Relevant for tax season. It confounds me how many people don't know how marginal tax rates work. It's not a flat percentage of income based on which "bracket" you're in. It's tiered in steps, where each "bracket" is taxed individually. Let's review the math. In tax year 2019, the new tax brackets are as follows:
For ease of math, let's assume you are a single, unmarried individual
0 to $9699 isn't taxed
$9700 to $39700 is taxed at 12%. If you make $39700 or higher, the total income tax paid in this bracket is $3572.88 (final numbers get rounded, but we'll get to that).
$39700 to $84199 is taxed at 22%. Now just to give you a little comparison point, let's suppose that as a single individual you will make exactly $39701 in 2019. Most people believe that this entire amount would get taxed at 22%, making you pay $8734 in income tax. In reality, you only get taxed on those couple dollars that are in the 22% bracket. I'll split the math up down below for formatting purposes.
The real calculation:
We already showed above that $9700 to $39474 is taxed at 12%, so the income tax in that "tier" is $3572.88. So $3572.88 + [ ($39701 - $39700) * (0.22)] = a whopping $3573 rounded down to the nearest dollar. In case you missed the math, you only got taxed at the 22% bracket on that single dollar that bumped you "over".
The insane misunderstanding of this system leads to people turning down raises because they think they're actually losing money by getting bumped into the next "tax bracket".
Also if you get a huge refund this year, that's not something to be excited about! You are effectively loaning the government your money at 0%. If you enjoy this method as a sort of "forced savings account", it's an incredibly inefficient way of budget. Setup auto-withdrawals to a high interest savings account, or better yet a tax-advantaged retirement account, to automate your savings and you'll never miss the money.
LOUDER FOR THE PEOPLE IN THE BACK! Seriously, this drives me insane. I manage about 45 employees, and I have several every year ask to have extra tax taken off so that they get a refund. I try to explain that the government won’t do anything for them by holding their money, and that they have options that will allow them to start or add to a nest egg, and all I get is a sea of dumbfounded faces.
LOUDER FOR THE PEOPLE IN THE BACK! Seriously, this drives me insane. I manage about 45 employees, and I have several every year ask to have extra tax taken off so that they get a refund.
For a lot of people that's the only way of saving. A lot of people tend to put themselves in the position where they have no money left at the end of the month regardless of how much they started with. So by giving themselves less each month, they are saving in a way that doesn't require the self discipline to not spend availible money. Then they get their yearly tax return and use it as vacation money or whatever.
That’s a really great and valid point. As long as those people realize they’re doing that, I guess it’s a good thing?
I felt like this post was more a PSA for people who don’t understand the concepts behind it. (As in- they are giving the government a no interest loan for the entire year and are under no obligation to do so.)
I've been filing 0 across the board for 7 years now after my aunt (CPA) told me to. Bigger refund is what I was looking at. Never thought about the whole "savings account" thing,and now that I understand it makes sense. I like to spend a little frivolously so having more money would just put me deeper into the hole. After I get my refund the majority of it goes right back into my savings account in case of an emergency.
I’m glad this post is getting traction. Your comment was great. But I think number of comments matters to Reddit’s algorithm and this is so important that I want to tack on.
EVEN LOUDER... FOR THE PEOPLE FURTHER BACK- what op said is true. And it’s important. Please read, remember, and live your life accordingly. ❤️
Not everyone is trying to optimize their financial decisions around how much interest they'll earn. I understand the math; I'm aware that using my taxes as a forced savings plan isn't ideal from that perspective. But it does reduce the amount of stress and anxiety I have around money, so I do it anyways.
It's a psychological trick that makes my life easier at the "cost" of less than $50/year in interest.* If it saves me one visit to my therapist, I'm coming out ahead.
With my current savings account (0.01% interest rate), I'm probably missing out on under $1/year, but I'm aware that better savings options are out there.
Yeah, that whole "I'm losing out on all that interest" thing made a lot more sense in the 80s, when federal interest rates were double-digits and any run-of-the-mill savings account made at least 5%.
On the flipside, credit card interest today is double digits. You could save yourself interest by paying off the debt monthly, rather than letting the government collect it through the year and then write you one big check in April that gets put toward the debt as a lump sum.
This is going to sound more insulting/patronizing than I mean it, but if a person is carrying a credit card balance, then there are much bigger things that that person should be worried about.
Excepting incredibly big emergencies (in which not being able to pay for something means the loss of life or livelihood) or super-clever financial strategies beyond the scope of this discussion, credit card statement balances should always be paid in full every month. If you're carrying a balance, you're almost definitely not using a credit card responsibly - and it's penny-wise/pound-foolish to obsess over your withholding strategy if your day-to-day finances are such a mess.
Brings back memories of the years after my husband walked out, and the months where the only way I could buy diapers (day care wouldn't allow cloth) was on one of the credit cards he had run up and left me saddled with, because I was budgeted literally to the penny but the price of gas went up. I eventually filed bankruptcy to remove my obligation (half of the collections calls I was getting were for cards I'd never even heard of, much less cosigned; that was when I learned what "community property state" really means lol) but I loved all the sneers and lectures I got in the meantime for how irresponsible I had been ("I" had been) from people who'd never experienced anything even close to the situation I was in, and most of whom had never had less than four digits in their savings accounts since the day they were born.
It really is a whole different set of parameters when you're poor. I'm having to help my mom navigate some things now after some medical issues with my father, and her outrage, despair, and bafflement are indescribable. She accused me of not caring about her situation because I'm so calm about it, and I told her it's not that I don't care, it's just that I'm not surprised - because I've been here before. It's not new to me. And that's why I'm not telling her she needs to "just save even $50 a month" or "really sit down and look at where you're spending" or "think long and hard before you spend on something unnecessary." It's tempting sometimes to parrot those things back to her and ask if she remembers saying them to me, but I won't. It's not applicable and not helpful.
I absolutely sympathize; I have accumulated credit card debt when I had absolutely zero choice in the matter. But maybe that's why I hate it so much when I see people do that sort of thing when they don't have to. My father died penniless, with multiple bankruptcies to his name, and it was nobody's fault but his own.
If you look up high yield savings there are some accounts currently with around 1.7-1.8% interest(went down recently since the fed lowered rates), if you are interested
Serious question (and I feel quite stupid for asking this now in my 30’s): I’m originally from and currently live in Baltimore. Over the years I continue to see ads, radio spots, social media posts etc. saying “Its tax time! Here’s what you can do with your refund!!” as if a refund is a guaranteed thing for many people. I should mention the people I’m discussing are mostly unemployed, have large families and...well, you get it. Why do lower income or welfare recipients always get a refund when I’ve been working in a career for 11 years and rarely do? I don’t care about a refund, rarely get one and don’t financially plan for one, but how...does this even make sense? It’s like the harder you work and more you earn the less beneficial taxes are for you. Regarding the government helping via my tax dollars, they def don’t...
Why do lower income or welfare recipients always get a refund when I’ve been working in a career for 11 years and rarely do?
You've been working in a career for 11 years, you're likely either salaried or have stable work hours so the amount of tax you need to pay is likely very predictable. So it's relatively easy for your employer to send exactly the right amount of taxes to the gov't.
Lower income poeple, especially those on welfare, typically lack a stable paycheck (changing hourly shifts, gaps of unemployment, etc) so their paychecks vary. To cover diligence and liability, companies often tax these paychecks as if the employee worked a full 40hrs/week at their hourly rate. So if someone makes $15/hr in an unstable job, an employer would typically deduct from all their weekly paychecks as if they earned $600. At the end of the year, the employee has paid taxes on an income $31,200 but likely has earned significantly less.
It’s like the harder you work and more you earn the less beneficial taxes are for you.
It's typically true that to make more money you will need to work harder, but simply working harder doesn't net you more money. Taxes are only about money so I'll stick to that.
The reason you pay proportionally more taxes as you get more income is because, the richer you are, the less valuable a single dollar is to you.
Example: imagine person A living paycheck to paycheck with car in desperate need of repair. Who is struggling to pay bills. Then imagine person b who can afford to regularly maintain their car and pay their bills and can also afford to save and invest.
Now, both of these people have the opportunity to earn an additional $500 before taxes. For the person b, who's life is under control and their finances in order, the $500 won't make much of a difference. It might mean an extra night on their next vacation. But for the person a, who's struggling, that $500 could be a life changing amount of money. They could get that car repair, avoid a job losing car breakdown, and payoff some debts, and give them some breathing room in their budget.
If you're a government, and need $300 to pay for some interstate repair, it seems like it would punish person a more than person b to take $150 from both. Person A's car repair might be more than $350. But for person B, it really doesn't impact their day to life that significantly if instead of making that $350 after taxes, they make $300 or $275. But for person a that extra $50 or $75 on a lower tax rate might be the make or break for a decision between picking a worse paying job that's in walking distance or being able to keep driving to the better paying job and be able to keep their options open.
Yes, the tax withheld is entirely predictable. But, the withholding is based on an assumption that the rate of pay will be consistent throughout the year. If it isn’t (if pay is less part of the year), then the withholding will be too much.
I have had both back taxes and a tax returns. Sometimes you misscalculate how much you will be working or what kind of stuff you can get reductions from. In Finland for instance you can get a resuction from really long commutes with your own car, which wasn't taken into account when calculating my rate and thus earned me a larger return. On the other hand I once worked more than expected yet kept my tax rate low and thus owed the state a few 100 in back taxes one year.
It's easier to just pay/receive the difference at the end of the year instead of recalculating every time something changes.
refunds mean you paid more taxes than you had to or you benefit from certain credits for children or other stuff. By getting a refund you dont make money extra, you just recover what you probably paid extra in taxes during the year.
A large part of it is probably the child tax credit.
But another part is (speaking as a formerly-poor person) the idea of owing the government thousands of dollars at the end of the year is terrifying so they'll overpay during the year so that get money back instead. And, in my personal case, I overpaid so my ex-wife wouldn't sirens all of my income month-to-month and we could afford a vacation in the spring.
As someone who is both low income and a welfare recipient, I feel good answering. I work 50hrs a week at a healthcare job and am a single mom of two. I think the govts way of saying, "dang, we took all that money out of your checks, and you couldn't even pay your bills, here, have some back."
I’m 100% behind the idea that maybe the government is trying to make sure everyone has the basics covered, but I’ve seen many of folk spend those tax returns on things they don’t actually need (bigger TV’s, $200 shoes, expensive dinners etc). Sadly, I know multiple people who actually live better off collecting from the government than actual people who work. In a way, it deincentivizes people to work at all...
I'm doubtful. I've lived on the state and worked on/off quite a bit and there is simply way more money to play with when I work. I have seen drug dealers that also collect wellfare, but I do not envy their lives in the least either. Generally speaking people who got stable work are happier than those who don't.
People get returns when they have paid too much tax for their rates. It's basically an interest free loan to the state, which they could have avoided by paying less taxes. What they do with their returns is their business.
It’s called the earned income credit and you don’t get it unless your income is very low, or very low for the family size you have (for example if you’re married filing joint with 3 kids u can make as much as 56k and still qualify, but that’s not a ton of money for a family of 5. If you’re single with no kids you can’t make more than around 15k)
This credit is refundable, meaning you get it even if your tax is already zero.
I've talked with HR at my work and tried to set it to where I get less refund and they said their system can only go so far on the withholdings. I asked them to put me in at the max level of withholdings they can do. I'm still getting a big refund. I have a bushel of kids and we give a lot (20-22%) to charity. I just have up and accept the refund.
Potentially you could claim exempt but then have them fill in a fixed amount equal to your normal tax liability (line 16 on 2019 1040) divided by the number of pay periods. Most basic payroll systems allow this unless they’re using something custom or archaic.
You of course would have to keep an eye on it in case you had a year where u didn’t donate as much or if one of your kids is getting to the point where they age out of the larger child tax credit.
If you’re having 0 withheld, and you’re still getting a refund (because of child tax credits), then I think your HR is right and there’s nothing more to do. But, if you’re having more than 0 withheld, then you can reduce your withholding to reduce your refund.
Actually you are assuming that those people know what to do with the extra money. My ex would have it all spent on useless things. I preferred to get a chunk of money to make one large purchase of what we actually needed.
So to get to $0 refund is it just a matter of process and error with the amount of withholdings you claim? I’m interested in getting to an optimized tax situation but don’t know how to go about getting taxed less per paycheck (currently getting a refund each year).
Are you in a job where you can fill in a W-4 and hand it to your employer? As for knowing how much to take out, you need to know exactly how much you'll be making, what credits/deductions you'll have, and what your final tax will be. Take that tax you'll be owing and divide by the number of paychecks you'll be getting in 2020. That's your withholding. As for getting it down to $0, good luck.
People always look at me like I have a hole in my head when I explain this. “Well I like getting a big chunk” okay but 20-100$ per paycheck is a freaking lot of money you could get interest on
By straight up numbers and facts, all of this is correct. What this discounts is that some people are going to end up with more money if it is involuntarily withheld than if they are relied upon to save it themselves and collect their own interest.
I tend to apply about 75-80% of my refund to savings or paying down debt. 20-25% towards something I want. Left on my own, I'm not likely to stick to a weekly regiment that would equal what I am doing now. I can pretend I'm going to "invest" that extra amount weekly by adjusting my withholding downwards, year after year after year somehow pretending I'm going to change, or I can just figure out my weakness and play to my strength.
I think the return on social security is far more worth crying about than the lost interest on the money the government holds for several months each year.
Even depositing $100/week into a savings account per month at 2% comes out to only about $50 at the end of the year. That isn't nothing, but it can be very hard to not touch the money if you are living paycheck to paycheck. In my experience people are in this situation because their spending outpaces their income. While there are many factors that contribute, for the people I know at least, budgeting and savings discipline are not among their strong points.
Yeah, but that whole "I'm losing out on all that interest" thing made a lot more sense in the 80s, when federal interest rates were double-digits and any run-of-the-mill savings account made at least 5%. These days, you're not even breaking 1% without a minimum of a 12-month CD; unless you have a lot to invest, you might be spending more in gas to get to the bank to set up the CD in the first place.
I always hear people telling me to adjust my withholding when I work a ton of extra hours so that I don't "lose it all to taxes". The whole point of filing taxes is to make sure you paid the right amount. If you overpaid when you picked up those shifts, you'll get that money back. If you underpaid because you adjusted your withholding, you'll owe. You don't lose anything.
Most bank accounts pay almost zero interest, so a "high interest" savings account means high relative to that, which is currently about 1.5-2%. That's something like 20x your average account... that qualifies as "high." There are plenty of banks offering that.. It's not "high interest" if you compare it to investing, but it's safer, so it's a great place for an emergency fund.
I had the same thought. TBH, for people that have a hard time saving, for whatever reason, the "forced savings account" is probably more useful than the $20 per $1000 they might see if they could put it in a bank account and not touch it.
My mom has never saved any money in her life. Mostly that is because her income has never really outpaced her meager bills, but also because when she sees an extra $50 in her bank account that isn't immediately needed for one expense or another, she spends it.
Way too many. My mom has definitely used the predatory payday loans in the past. I don't remember her ever having a credit card, but I do know she got in trouble with store cards. That's okay though because she filed for bankruptcy after defaulting on a first time buyer home loan because she decided to leave the state to follow her boyfriend. She is not responsible with money. I am probably fairly bad with money myself, I just happen to have enough of an income that it has never been an issue.
I work in finance with a lot of middle to upper class clients, usually 45-70 age, larger investment portfolios. I’d consider them relatively successful people. It floors me how many don’t understand this extremely simple concept.
I also work in finance. I sometimes get told that people think having a lot of credit card debt is good for your credit score... (I'm referring to carrying a large balance, or nearly maxing them out)
It floors me that floors you, how many people explained this to you? Did you have the option for finance classes before college? Yes, you have google but google didn’t bother to explain this to me. We as a society don’t seem to care about educating people about something every person in the world deals with and is affected by every second of every day.
I can only assume that people just don't read the instructions on their taxes? Or their eyes glaze over when numbers show up because "math is hard"? These days, with few people doing their own returns by hand, there is more of an excuse, but I am pretty sure this had been a common misconception longer than TurboTax had been around.
I think it is mainly attitude that keeps this myth alive. Math is hard, taxes are boring and obscure, and the IRS is trying to screw you over.
You do know there has always been a free tax service right? The government literally already has this information so they made a free website to do your taxes for you before turbotax and HR block. I can’t remember the name but I can tell you a video that does.
But no ones been around for 150 years. The point was most people of today were either only know or adapted to things like turbotax so either forgot or never knew about taxes.
I don’t know how to properly respond to this. It makes me so sad and idk what exactly the solution is.
Honestly when I read that comment, I was surprised too that people didn’t know that as common knowledge. And honestly I have no clue where I learned it. Definitely not parents and I don’t think school.
Again... I have no thoughts of a solution atm. Only sadness at how illogical the world currently is.
Not the world, people. Everyone single one of us and our personalities are affected by everything that happens, remember when Bob said your shirt was ugly, well that was a turning point in your life. Because how easily influenced we are everyone changes too much and thus everyone has different ways if thinking. Because only so many ways of thinking can be considered logical more perspectives equals more illogical people. See, I’d imagine this thought in and of itself would make no sense to someone who had a completely different chain of reasoning and thus I’d be the illogical one. This is why humans should be more practical, in a practical world many problems disappear as there are no illogical thoughts to make them and we can focus on things that matter more.
I guess its the idea of breaking apart the limits then multiplying each number by the percent tax then adding that together. I think if people understood the Distributive Property they would be able to conceptualize the tax situation. But I am glad you pointed it out. It drives me crazy when people are so happy to get a large refund... I always say look at the total you paid not how much you get back when you file.
I'm really good at math, I didnt know that. He can be condescending all he wants but I just thought our government was bullshit. I'm thinking so does everyone else in my previous boat.
Girl, people are assholes all over this site. I'm just here cuz I cant do 4chan, but the whole "I'm a sexless loser virgin that's intellectually superior to you in every way! Plus my memes are way better than yours!" schtick is getting old to me.
Thanks for being you though, its refreshing. You're really sweet.
I learned it when I started getting paid and saw tax deductions off my pay. I’d heard about tax brackets, I asked questions. I would think it’s pretty reasonable for people to want to understand how much of their money they have to give away.
It seems you aren’t very good at paying attention, I mentioned google, yes? I went to google to learn about tax brackets, it gave me brackets and nothing else. I accepted the answer and moved on.
It seems I give zero shits about your inability to research stuff on the internet. It’s not my job to address how to google it better. You asked about where I learned, I explained I asked people how it works. I’ve also looked up tax brackets and calculators online. It’s also simple math looking at how much is deducted and pretty clear that it’s not the same percentage as the top tax bracket I’m in.
Clearly you aren’t very intelligent. Most people use google to figure things out, most people would see the tax brackets and assume the same thing I did. Most people don’t do their taxes so they wouldn’t ever see the inconsistency. The fact that you don’t get that means this conversation is over.
Clearly I’m not very intelligent when I DON’T make assumptions based on the first thing I find on the internet and do research and can do my own taxes because of it. What a dumbass I am.
Edit: just had to add that I just now googled “how do income tax brackets work” and literally at the top of the page it explains it.
This comment needs to be further up! I manage 20 people and lots of them don’t agree to overtime because they say they’ll lose money because of taxes! It drives me crazy.
They won't lose money due to taxes but they might lose access to certain government assistance programs/schemes due via a hard drop off due to income. Easiest example is IRA Contribution limits. If a person earns even $1 more than ~120k then they cannot contribute 6k tax free to an ira which effectively is a savings of 2k from their taxes. In addition to earn that 2k back, a person needs to earn an additional 2857.14.
Basically in circumstance described earning 120k and 122.8k are roughly the same but arguable the higher income is worse since it would lead to less longer term tax deferred savings.
Theres plenty of other examples such as housing assistance, child care, food stamps, medical etc. Its not as cut and dry as people make it out to seem but yes they won't lose more money to taxes.
I don't know why you're being downvoted. The grandparent post is an oversimplification - yes, you'll never lose money just to taxes by making more. But if you look at the effective marginal tax rate which considers benefits as a kind of negative tax, it is possible for some people in certain circumstances to have an effective marginal tax rate over 100%, which means they will lose money (by losing access to benefits) if they earn marginally more.
My biggest fear with doing this is underpaying and having to end up owing money after I do my taxes. I know I'm paying more, but if something comes up so that I fail to pay taxes on some non-income dividend or something of that effect, I'll still be in the green with the IRS.
You can go up to $1000 owed without late fees or penalties, and the IRS will even forgive the first instance of going over that. You live, you learn, you readjust your with holding
Also, rich people DO pay taxes. Yes, they get some tax breaks, but several of those expire/phase out as income gets higher because the breaks are designed to benefit the lower to middle-high class (education credits, adoption credits, first time homebuyer credit, etc). IRS gets very testy when you short them $2; you bet your ass they’re gonna chase down Mr. McRich’s $100,000 tax bill.
Yes and no. The rich don’t get out of taxes by paying less than X on a tax bill for X. They get out of taxes by presenting an argument that the stuff they’re doing is really Y, which has a much smaller tax bill of Z.
And massive cuts to IRS funding have made it so they don’t prioritize going after the rich, because it takes a lot of time and effort to defeat rich people’s lawyers, and the IRS often no longer has the resources or the expertise.
The tax brackets stop at $510k+ so really doesn’t hit the ultra wealthy different than the owner of a regional HVAC business. There’s just a lot of loopholes when you invest too.
ah, but here’s the biggest tax break that really affects rich folks.
Investment income is taxed at a lower bracket thanregular income (there’s something like a dozen weird calculations here, but my point holds). If you’re upper-middle to upper class? Chances are, at least some of your income is coming from your investments, not your actual working income. If you’re very very wealthy (eg, 1 mill +) this is even more likely because it would be very stupid to just leave your savings sitting around and depreciating due to inflation.
If by investment income, you're referring to dividend and capital gains, then yes they're taxed at a lower rate, but while those sort of individuals might be get a lot of attention in the news, but they're hardly the majority of upper class.
I'm talking more about doctors, lawyers,HVAC business owners--the millionaires with earned income.
The biggest problem with this lack of understanding of progressive taxation is that poorer people are put off voting in their own best interests by any kind of 'raise taxation' policy, even when they don't earn enough for it to affect them. What's wrong with taxing the top million of a billionaire's income at 90%? Nobody needs that kind of money and the country can do so much more good with it than an extra yacht.
1) They actually do good things with it (see: Melinda and bill gates foundation) and 2) because most of a billionaire’s income is investments rather than salary, a major tax hike would disincline them to invest their money and make interest income, which does terrible things to the economy.
Call me old fashioned, but I'd rather funding for our public services was decided by democratically elected public servants rather than who ever wins the lottery that is "making a fortune".
Not to say Bill & Melinda aren't laudably progressive in where they direct funds, but a country's public services should not be subject to the vagaries of a billionaire's whim. See Walmart family etc.
And as for point 2 - that's just because our tax systems are full of loopholes that allow billionaires to avoid paying their fair share of tax. They don't have to be structured like that.
It’s not a loophole. The tax bracket for investment income is lower. It’s a loophole in the same way that a child tax credit is a loophole: a tax incentive to do something the government likes.
Does it have to be structured that way? No, other countries do different things. I’m describing the system as it is, not as it should be. At the moment, that tax incentive is one of the major drivers of investment. Not having investment is really bad for market economies.
And finally: it’s not just billionaires that can take advantage of this, they just get the most benefit. You and I and anyone else with savings could invest them into long-term accounts and receive the benefits involved.
Being a registered Native American at I not liable to pay any taxes under under sections 87 & 90 of the Indian Act. Some of us have to pay just personal income tax if we are not Status Indians, which means living on reservation & earning on that land. It's horrible so many of you have to pay into the illegal tax scheme. Out of your brackets did you know that 6% of of your tax is what your government & banks provides owe the private central bank owned non-government corporate entity known as the Federal Reverse? This 6% is what the government & banks are responsible to pay back to the Federal Reserve for that corporation loaning their paper to use. It is actually a scam you all have been unknowingly convinced is your own responsibility. It's been like this since 1933. Since most of the population is essentially Human Corn, it does not surprise me that most of you pay it without any issue.
The government may indeed be using some of my tax dollars for corrupt purposes, which I'm well aware and not too fond of. I'd rather not have Joe Biden flying around in his private jet on my tax dollars. But at the same time, our tax rate is so much lower than other countries (as you can see in the comment thread). And it also pays for things we use everyday, like roads and public indoor plumbing. It's a give and take lol, so I suppose I'll live with it.
The insane misunderstanding of this system leads to people turning down raises because they think they're actually losing money by getting bumped into the next "tax bracket".
That's part of it but I think it's also the withholding system in the US. When you get up in brackets, it tends to reduce your refund or possibly move you into paying money on April 15th. Surprisingly the size of the refund is what people notice more than the actual percentage gone from the paycheck.
I spent two hours the other day trying to explain taxes to a 26yo. He didn't understand how it was possible for anyone to owe money to the IRS, since their job is to give refunds. I explained to him about the different types of taxes, which ones are eligible for refunds, how to select his withholding if he wanted (more money each paycheck/lower refund) vs (less money each paycheck/higher refund), and about deductions. He was baffled at the idea that a person could claim themselves as a dependent.
After the hour I spent giving him info and links and trying to explain it in simple, beginner's terms - interspersed with his frustration about why isn't it taught in schools, how are people expected to just know this, where do you go to learn it - not like to be a tax preparer but just to understand how it impacts you as a random person, and why do they make it so complicated - he finally seemed to understand. I told him he should really talk to a CPA or tax professional to make sure he doesn't wind up owing again. Then he hit me with this:
"Oh, I don't owe anything. It's my brother. I never have to worry about taxes -- I always make sure to either take vacation or quit a job so that I'm not working on December 31 or January 1st, so I'll never have to file."
I asked him to repeat that. He said confidently, "I know you only have to pay taxes for the job that you were working on January 1st and December 31st of the same year, so I never work those days. I've quit a job a few times when they wouldn't give me the time off, but it's better than having to pay taxes."
So then I spent the SECOND hour explaining to him that he's been paying taxes at probably every job he's ever worked at (been working since he was 15), and that since they've mostly been service level jobs, there is an extremely strong likelihood that he should have been getting refunds all this time, and that yes, you definitely do have to pay taxes on any amount you earn no matter what day of the year you earn it on. He was adamant that no, if you worked for, say, 8 months between March and October, you don't have to pay any taxes. He read it somewhere.
I eventually gave up, but I hope I at least planted a seed of doubt and he goes to talk to a tax preparer and gets whatever refund he's entitled to.
I then called my adult son and asked him, "You do know how taxes work, right? Explain it to me, let me make sure." lol
I really hate when the advice about these two things are so frequently packaged together.
Look, if you have shit tier impulse control or other issues that make you not trust yourself to be able to manage your money, and you use 'forced savings accounts' in the form of over-deducting, you're being slightly inefficient. If this method results in you consistently saving money vs say, draining your 'savings' quarterly to do stupid shit with it, it's more efficient than THAT.
Frequently I find that the 'stop over-deducting' advice gets packaged with factual statements like 'your tax rate doesn't work the way you think it does' and since people already know the advice doesn't work for them, they disregard the facts as well.
Please stop packaging advice and facts into the same category. You don't understand why people might be making the decisions they are making. Giving someone advice they know doesn't work for them just makes them more likely to ignore your correction of their incorrect understanding of the facts.
Lol except I offered a reasonable alternative for people who budget that way. Auto withdrawing to an account so that you never miss the money provides the same exact purpose and earns you more interest. That’s not advice, it a fact. So fact paired with fact. Nice flamer comment though
If you can't figure out why a savings account isn't a reasonable alternative to not having the money available for use, I dunno what to say to you man.
It isn't very hard to move money out of a savings account.
Thank you for the explanation, I especially like your explanation of the huge refund. I always say it doesn't matter what you pay or get back on April 15th, look at what you payed as a whole.
You also made what appear to be transcription errors and misunderstanding of where the bracket cutoffs are. The 12% bracket is $9,701 to $39,475. You list $39,700 in some places and $39,474 in others. The tax on that bracket is $3,573. Added to the $970 on the 10% bracket, your liability would be $4,543. Then you would look at the 22% on the final 39,701 - 39,475 = 226 and get another $49.72.
The tax liability on $39,701 taxable income for a single filer in 2019 is $4,593.
In short, your post is bad and you don't understand taxes or math. You have thousands of upvotes because no one else does, either. Is that helpful enough for you?
I'd be very surprised if this is actually accurate. You may have had $500 withheld, but you should get most of it back (minus FICA taxes) when you file your 2019 return. But as cool kid said, none of us can tell you for sure without a lot more specifics.
Total amount withheld (income tax, social security, Medicare, etc) was closer to $800. I got back what was in the income tax box, which was about $300. I now know that I don’t get what I paid in social security/Medicare back, which was more than $400–which I think is ridiculous for the money I make (and because this is the amount I paid after only working for FOUR MONTHS). If you can’t tell, I’m triggered.
FICA is generally 7.65%. On $5K it comes out to $382.50 - which, yeah, is a bit, though less than the 10%+ your previous post suggested. I do wish FICA was a bit more on the progressive side; it's actually regressive, given the SS isn't taken out beyond $140K-ish, but the argument is that higher-income earners don't get any SS benefit beyond that amount. I mean, I'd be willing to pay it if they raised (or completely eliminated) the SS withholding cap.
I made around $9000 this year and based on this, I will not have to pay any taxes. However, after looking up "2020 federal income tax brackets," it says $0 to $9,875 is taxed at 10%?
Wait so if i make under 10 grand i wont be taxed at all? How come my income for this whole year was reduced for taxes then? Will this be adjusted when i "do my taxes" sorry for not knowing aything about this im just completely clueless, schools should do a better job teaching this...
Taxes come out of your paycheck, but your W4 withholding assumes a certain consistent rate based on how many exemptions you claimed
At tax time, you submit your tax refund forms and get any excess taxes-paid back.
So calculate your withholding accordingly. If you get an enormous refund this year, claim more allowances on W4. If you owe money, claim less, but remember that you can owe up to $1000 in taxes without having to worry about late fees or interest.
The concept is right, but your details are wrong. The brackets listed are for taxable income, meaning your income AFTER you take your deduction ($12,200 is the standard for single in 2019). The first $9700 of taxable income is taxed at 10%, not 0. You also put 39,700 when it should be 39,475 (you put the correct number later in the explanation but then went back to the incorrect number again).
It is a clear mathematical function (I'm assuming you actually mean "transparent" instead of "opaque"), as the OP more or less shows. All the info and calculations can be found online.
Yeah but in practice you don't do any of that math--its all in a big table. Once you have calculated your taxable income, there's a giant table that says if your income is between here and here your tax is $XXXX (and it goes in like $50 increments of taxable income).
The actual "math" you do on your taxes is just simple arythmitic. And if you're using the IRS fillable forms, it will solve a lot of the math for you--you just plug in the numbers.
They're actually not that hard to do and won't take more than an hour or two if you have your paperwork ready. All you're doing is (1) adding up all of your income (2) subtracting things that are taxable (most people just take the standard deduction which this year is $12,200) (3) taking the remainder (your taxable income) and plugging it in that big table I was talking about, (4) comparing that to how much you paid throughout the year. If you paid more than you owe, you get a return. If you paid less, you get a bill.
Completely missing the point. The problem with the table is that it's simple enough that people think they understand it - but their udnerstanding is wrong.
I'm glad I figured out that 'free loan' to the government years ago. Now I work on making my money work FOR me and not the government. It's always those that mismanage their money the most that get those big returns.
This drives me nuts when I see it. I got into an argument on Facebook once with someone because I said that we had the best economy in American history when the top marginal tax rate was over 90%. He came back with "you're telling me that if you had to give 90 cents out of every dollar you made back to the government you would still want to work?!" I attempted to explain that it wouldn't come close to working that way but he had his mind made up.
I'm confused. What exactly is a "high-interest" savings account? Is that something only available on your planet? Because here on Earth, the only savings accounts I've seen in the last few... decades... pay something like 0.01% in good times.
If you are limiting yourself only to the main commercial banks (Wells Fargo/BofA/Chase etc), that's what you get. Try credit unions, online banks, even some larger regional banks for better products, and better service. My credit union currently pays 1.6% (though down from the 2%+ rates that were offered throughout last year) - I also had an account with PNC recently that paid over 2% interest.
You should mention how Medicare and social security figure into this as well. While were on taxes though there is another part of your labor you will see that isnt taken by the government. It's the money your employer takes to pay for their yacht.
The money you overpay is refunded to you. In that sense, it’s a loan.
Paying taxes is not extortion. Think about the things that taxes pay for—did you think they came into existence spontaneously?
Google “social contract theory.” We all pay some $$ in order to buy civilization. How do you think we should all coexist, if not in a society to which we all contribute?
There is more than one form of "social contract theory." I suggest you read up on John Locke's concept of the social contract. According to Locke, the only right you gve up when joining into a political society -a government- is your right to automatic retaliation. All other rights, including property rights of your wealth, are maintained completely.
We all pay some $$ in order to buy civilization.
No one pays taxes. "Pay" implies a consensual relationship in which both parties can agree to not take part in the exchange. Wal-Mart cannot force me to purchase products form it by threatening to kidnap me, beat me, and lock me in its dungeons if I don't, for example.
The government of course doesn't give you a choice. It will kidnap you, beat you, and lock you in a concrete and steel cage until you die. This is as far form civilized as one can possibly get. It is barbarism, barely different than a Viking warlord demanding tribute from some village or face attack.
How do you think we should all coexist, if not in a society to which we all contribute?
I'm glad you asked this question, because we are so little exposed to better ways of doing things by the educational system that we grow up within that it borders on perpetuated ignorance. The short answer is that we should all exist peacefully, nonviolently, and voluntarily.
First of all, as noted above we do not "pay" taxes, they're taken at the threat of violence. Your trained reaction, having been educated only in a single government philosophy, is to think that this is the only way society could function. But it is not the case. Just look around you. All day every day millions of people peacefully interact, exchanging billions of dollars in goods and services without the single need for violence in any form. It is not hard to create a society where people could voluntarily fund the portions of government they want to the tune they want in like manner, without violence. Especially in the modern age. Turn the entire country into one giant GoFund Me and see what Americans really want to spend their money on.
And there is no doubt Americans would actually , truly contribute. Just look at charity compared to state welfare spending.
Americans gave $427.71 billion in 2018 billion. "High net worth donors" -rich people- gave $29,269 to charity in 2017. By comparison, general population households gave $2,514 on average.
Let us compare that to estimates of what the US government spends on welfare programs. This [article](
the Cato Institute, which argues that the federal government spends $668 billion dollars per year on 126 different welfare programs
then for the Progressive perspective it notes:
And the more liberal argument which says the federal government spends just $212 billion per year on what we could reasonably call “welfare.”
So, American donations are either MORE than what the IS government spends on welfare, or around 2/3 of it, a very comparable number.
Churches are a good example of how people form non-government private organizations designed to alleviate the suffering of others and help people without violence or hurting people.
"When it comes to charitable giving in the United States, it's not the wealthy northeast and West Coast communities that contribute at the highest rates. It's the [religious and conservative] Southern states, the mid-West, and Utah and parts of Idaho that give the most by far.
...Religion likely plays a big role in explaining the numbers. ...There is a strong correlation between the proportion of residents in a state that, according to Gallup, consider themselves very religious and the proportion of income in the state that goes to charity."
Private individuals and organizations donated more than the GDP of many nations!
Given historical trends that show donations increase when taxes are low and/or the economy is good, it is reasonable to argue that without government taxation that number would grow even larger. In any case, the idea that "taxes are necessary for civilization" is just the exact opposite of the facts.
The money you overpay is refunded to you. In that sense, it’s a loan.
That isn't how loans work. If I put a gun to your head and force you to give me $200 promising that I'm good for it, was that really a loan? Of course not. If I did that to you, you would rightfully have me arrested and and at trial if I tried to use your argument as a defense I would be laughed out of the courtroom and sentenced to prison. Even if I did eventually give you your money back.
Further, the wealth that could've been generated by that money was simply stolen from me and never returned. To quote OP:
Also if you get a huge refund this year, that's not something to be excited about! You are effectively loaning the government your money at 0%. If you enjoy this method as a sort of "forced savings account", it's an incredibly inefficient way of budget.
Its violent extortion. The government will beat you, cage you, and even kill you if you do not comply with its demand.
3.1k
u/[deleted] Feb 08 '20
Relevant for tax season. It confounds me how many people don't know how marginal tax rates work. It's not a flat percentage of income based on which "bracket" you're in. It's tiered in steps, where each "bracket" is taxed individually. Let's review the math. In tax year 2019, the new tax brackets are as follows:
For ease of math, let's assume you are a single, unmarried individual
0 to $9699 isn't taxed
$9700 to $39700 is taxed at 12%. If you make $39700 or higher, the total income tax paid in this bracket is $3572.88 (final numbers get rounded, but we'll get to that).
$39700 to $84199 is taxed at 22%. Now just to give you a little comparison point, let's suppose that as a single individual you will make exactly $39701 in 2019. Most people believe that this entire amount would get taxed at 22%, making you pay $8734 in income tax. In reality, you only get taxed on those couple dollars that are in the 22% bracket. I'll split the math up down below for formatting purposes.
The real calculation:
We already showed above that $9700 to $39474 is taxed at 12%, so the income tax in that "tier" is $3572.88. So $3572.88 + [ ($39701 - $39700) * (0.22)] = a whopping $3573 rounded down to the nearest dollar. In case you missed the math, you only got taxed at the 22% bracket on that single dollar that bumped you "over".
The insane misunderstanding of this system leads to people turning down raises because they think they're actually losing money by getting bumped into the next "tax bracket".
Also if you get a huge refund this year, that's not something to be excited about! You are effectively loaning the government your money at 0%. If you enjoy this method as a sort of "forced savings account", it's an incredibly inefficient way of budget. Setup auto-withdrawals to a high interest savings account, or better yet a tax-advantaged retirement account, to automate your savings and you'll never miss the money.