gross income and $23,433 in Income, SS, and Medicare taxes.


[Edit to show the affect of health insurance premiums and FSA contributions shown later in the thread: viewtopic.php?p=1133025#1133025]
New bottom line:
"OK, with that $7,000 of above-the-line reduction in AGI, the income tax is now $13,319 so add in the $8310 of FICA/medicare and you get $21,629 in taxes."
Last edited by livesoft on Wed Aug 03, 2011 3:36 am, edited 1 time in total.
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touchdowntodd
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Post by touchdowntodd » Mon Aug 01, 2011 6:34 pm

agreed ,,

and interesting

even better because i knew before reading you would have the woman making more $$ :lol: :wink:
tryin to do this right... thanks guys

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Post by Puakinekine » Mon Aug 01, 2011 6:38 pm

AMT???

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Re: Taxes on a family with $200,000 gross income

Post by Uninvested » Mon Aug 01, 2011 6:41 pm

livesoft wrote:Folks keep asking me how a family can have $200,000 of income and not pay much tax. Hence I present this thread where we can argue, I mean discuss, this.

I'll start with this example.

Married couple, both age 50. Two kids ages 15 and 18.

Wife makes $168,000
Husband makes $22,000
They make $10,000 in qualified dividends from tax-efficient index funds and some of those dividends are foreign, so they get a $600 foreign tax credit.
They have a $3000 capital loss from tax-loss harvesting.
Both are age 50; both contribute $22,000 to their 401(k) plans.
$200,000 - $44,000 - $3,000 = $153,000

They live in a state like Texas where there are no state income taxes.
They pay FICA and medicare taxes of $4486 and $924 or total $5410.
They pay Medicare taxes of $2581 and $319 or total $2900.

They have a kid in college so they get a tuition credit.

They pay $12,000 in mortgage interest, $8.000 in property taxes and donate $8,000 to charity.

So with $200,000 of gross income, Intuit Taxcastersays this family will owe $15,723 in income taxes without the foreign tax credit, so $15,123 with the foreign tax credit applied.

Add in SS/medicare of $5410 + $2900 and the taxes are $23,433 on that $200,000 of income without property tax.

Bottom line:
$200,000 gross income and $23,433 in Income, SS, and Medicare taxes.


Good thread. It would be highly unusual for somebody to be able to take their entire income (like the husband here) for a 401K deduction. Although if self employed, I think he could in an individual 401K.

Also recognize that a lot of the decrease in taxes is from sources of expenditure otherwise like charity and losses. Also, they are deferring, not avoiding taxes, on 44K of income. So I agree that the current taxes are as you say but the true taxes include deferred taxes on this...

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Post by livesoft » Mon Aug 01, 2011 6:42 pm

Ooops, I left out a couple of things that would reduce their AGI and taxes:
(a) health insurance premiums for their company plan, and
(b) FSA contributions (no FICA on these).



Let's say the $3000 capital loss is a carryover loss from 2008.
Give the husband a little more income and he'll be OK with a $22,000 contribution to the 401(k) plan. My spouse's plan allows employees to contribute up to 90% of their pay as long as they are below the $16,500 or $22,000 limit.
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Post by livesoft » Mon Aug 01, 2011 6:45 pm

Puakinekine wrote:AMT???

There is no AMT in the situation in the OP. Present your own numbers if you like.
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Post by bond50 » Mon Aug 01, 2011 6:56 pm

When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.

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Post by livesoft » Mon Aug 01, 2011 7:06 pm

Let's say the family paid $5000 in health insurance premiums (before tax) and contributed $2000 to an FSA that was used for co-pays, deductibles, contacts, eyeglasses, dental stuff. I'll recalculate the approximate taxes in a moment.

OK, with that $7,000 of above-the-line reduction in AGI, the income tax is now $13,319 so add in the $8310 of FICA/medicare and you get $21,629 in taxes. We're getting awfully close to just 10% in Federal taxes on that $200,000 in income. A little more charity, a little more mortgage interest, maybe deduct sales taxes on Schedule A (does that work for 2011?) and they are there.
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Post by billern » Mon Aug 01, 2011 7:24 pm

bond50 wrote:When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.
These examples are misleading. Money contributed into retirements reduce taxable income now and they defer the income tax to a future year instead of avoiding it.

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Post by livesoft » Mon Aug 01, 2011 7:25 pm

I suppose I need another thread to show how a retiree can withdraw their 401(k) money without paying any taxes on it. :)
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Post by Bob's not my name » Mon Aug 01, 2011 7:26 pm

bond50 wrote:the rich could pay lower tax rates than their secretaries
Hey, just because everybody in government and all the major newspapers and television stations confuse "high income" with "wealthy" doesn't mean we have to do it on bogleheads.

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Post by earlyout » Mon Aug 01, 2011 7:26 pm

You also get to deduct an amount you pay for sales taxes since there is no state income tax.

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Re: Taxes on a family with $200,000 gross income

Post by Grt2bOutdoors » Mon Aug 01, 2011 7:29 pm

livesoft wrote:Folks keep asking me how a family can have $200,000 of income and not pay much tax. Hence I present this thread where we can argue, I mean discuss, this.

I'll start with this example.

Married couple, both age 50. Two kids ages 15 and 18.

Wife makes $168,000
Husband makes $22,000
They make $10,000 in qualified dividends from tax-efficient index funds and some of those dividends are foreign, so they get a $600 foreign tax credit.
They have a $3000 capital loss from tax-loss harvesting.
Both are age 50; both contribute $22,000 to their 401(k) plans.
$200,000 - $44,000 - $3,000 = $153,000

They live in a state like Texas where there are no state income taxes.
They pay FICA and medicare taxes of $4486 and $924 or total $5410.
They pay Medicare taxes of $2581 and $319 or total $2900.

They have a kid in college so they get a tuition credit.

They pay $12,000 in mortgage interest, $8.000 in property taxes and donate $8,000 to charity.

So with $200,000 of gross income, Intuit Taxcastersays this family will owe $15,723 in income taxes without the foreign tax credit, so $15,123 with the foreign tax credit applied.

Add in SS/medicare of $5410 + $2900 and the taxes are $23,433 on that $200,000 of income without property tax.

Bottom line:
$200,000 gross income and $23,433 in Income, SS, and Medicare taxes.



Here's another twist on the above:

Married couple, ages 35 and 33, with one kid 18 in first year of college
State of disbelief: New York
Annual college tuition - $26,000
Annual income - Jane makes $100,000 and Joe adds another $90,000
Annual Dividend income: $10,000
LT Capital Loss of $3,000 - poor investment in Shoreham nuclear vegetable company. :lol:

They live in the burbs so they escape NYC taxes, yet each pay 5% in state tax. FICA and Medicare of $5,850 + $5,265 (this year FICA is 4.2%).

Mortgage interest of $8,000 - they bought a smaller home, but due to ongoing fiscal cookery, property taxes are higher - think Island of Long of $12,000. A cash donation of $8,000 is made annually to various charities, including the local "holy mackarels" organization. :lol:

Medical Insurance of $3,000 - they have a decent group policy
FSA of $1,000 - no need to max this out - same decent health plan has low or no deductibles
So with $200,000 of gross income - Intuit Tax Caster http://turbotax.intuit.com/tax-tools/ca ... taxcaster/

$200,000 - $16,500 - $16,500 - $3,000 = $164,000

has this couple paying $28,398 in Regular Tax plus $740 in AMT for a 28% marginal tax bracket. Add in the $11,115 for Medicare and FICA. Total Tax paid is $40,253.

Considerably more than $30K.

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Post by pshonore » Mon Aug 01, 2011 7:30 pm

removed
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Post by Grt2bOutdoors » Mon Aug 01, 2011 7:32 pm

pshonore wrote:
livesoft wrote:Let's say the family paid $5000 in health insurance premiums (before tax) and contributed $2000 to an FSA that was used for co-pays, deductibles, contacts, eyeglasses, dental stuff. I'll recalculate the approximate taxes in a moment.

Believe only the Health insurance premiums that exceed 7.5% of AGI are deductible, although they could deduct contributions to an HSA if they had an HDHP and were otherwise eligible. That would probably negate the FSA though.


Employers who deduct medical premiums from employees gross incomes can do so on a pre-tax basis.

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Post by 555 » Mon Aug 01, 2011 7:33 pm

I pay into a 401a (8% of salary) then max 403b ($16.5k), 457 ($16.5k) and pay health insurance and FSA in cafeteria plan, and all this is subtracted from gross salary to give Form 1040 Line 7.

We put $10k into his/her IRAs (wife doesn't work) and can deduct whatever part of this we put into Trad IRA.

Then there's standard deductions and some exemptions.

Tax on what's left is close to zero.

But then getting back Retirement Savers Credit, Child Tax Credit, Earned Income Credit: from a high five figure salary I "pay" negative high four figures in taxes.

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Post by Grt2bOutdoors » Mon Aug 01, 2011 7:34 pm

555 wrote:I pay into a 401a (8% of salary) then max 403b ($16.5k), 457 ($16.5k) and pay health insurance and FSA in cafeteria plan, and all this is subtracted from gross salary to give Form 1040 Line 7.

We put $10k into his/her IRAs (wife doesn't work) and can deduct whatever part of this we put into Trad IRA.

Then there's standard deductions and some exemptions.

Tax on what's left is close to zero.

But then getting back Retirement Savers Credit, Child Tax Credit, Earned Income Credit: from a high five figure salary I "pay" negative high four figures in taxes.


Try doing that in a for-profit corporation, unless you were a high paid executive, those plans are not available to the the average Joe.

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Post by MrMiyagi » Mon Aug 01, 2011 7:40 pm

tag for later

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Post by bottlecap » Mon Aug 01, 2011 7:55 pm

I'm not exactly sure what the point of the exercise is, but there are a lot of flaws:

1. Husband can't contribute the full $22,000 to 401k because of (at least) employment taxes;

2. This couple owns a $1.6 million home to get that much of a deduction in real estate taxes - they don't make enough to pay their mortage;

3. This couple has more than $500,000 in after tax savings to get $10,000 in dividends - more if we believe they get a $600 foreign tax credit; and

4. This does not include the additional 7.65% in employment taxes paid on their behalf by their employer.

It looks like their employment taxes are a little low, too, if I'm not mistaken.

Can people reduce their taxes greatly by spending a lot of money to get those deductions? Yes, and GE can do it as well. Is it fair? Hell, no. But that's the price we pay for trying to reward certain behavior, I guess.

JT

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Post by Wagnerjb » Mon Aug 01, 2011 8:01 pm

bond50 wrote:When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.


22% seems awful high to me. Can you share with us the components and dollar amounts? That would help us see what taxes you are paying that the $200K person doesn't pay.

Thanks.
Andy

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Post by FireProof » Mon Aug 01, 2011 8:06 pm

Man, and I'm paying 60K in taxes.

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Post by livesoft » Mon Aug 01, 2011 8:06 pm

bottlecap wrote:I'm not exactly sure what the point of the exercise is, but there are a lot of flaws:

1. Husband can't contribute the full $22,000 to 401k because of (at least) employment taxes; <-- Agree, so what is his minimum gross in order to contribute $22K, $23K+? $24.5K?

2. This couple owns a $1.6 million home to get that much of a deduction in real estate taxes - they don't make enough to pay their mortage; <-- Remember, they live in TX, their home is probably $400K

3. This couple has more than $500,000 in after tax savings to get $10,000 in dividends - more if we believe they get a $600 foreign tax credit; and <-- Remember, they are 50 years old, so have been saving/investing for 30 years and they just bought their first home last year :)

4. This does not include the additional 7.65% in employment taxes paid on their behalf by their employer.

It looks like their employment taxes are a little low, too, if I'm not mistaken. <- Remember the 2% tax break for this year?

Can people reduce their taxes greatly by spending a lot of money to get those deductions? Yes, and GE can do it as well. Is it fair? Hell, no. But that's the price we pay for trying to reward certain behavior, I guess. <- I did not make the deductions out of line at all. I think many folks with this income level pay more in mortgage interest, more in prop taxes, but perhaps do not donate as much to charity.

JT
Last edited by livesoft on Mon Aug 01, 2011 8:15 pm, edited 2 times in total.
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Post by Wagnerjb » Mon Aug 01, 2011 8:07 pm

bottlecap wrote:This couple owns a $1.6 million home to get that much of a deduction in real estate taxes - they don't make enough to pay their mortage;



Not in Texas. Your $300,000 home will generate $8,000 in property taxes here.

3. This couple has more than $500,000 in after tax savings to get $10,000 in dividends


I don't consider that unusual for people making $200,000 per year, especially if they are later in their careers.

Best wishes.
Andy

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Re: Taxes on a family with $200,000 gross income

Post by livesoft » Mon Aug 01, 2011 8:09 pm

GRT2BOUTDOORS wrote:Here's another twist on the above:

Married couple, ages 35 and 33, with one kid 18 in first year of college.

I would say the problem was having your first child when you were 15 years old. :)
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Post by bond50 » Mon Aug 01, 2011 8:14 pm

Wagnerjb wrote:
bond50 wrote:When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.


22% seems awful high to me. Can you share with us the components and dollar amounts? That would help us see what taxes you are paying that the $200K person doesn't pay.
Thanks.


Medicare+SS-$2300
State + Local Income-$2200
Federal Income Tax - $2400
Total - $6900/30k = 23%

I rounded the numbers to the nearest hundred.

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Post by word » Mon Aug 01, 2011 8:22 pm

bottlecap wrote:I'm not exactly sure what the point of the exercise is

The point of this exercise is to argue against some folks in another thread that are disputing the ease at which some are claiming you can pay for college out of normal cash flow. All I've seen proven is that with all the outflows to various areas to get your taxes lower, they've essentially shown that it could be very difficult to do so.

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Post by epilnk » Mon Aug 01, 2011 8:22 pm

bond50 wrote:When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.

Excluding state taxes, livesoft's example is in line with our experience. On a percentage basis we pay less in tax now than we did when we were young and poor, or young and middle income.

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Post by Johm221122 » Mon Aug 01, 2011 8:22 pm

livesoft wrote:I suppose I need another thread to show how a retiree can withdraw their 401(k) money without paying any taxes on it. :)

It would be interesting,I would like to see it so I can get ideas

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Post by mhc » Mon Aug 01, 2011 8:26 pm

I'm not sure about the kind of medical plan you are using for your example, but if it is a high deductible plan, you could throw in another deduction of $6150.

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Post by mikep » Mon Aug 01, 2011 8:29 pm

mhc wrote:I'm not sure about the kind of medical plan you are using for your example, but if it is a high deductible plan, you could throw in another deduction of $6150.


Add another $1000 ($2000 possibly?) if one (both) are over 55 due to HSA catch up limits. If they have a "dental/vision" only FSA through their employer there's another $5000 if kid needs braces or something and they don't want to touch their HSA dollars.

If the wife was a teacher she could max 403b / 457 at 22k each (?) to further reduce the taxes
Last edited by mikep on Mon Aug 01, 2011 8:34 pm, edited 1 time in total.

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Post by livesoft » Mon Aug 01, 2011 8:30 pm

word wrote:
bottlecap wrote:I'm not exactly sure what the point of the exercise is

The point of this exercise is to argue against some folks in another thread that are disputing the ease at which some are claiming you can pay for college out of normal cash flow. All I've seen proven is that with all the outflows to various areas to get your taxes lower, they've essentially shown that it could be very difficult to do so.

I take issue with your conclusion. The outflows are normal expenses. I gave the family a normal mortgage, normal prop taxes, normal FSA and health care expenses, and normal charitable donations.

Suppose the husband made $40K and the wife made corresponding less. Yes, he would pay more FICA/medicare but not exhorbitantly more.

If they had been maxing out retirement plan contributions from early in their careers, they would continue to do so.

Another way to think of this is how much does this family have to spend after what is shown in this thread? Don't forget their health care and most of their housing PITI are included already.
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Post by livesoft » Mon Aug 01, 2011 8:36 pm

mhc wrote:I'm not sure about the kind of medical plan you are using for your example, but if it is a high deductible plan, you could throw in another deduction of $6150.

I just used a plan that I am very familiar with. The cost of health insurance is split between the employer and employee for this family. I only showed the family's premiums.
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Post by word » Mon Aug 01, 2011 8:47 pm

livesoft wrote:
word wrote:
bottlecap wrote:I'm not exactly sure what the point of the exercise is

The point of this exercise is to argue against some folks in another thread that are disputing the ease at which some are claiming you can pay for college out of normal cash flow. All I've seen proven is that with all the outflows to various areas to get your taxes lower, they've essentially shown that it could be very difficult to do so.

I take issue with your conclusion. The outflows are normal expenses. I gave the family a normal mortgage, normal prop taxes, normal FSA and health care expenses, and normal charitable donations.

Suppose the husband made $40K and the wife made corresponding less. Yes, he would pay more FICA/medicare but not exhorbitantly more.

If they had been maxing out retirement plan contributions from early in their careers, they would continue to do so.

Another way to think of this is how much does this family have to spend after what is shown in this thread? Don't forget their health care and most of their housing PITI are included already.
Based on the numbers you proposed it looks like they have in the neighborhood of 105k net.

Texas A&M is about 20k per year (based on their calculator) if the kids want to go out of state I can expect 30-40k per year. This will be pretty painful the year they both go to college. I'm not that familiar with cost of living in texas, for this family would 50k/year seem reasonable?

Doing the number it does seem that you're correct you could pay it out of cash flow, I'm not sure I'd want to though, if something unexpected happens I'm not leaving myself much in the way of leeway.

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Post by livesoft » Mon Aug 01, 2011 8:52 pm

word wrote:Doing the number it does seem that you're correct you could pay it out of cash flow, I'm not sure I'd want to though, if something unexpected happens I'm not leaving myself much in the way of leeway.

If something unexpected happens, they could reduce 401(k) contributions, but would take a tax hit to do so. Or possibly use a 401(k) loan while still contributing to the max.
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Re: Taxes on a family with $200,000 gross income

Post by oragne lovre » Mon Aug 01, 2011 8:58 pm

livesoft wrote:Folks keep asking me how a family can have $200,000 of income and not pay much tax. Hence I present this thread where we can argue, I mean discuss, this.

I'll start with this example.

Married couple, both age 50. Two kids ages 15 and 18.

Wife makes $168,000
Husband makes $22,000
They make $10,000 in qualified dividends from tax-efficient index funds and some of those dividends are foreign, so they get a $600 foreign tax credit.
They have a $3000 capital loss from tax-loss harvesting.
Both are age 50; both contribute $22,000 to their 401(k) plans.
$200,000 - $44,000 - $3,000 = $153,000

They live in a state like Texas where there are no state income taxes.
They pay FICA and medicare taxes of $4486 and $924 or total $5410.
They pay Medicare taxes of $2581 and $319 or total $2900.

They have a kid in college so they get a tuition credit.

They pay $12,000 in mortgage interest, $8.000 in property taxes and donate $8,000 to charity.

So with $200,000 of gross income, Intuit Taxcastersays this family will owe $15,723 in income taxes without the foreign tax credit, so $15,123 with the foreign tax credit applied.

Add in SS/medicare of $5410 + $2900 and the taxes are $23,433 on that $200,000 of income without property tax.

Bottom line:
$200,000 gross income and $23,433 in Income, SS, and Medicare taxes.


Let's move to Texas :)

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Post by livesoft » Mon Aug 01, 2011 8:59 pm

I used to live on Long Island. To get me to move to Texas, they had to pay me a much bigger salary. :)
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Post by Allan » Mon Aug 01, 2011 9:11 pm

How much would a childless, single guy pay who makes $200,000 in W-2 income, rents, and only contributes to an IRA.

Allan

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Post by Wagnerjb » Mon Aug 01, 2011 9:14 pm

bond50 wrote:
Wagnerjb wrote:
bond50 wrote:When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.


22% seems awful high to me. Can you share with us the components and dollar amounts? That would help us see what taxes you are paying that the $200K person doesn't pay.
Thanks.


Medicare+SS-$2300
State + Local Income-$2200
Federal Income Tax - $2400
Total - $6900/30k = 23%

I rounded the numbers to the nearest hundred.


You are comparing a figure which includes state income taxes to Livesoft's figure for Texas, which doesn't have a state income tax. But the state gets their money....through much higher property taxes. If you added property taxes to your comparison, you would have a more valid comparison.

Best wishes.
Andy

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Post by grabiner » Mon Aug 01, 2011 9:16 pm

word wrote:Texas A&M is about 20k per year (based on their calculator) if the kids want to go out of state I can expect 30-40k per year. This will be pretty painful the year they both go to college. I'm not that familiar with cost of living in texas, for this family would 50k/year seem reasonable?


But they have a large taxable stock portfolio, and can liquidate it to pay for college costs (and if they harvested tax losses on their stock portfolio in 2008, they will have enough carryovers to avoid paying any tax on the gains).

Admittedly, they made a mistake; they would have been better off saving for their children's college education in a 529 plan, because that would have made the stock dividends and capital gains on sale completely tax-free.
David Grabiner

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Post by MoneyOCD » Mon Aug 01, 2011 9:16 pm

bond50 wrote:
Wagnerjb wrote:
bond50 wrote:When I earned $30k a year, my total income/FICA taxes amounted to an average rate of 22% of my gross income. You have a family earning $200k paying an average rate of 12%. I never believed it when people said the rich could pay lower tax rates than their secretaries, but maybe I was wrong.


22% seems awful high to me. Can you share with us the components and dollar amounts? That would help us see what taxes you are paying that the $200K person doesn't pay.
Thanks.


Medicare+SS-$2300
State + Local Income-$2200
Federal Income Tax - $2400
Total - $6900/30k = 23%

I rounded the numbers to the nearest hundred.


Looks like we live in the same/similar areas :lol:

Gross Income 2010: 210K
Medicare+SS-$14K
State + Local Income-$16K
Federal Income Tax - $29K
Total - $59K/210k = 28%
lets move to TEXAS!!!!! :twisted:

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Post by livesoft » Mon Aug 01, 2011 9:20 pm

Here's something to help you on your move to Texas:
http://www.youtube.com/watch?v=GMk208Op1Jc
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Post by livesoft » Mon Aug 01, 2011 9:30 pm

grabiner wrote:But they have a large taxable stock portfolio, and can liquidate it to pay for college costs (and if they harvested tax losses on their stock portfolio in 2008, they will have enough carryovers to avoid paying any tax on the gains).

Admittedly, they made a mistake; they would have been better off saving for their children's college education in a 529 plan, because that would have made the stock dividends and capital gains on sale completely tax-free.


But their 529 plans are underwater also because of 2008. At least in a taxable account, they harvested the losses and thus pay no taxes when finally realizing gains. :)
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Re: Taxes on a family with $200,000 gross income

Post by bpp » Mon Aug 01, 2011 10:00 pm

livesoft wrote:So with $200,000 of gross income, Intuit Taxcastersays this family will owe $15,723 in income taxes without the foreign tax credit, so $15,123 with the foreign tax credit applied.


This is cheating. You cannot treat the foreign tax credit as a reduction in tax burden. It is a credit for taxes already paid.

The family paid those taxes, just not to the IRS.

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Post by MWCA » Mon Aug 01, 2011 10:02 pm

Johm221122 wrote:
livesoft wrote:I suppose I need another thread to show how a retiree can withdraw their 401(k) money without paying any taxes on it. :)

It would be interesting,I would like to see it so I can get ideas


Heck yeah would love to see it also!
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Re: Taxes on a family with $200,000 gross income

Post by interplanetjanet » Mon Aug 01, 2011 10:28 pm

livesoft wrote:Folks keep asking me how a family can have $200,000 of income and not pay much tax. Hence I present this thread where we can argue, I mean discuss, this.

Your example seems fine, I'd just like to offer a counterexample from the other end of the spectrum - assuming that by "family", you didn't mean "family with married opposite-sex parents". These figures are pretty close to one tax year of my own from within the past few years:

Single parent with three children, living together fulltime (claiming HOH with dependents):

$190k income
(16.5k) 401k contributions
(4k) medical/cafeteria pretax benefits
(2k) medical FSA
= $167.5k AGI

$7.2k payroll taxes
$34k federal income tax (AMT, no mortgage deduction)
$11.3k state income tax (California)
---------
$52.5k in taxes

Since this point things have changed for me - I now max out both medical and dependant FSAs and pay alimony, which has dropped my tax load some, though obviously at a cost.

Getting either a mortgage or a spouse would probably help this quite a bit, but I'm not ready to do either. :roll:

-janet

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Post by letsgobobby » Mon Aug 01, 2011 11:27 pm

one data point does not a story make. We grossed somewhat but not a ton more than your example and had ballpark similar deductions and paid about $41k in federal income tax and more than $12k in FICA = $53k total. No state income tax, fortunately.

Also your example assumes the 4.2% SS tax rate which is a short-timer tax if ever there was one. Generally 6.2% would be the correct number, raising your example's tax by $2100. I know you know that, just saying.

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Post by bottlecap » Tue Aug 02, 2011 12:16 am

livesoft wrote:
bottlecap wrote:I'm not exactly sure what the point of the exercise is, but there are a lot of flaws:

1. Husband can't contribute the full $22,000 to 401k because of (at least) employment taxes; <-- Agree, so what is his minimum gross in order to contribute $22K, $23K+? $24.5K?

2. This couple owns a $1.6 million home to get that much of a deduction in real estate taxes - they don't make enough to pay their mortage; <-- Remember, they live in TX, their home is probably $400K

3. This couple has more than $500,000 in after tax savings to get $10,000 in dividends - more if we believe they get a $600 foreign tax credit; and <-- Remember, they are 50 years old, so have been saving/investing for 30 years and they just bought their first home last year :)

4. This does not include the additional 7.65% in employment taxes paid on their behalf by their employer.

It looks like their employment taxes are a little low, too, if I'm not mistaken. <- Remember the 2% tax break for this year?

Can people reduce their taxes greatly by spending a lot of money to get those deductions? Yes, and GE can do it as well. Is it fair? Hell, no. But that's the price we pay for trying to reward certain behavior, I guess. <- I did not make the deductions out of line at all. I think many folks with this income level pay more in mortgage interest, more in prop taxes, but perhaps do not donate as much to charity.

JT


Are you sure that you aren't applying the property tax rate to the full assessed value of the home? Typically, it's only applied to 25%, right? The total rate turns out to be more like this: http://www.county.org/resources/countyd ... index.html

They've made $200,000 for the past twenty years? I guess they've paid their fair share of taxes, then. Even if they did, after fully contributing to their retirement account and raising two kids, they must have either lived a poverty level lifestyle or purchased some great stocks to have so much in after tax savings at 50. Don't forget they just put all that money down on the house, too!

I forgot about the rebate - that's where my numbers don't match.

JT

P.S. I can't figure the Texas tax rates out. Do they vary so widely by county? Tennessee is a no income tax state and to have $8,000 in taxes you'd need a $1.2 million home.

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Post by dgm » Tue Aug 02, 2011 12:35 am

Couldn't you just have a retired couple w/ 5 million in decent yielding tax free municipal bonds?

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Post by sergeant » Tue Aug 02, 2011 12:39 am

livesoft wrote:I used to live on Long Island. To get me to move to Texas, they had to pay me a much bigger salary. :)


I was in Austin last month. I enjoyed the Capitol Building and the State Museum. The bbq at Salt Lick was real good. I swore to never visit the place again. Hot, humid and ugly! They could offer me three times my current salary and I wouldn't even have to think about it.
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Post by letsgobobby » Tue Aug 02, 2011 12:50 am

and Austin is one of the least humid and least ugly populated areas of TX.

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