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102%?? Piker.

I've had clients who pay 200% and 300% of their taxable income in Federal taxes.

I couldn't really follow his explanation of how he got to the high tax rate. But for my clients with astronomical rates, its pretty simple.

Make $30k or $40k in self-employment income. Pay $15k in itemized deductions. Be married with 3 kids.

Here's the quick calculation:

Self-employment income 40,000
Less 1/2 of SE tax (3,000)
AGI 37,000
Itemized deduct (15,000)
Personal exemptions (18,500) (rounded a bit)
Taxable income 3,500
Income Tax 350
Self-employment tax 6,000
Total tax 6,350

Effective Tax Rate 181% (as a percentage of taxable income)


OK - so I didn't quite get to 200%. But it was a quick example and I got pretty close. I think you get the idea.

--Peter
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Thanks Peter. That helps me understand it. I figured it was something like that.

In other words, it's meaningless and just dramatic media fodder.
Your guy actually paid about 15% tax on his ACTUAL income.

RB
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Hey Peter,

Your post is a real eye opener regarding SE taxes. I just looked at the IRS website http://www.irs.gov/businesses/small/article/0,,id=98846,00.h... and read the following:

Self-Employment Tax Rate

The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011. The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). For self-employment income earned in 2010, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

For both 2010 and 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. Income you make after $106,800 will not be subject to the Social Security tax.

All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either Social Security or railroad retirement (tier 1) tax, or both, and total at least $106,800, do not pay the Social Security part of the self-employment tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the self-employment tax on all your net earnings.

If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.


=============================================================================================

If you look at my bolded part its obvious that $106,800 cap is not fair, favors the wealthy and should be eliminated. I suspect if that were to happen that the total SE tax rate % would be significantly reduced for everyone.

This may seem simplistic, but I believe it would result in a fairer SE tax system. Of course this does not address the wealthy individuals who derive their income solely from capital gains and dividend income.

Any comments?

Rich
Arizona
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If you look at my bolded part its obvious that $106,800 cap is not fair, favors the wealthy and should be eliminated. I suspect if that were to happen that the total SE tax rate % would be significantly reduced for everyone.

This may seem simplistic, but I believe it would result in a fairer SE tax system. Of course this does not address the wealthy individuals who derive their income solely from capital gains and dividend income.
Any comments?
Rich
Arizona

============================
I'd submit that the $106,800 cap is not unfair, in that a person's eventual Social Security benefits are based on his/her lifetime taxable FICA wages, subject to indexing, various adjustments, etc. And those wages are subject to that limit.

While I'm not particularly sympathetic to the Mitt Romney class, I'd acknowledge that they pay far more than their share of the federal income tax burden, even though much of their income is taxed at the 15% cap gain/qualified dividend rate.

And for all the finger-pointing about high-low rates, I still think the most expensive federal tax range is for a self-employed single person who makes between about $84,000-$106,800 after deductions. That's a regular tax rate of 28% plus SE tax, or around 40%, not counting state taxes. And such a person is MUCH less able to afford that, than is Mitt Romney in the 35% bracket (which probably only applies to his speaking fees.)

Bill
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Sure, take off the cap on contributions as long as they take off the cap on benefits for the same people.
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Makes about as much sense as the recent attempt by some on the right to claim credit for 35% corporate tax after they were criticized for only paying 15% capital gains tax. Funny they never thought to claim that until Mitt released his low tax rate.

I don't care about Mitt's rate, BTW. He did it legally. What I will fight forever is the attempt to have a flat tax that would have reduced his rate to near zero by exempting dividends, interest and capital gains. I think that's the real reason some conservatives have suddenly decided the corporate tax should be included in calculating a person's individual tax rate. Of coures, most corportions don't pay anywhere near 35%. That's just for small businesses that don't have the loopholes to get a lower rate.

I worked for 24 years for a multinational company headquartered in NYC that paid zero or near zero corporate tax. While GE did it for a short time, we did it for decades. And it was all legal.

I'd love to see the corporate tax rate for small business reduced but the big corporations will never allow it because they would have to pay a little more if their loopholes were closed. That's politics.
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its obvious that $106,800 cap is not fair, favors the wealthy

No, it doesn't favor the wealthy. That's because benefits are capped. If the cap on income were removed, those who paid SS taxes on a $300,000 income wouldn't get any more in benefits than those who paid SS taxes on $106,800.

--fleg
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ptheland: "102%?? Piker.

I've had clients who pay 200% and 300% of their taxable income in Federal taxes."


Peter, you did not read the link clearly.

From the link in the OP:

"Yet Mr. Ross told me that he paid 102 percent of his taxable income in federal, state and local taxes for 2010. “This does not include real estate taxes, sales taxes and other taxes I paid for 2010.”

Not entirely clear, but it looks like state and local income taxes are included, too.

Regards, JAFO
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stockmover: "If you look at my bolded part its obvious that $106,800 cap is not fair, favors the wealthy and should be eliminated. I suspect if that were to happen that the total SE tax rate % would be significantly reduced for everyone.

This may seem simplistic, but I believe it would result in a fairer SE tax system. Of course this does not address the wealthy individuals who derive their income solely from capital gains and dividend income.

Any comments?"


Are you also increasing the payments to those who pay more?

From http://www.ssa.gov/oact/COLA/piaformula.html

"PIA formula
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2012, or who dies in 2012 before becoming eligible for benefits, his/her PIA will be the sum of:

(a) 90 percent of the first $767 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $767 and through $4,624, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,624.

AIME is capped because of the cap of income on which SS tax is paid.

Mid to high income people already take in the shorts with the inflection points.

Note that 767 * 12 < $9,600 annual income;
that 4624 * 12 < $56,00 annual income: and
that AIME is capped at either 106,800/12 or 110,100/12.

How do your propose to calculate payments due those whom you woudl require to pay more ni taxes?

Regards, JAFO
(in theory, no fan of the income limit)
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How do your propose to calculate payments due those whom you would require to pay more (in) taxes?

Simple ... keep the total SS benefit caps where they are currently but adjusted for inflation. Chances are good that the wealthy don't even need SS benefits in addition to their pensions, golden parachute contracts, not to mention their large asset base at retirement.

You are an attorney correct? If you have been successful, financially astute ... can you honestly say that you would not be able to retire at a normal retirement age (say 65) with the current maximum SS retirement benefits (including COLA) to which you may be entitled ?

Some may see this as a transfer of wealth strategy. However I see as a fairer SS tax system with much lower SS rates across the board for all taxpayers.

Rich
Arizona
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stockmover:

<<<How do your propose to calculate payments due those whom you would require to pay more (in) taxes?>>>

"Simple ... keep the total SS benefit caps where they are currently but adjusted for inflation."

So you would not even recognize the change in AIME?

"Chances are good that the wealthy don't even need SS benefits in addition to their pensions, golden parachute contracts, not to mention their large asset base at retirement."

Please note that per the Tax Foundation

Table 7
Dollar Cut-Off, 1980-2009 (Minimum AGI for tax return to fall into various percentiles; Thresholds not adjusted for inflation)

Year Top 1% Top5% Top 10%
2006 $388,806 $153,542 $108,904
2007 $410,096 $160,041 $113,018
2008 $380,354 $159,619 $113,799
2009 $343,927 $154,643 $112,124

One could be over teh SS limit without even being in the top 10% for AGI.

"You are an attorney correct?"

Yes.

"If you have been successful, financially astute ... can you honestly say that you would not be able to retire at a normal retirement age (say 65) with the current maximum SS retirement benefits (including COLA) to which you may be entitled?

Well, (1) I have not run thsoe numbers and (2) I do not have 35 years of attorney income, so the current maximum to which I authorized is not the same as it will be when I do have 35 years in.

"Some may see this as a transfer of wealth strategy."

SS has always been a wealth transfer mechanism. You are simply making it more obvious and more tilted than it already is.

Regards, JAFO
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