Your Tax Rate is 40%

Check this out. It's an article from Money Central that says your real tax rate is 40%. The details:

Politicians...generally talk about only one tax: the federal income tax, which offers graduated rates from 10% to 35%. Politicians rarely talk about what real people experience: the true maze of taxes and government benefits. If someone put them all together, we could see what our actual tax burden was. We could see who pays at the highest or lowest rates. Discussions of tax policy wouldn't be a waste of time.

Well, two researchers did it.

In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is 40%, give or take a bit. Yes, you read that right: 40%.

Most workers will pay about that much on each dollar of income when all taxes -- federal and state income taxes, sales taxes, taxes for benefit programs, etc. -- are considered.

40%? Yikes! Is it any wonder we hate all these taxes?

I try everything I can to get out of as many taxes as possible. I fully fund my 401k, have IRAs to boot, save for college in 529s, and the like. And, one thing that often goes unnoticed, I don't spend when I don't have to (saving me sales tax in addition to an unneeded purchase.)

Any tips out there for how to get out from under taxes? I'd love to hear some good ones.

Comments

[limeade]

I've found that one of the best ways to avoid taxes is to own investment real estate. Now, don't make this more complicated than it is. I'm not talking about the no money down seminars and things.

Accumulate enough for like 10% down on a property and make sure that the rent covers all the expenses plus some. You can deduct any and all expenses associated with the property including travel. I drove back to Utah from Missouri and got to write off the mileage.

You also get to depreciate the property even though it typically appreciates. The depreciation losses can offset your cash flow gains making them essentially tax free. Plus when you sell, roll it into another property via a 1031 exchange and again pay no capital gains taxes. True they are deferred taxes, but if the property is providing a good income stream, why sell to get equity? Keep rolling into bigger and better investments.

Enough rambling. It's worth looking into, or at least at some point in the future.

-limeade
http://fiscalmusings.blogspot.com

[Easy E]

The best way to get out from under taxes is to remember that we live in a democratic republic. If we don't make noise about the things that we don't like, namely taxes, then nothing will get done about them. We need to make ourselves heard and vote out those who do not want to listen. In my opinion our best bet for a sane tax policy is the Fair Tax. Check it out at www.fairtax.org

[Lord]

Concerning your prior post on hated taxes, it occurred to me, the reason property taxes are hated is they are not dependent on the ability to pay. The retired or even people without regular income raises can be hit hard by them if rate increase caps are not in place. The spotty nature of caps and the spotty nature of price increases dictates some will be greatly vexed while others will be unbothered.

[lorax]

I don't like paying taxes any more than the next person, but...

Let's look at this realistically, tax policy isn't going to change anytime soon. If you want less taxes on the large scale, you have some choices. Cut spending or shift the burden. You can make other people pay for them - shift tax to another group. Right now we aren't paying ENOUGH taxes for our spending. This means all those Gen X and Gen Yers out there will pay disproportionally.

We don't need to be attacking taxes so much as attacking spending. Vote. Or move.

On a personal level, for SS Fica, etc... you're already getting some of this back in terms of benefits. Some get more benefits than others. For actual taxes, you can look for the well-known tax deferments like a 401k. But your tax may actually be higher in the future when we're paying down the boomers' debts.

[leda]

If you think that 40% is the tax rate, think again. Practically everything (with a few exceptions) you buy with that remaining 60% is taxed again at the state level. That probably makes your "real" tax rate more like 70%.

[lorax]

And with the recent federal tax cuts, state taxes went up (property taxes especially). You think you're getting a tax cut, but it's really kinda a shell game.

[Ryan Waggoner]

@leda

The researchers who conducted the study took ALL taxes into account to come up with the 40% figure, not just Federal. From the article:

"Most workers will pay about that much on each dollar of income when all taxes -- federal and state income taxes, sales taxes, taxes for benefit programs, etc. -- are considered."

I find it depressing to think that 40% of my money is disappearing into a black hole. Judging by the way things are currently going, it's not going to get any better anytime soon. Good job, Congress. With the way the world is going, I may someday end up moving to another country with more favorable tax laws.

Also, I definitely agree with limeade. Investment real estate still offers tremendous tax benefits. Take advantage if you can.

[plonkee]

Tax money buys a lot of useful things. Like roads and schools, and enormous great big nuclear weapons (ok we might not actually want the last thing to be useful). Some one has to pay for it all.