Thursday, January 24, 2013

Romney's Taxes vs. my taxes

Since tax season is coming up, I felt inspired to post this bit I had previously posted on Facebook.

I was thinking about how "awful" it is from the revelation that a) Mitt Romney makes millions of dollars a year, and b) he has an effective tax rate of less than 15% (because almost all of his income is from Capital Gains/Dividends not ordinary income). So I decided to take a look at my own finances, what is my effective tax rate?

To begin, let me iterate that I fall into the top 15% of wage earners based on reported AGI in table 488 ofhttp://www.census.gov/compendia/statab/2012/tables/12s0488.pdf . Lest you think that makes me a millionaire, the top 3% make $200,000 or more (so I wouldn't even fit Pres. Obama's definition of millionaire). So I have admitted that I make less than $200K. Now going back on my tax returns to 2001, I averaged my federal taxes (income and payroll), state taxes, and charitable contributions.

Why include payroll taxes (SS and Medicare)? Because in the end it is money going to the federal government to finance our nation. Mr. Romney probably pays nothing into SS and Medicare because (if you look at his return) he has no ordinary income (line 7 Wages, salaries, and tips). At 7.65% (5.65% currently), this is by far the biggest tax bite that workers in America pay (and if you include the employer portion, you can double that number to 15%). So, without refundable credits, you are automatically paying an effective tax rate of 7.65% if your income is primarily derived from ordinary income.

Anyway, my effective federal tax rate remained around 12% from 2001 to 2007. In 2008, it dropped to 7% (this would have been under Bush II). And then in 2009 and 2010 it was down to 6%. So, not only does Mr. Romney pay 2.5X an effective tax rate as me, he also pays about $3 million more than me. Can't say I have anything to complain about there. Besides, my tax return is only about 20 pages, not the 200 that Mr. Romney has to do. And I still do my own taxes, so I am not paying an accountant a few grand.

My state tax (when I lived in a state that has an income tax) has remained fairly stable at 4.5%. I have no desire to try and figure out what Mr. Romney's rate is. Nobody seems to care. They only care about his Buffet rate.

As for charitable contributions, mine have remained between 10% and 15%. This is right in-line with the 13.7% that Mitt donates to charity. So, maybe I should like Romney after all.

Having done my own taxes for my entire life, I would guess that the only people who are paying more than a 15% effective tax rate are those that fall into the 1% (according to IRS statistics those with income of about $350K) that the Occupy movement rails against. The exception would be single or married with two incomes who make between $100K and $350K. But even then, we are still talking about less than 7% of the population. If you make less than $100K and are paying an effective tax rate of more than 15%, you haven't figured out how to do your taxes. Get some advice from an accountant, and follow it.

So, have you ever bothered to figure out what your effective tax rate is? (Hint: It is not as easy as taking your paycheck withholding and dividing it by your income.)

2 comments:

  1. Okay wise guy... so why do people say that millionaries pay a 60% tax rate?

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  2. Because they don't know how to do math. The top marginal rate may be 39% and you may be paying SS of 6% (but only on the first $110000), and you may have state taxes of 10-15%. But once you add in all of your deductions, credits and other whop-de-dos the government gives you, NO ONE is paying 60% (even if they did have 60% deducted from their paycheck).

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