You Are NOT Paying 35% in Federal Taxes
On April 15, 2015, a guy named Mitch Wade posted a series of pictures on Facebook regarding taxes, and how much the government steals from the ordinary person. I did not see it in 2015, but it has made its way around my wall this tax season. And let me be honest, it is a TERRIBLE infographic. It just is. Mostly because it is misleading enough that it might as well be lies.
I used to write a personal finance blog. Financial literacy is something that is incredibly important to me. I honestly believe that as a country, we would be in infinitely better shape if we got rid of this taboo on talking about money. How is it possible for people to make good financial decisions if no one has ever talked to them about finances?
I am not going to share Mitch’s pictures here because those are his intellectual property, and I do not have permission to use them. But I am going to post his numbers. And then I am going to post my numbers. And explain the difference between them.
Mitch Wade’s Numbers
Payday: $100
Federal Taxes: $35
State Taxes: $8
Property/Sales Taxes: $9
Health Insurance: $5
Social Security: $11
After tax earnings: $32
Housing/Utilities/Food/Transportation: $30
Leaving him with $2 at the end of every payday/month.
My numbers are my actual numbers (still simplified to $100) so a bit more complicated, but let’s see how they compare
Erin Shanendoah’s Number
Payday: $100
Federal Taxes: $7
State Taxes: $0
Property/Sales Taxes: $0
Insurance (health, life, ltd): $3
Social Security: $6
Medicare: $1.5
Retirement Savings: $7.5
After Tax Earnings: $75
Housing: $31
Utilities: $8
Food: $9.5
Transportation: $4
Medical: $1.5
Pets: $3
Leaving me with $18 at the end of every payday/month.
What is the difference here? Besides the fact that I actually included more categories in my spending and taxes?
Let us start at the top. I make a little over $90k per year. However, my taxable income is about 60% of my adjusted gross income. Which puts me in a roughly 10% tax bracket. And the truth is, I do not even pay that much in federal taxes. I know this because I get a refund every year.
Mitch Wade pays 35% in federal taxes. According to the IRS, in order to be in the 35% tax bracket, your taxable income (remember, mine is only 60% of my actual income) has to be between $411k and $413k. I will also note that a look at the numbers tells you that Warren Buffet only pays about 17% in taxes. So no matter what the tax code says, a good accountant will find a way for your taxable income to be a LOT less than $412k/year.
Now, 41 states and DC also levy state income taxes. Oddly, I have never lived in one of those states. But CA did take 12.3%, so I am not going to argue that number.
Next, Mitch Claims property and sales taxes, with the theory that if you want to own a house or a car, you will pay those. That is true, but incredibly misleading. You see, sales tax is a ONE TIME expense. You do not pay it every month. You pay it once, when you buy the car or house. Now, if you choose to finance the purchase and roll the sales tax into the financing, then you are paying it monthly, but that is your choice.
As for property taxes, if you are a renter, you do not pay separate property tax. Your landlord pays this. Yes, the expense is built into your rent, but look, there is another category for rent! And if you have a mortgage, you are also unlikely to pay your property tax separately. It is built into your mortgage payment, which generally include your principal, interest, taxes, and insurance. Some counties or mortgage companies MIGHT let you pay your property tax separately, but it is not likely. Most often, if you are responsible for paying your property tax on your own (vs the mortgage company paying it), it means you have already paid off your house. At which point, there is not a payment for mortgage.
Mitch also pays 5% for health insurance. I pay 3%, not just for my health insurance, but including my life and long term disability coverage. I also pay this amount for two people, not just one. And adding that second person actually more than doubles the amount I pay, since my employer does not contribute to my spouse’s insurance. And I have what is called a “Cadillac” plan.
However, from the other numbers Mitch posts, it is reasonable to think that he is self-employed, and therefore paying both the employer and individual portion of his health insurance, so 5% maybe fairly accurate.
The Social Security line is where we learn that Mitch is self-employed. He tells us that if we are employed, we pay 5.5% for Social Security, while our employer pays the other 5.5%. If you are getting a monthly paycheck, this is almost certainly you. You are NOT paying 11% in Social Security. However, if you are self-employed, you are.
Mitch does not take into account Medicare. I do not know why. Nor does he appear to be saving for retirement. And that sucks for him, but his numbers say he “cannot afford” to save, right?
Now, my additional costs are considerably more than Mitch’s. In fact, I pay more for my housing (though that does include property tax) than Mitch pays for all of his other monthly expenses.
And poor Mitch only has $2 left over after all of this, while I have $18. However, if we remove the $9 in property/sales taxes that for most people are NOT separate from their housing and transportation costs, and also add back in that $5.50 of Social Security tax that is paid for by your employer, Mitch now has $16.50 left over each month – and that’s quite a bit closer to my $18.
But now, let us look at actual numbers. Remember what I said about how much taxable income you have to have to be in the 35% income bracket? Roughly $412,000/year. And as I mentioned, my taxable income is about 60% of my actual income each year. Now, let us be generous to Mitch and assume that his taxable income is actually 70% of his adjusted gross income. That still puts his yearly income at over $588,500/year. And his monthly income at almost $50,000. So the $2 he has left at the end of the month is $1,000. Granted, that is not much, but he is also apparently paying $15,000/month for his mortgage, car, food, and utilities. Really? How expensive of a house and car do you need?
But even if we leave his income at $412,000/year, Mitch’s monthly income is $34,333. That is right, his MONTHLY taxable income is the same as the YEARLY gross income for a person earning $16.50/hour. Are you certain you still sympathize with Mitch’s plight? (And none of this even gets into his later picture where he tries to claim the government takes 50% in estate taxes. The highest amount the government will ever take is 40%, and that is only on amounts over 5.5million. Only 0.2% of ANY estate pays estate taxes. Or, to makes things simpler, 2 estates out of every 1,000, pay some kind of estate taxes.)
Are we certain we still feel sorry for Mitch and the amount of money he pays in taxes?
I know his numbers “feel” real to a lot of people. But the truth is, if you are reading this blog, you are NOT paying 35% of your income in federal taxes. And you probably are not paying even close to $15,000/month in housing, utility, food, and transportation costs, either. The real numbers actually show me having more real dollars in disposable income each month than Mitch, despite the fact that I make about 1/5 of what he does – or, to put it in his numbers, for every one of his $100 paydays, my payday is $20.
And yet, I have more money left at the end of the month. Perhaps if he is concerned about how little he has left, like the rest of us, he could consider cheaper rent, a less expensive car, cutting the cable package, turning down the heat, etc.
I am not saying it is not hard to make ends meet. It can be. And taxes are part of it, but not the exceptionally large part Mitch claims. At least not for most people. If you really want to know where all your money goes from each paycheck, the first thing you need to do is write it all down. You cannot know what you are spending if you do not track it.
So take a moment. Write the numbers down. Mitch claims 68% of his money goes to taxes and government required insurance. I will bet that your numbers are much closer to the 25% I pay.
