FICA stands for Federal Insurance Contributions Act and consists of a Social Security tax and a Medicare tax. This tax is very important for everyone to understand because so often we only think about federal tax rates and state income tax rates. The FICA tax is a big percentage of your total tax bill, especially for those making under six figures a year.

When I was making big bucks in finance, the tax bill was equally big bucks. The only saving grace was seeing my after tax paycheck increase after the maximum taxable income threshold for Social Security was breached each year. The tax amounts were jolting based on how inefficient the government was and still is with regards to spending our money.

In 2020, employees are required to pay a 6.2% Social Security tax (with their employer matching that payment) on income up to $137,700. Any earnings above that amount are not subject to FICA tax. The FICA maximum income level tends to increase roughly 2% a year due to inflation.

The flip side of this is that as the taxable maximum increases, so does the maximum amount of earnings used by the SSA to calculate retirement benefits.

The maximum monthly Social Security benefit that an individual can receive per month in 2020 is $3,790 for someone who files at age 70. For someone at full retirement age, the maximum amount is $3,011, and for someone aged 62, the maximum amount is $2,265.

Given we have a progressive tax system in America with Alternative Minimum Tax (AMT) and deduction phaseouts, I’ve calculated that the optimal Adjusted Gross Income is roughly $250,000, +/- $50,000. At $250,000, $112,300 of the earnings is free from the 6.2% FICA tax.

Meanwhile, you still get most of your mortgage interest deduction, and only have to pay a slight amount of AMT, depending on the person. A $250,000 income is also high enough to live relatively comfortably in any part of the world.

Some might argue that the Social Security tax is regressive because it caps out. Why shouldn’t rich people pay more? Here’s the thing people might not understand. Social Security benefits cap out based on the maximum amount of Social Security tax contribution as well.

It’s not like someone who is making $500,000, and not having to pay the 6.2% Social Security tax on $381,500 of his earnings is getting extra benefits based off his $500,000 income. He’s just getting the maximum Social Security payout amount when it comes time for him to collect based on the maximum taxable income amount he contributes.

The $500,000 income earner is already paying the highest marginal federal tax rate of 39.6% plus state taxes, if applicable. 

Taxes are our largest ongoing liability. As a result, it behooves us to optimize our taxes as much as possible. 

The good thing about having multiple income streams is the financial security it provides. The bad thing about having multiple sources of income is that taxes are a little more cumbersome to file.

My main income sources come from stock dividends, bond income, real estate rental income, occasional 1099 income, venture debt income, private equity income, and real estate crowdfunding income.

Before I had a family, my old goal was to shield as much income from taxes as legally possible and keep my Adjusted Gross Income to no greater than $200,000 a year. After ~$200,000 per person, the Alternative Minimum Tax used to really start to kick in as deductions were also phased out.

Thanks to lifestyle inflation and the need to support a family, I’ve decided to shoot for and limit our household income up to $350,000. The marriage penalty tax has all but disappeared after the Tax Cuts and Jobs Act was passed in 2017. Therefore, it’s OK to earn more money now. Besides, after $200,000 per person and $350,000 for a family of up to four, I’ve noticed there is no incremental increase in happiness.

The majority of actions to reduce your taxes must take place during the calendar year unless you’re filing as a business entity on a fiscal year. So if you want to pay less taxes, it’s worth setting aside some time during the holidays and wrestle this beast to the ground.

The maximum amount of earnings subject to the 6.2% Social Security payroll tax climbed to a record $132,900 in 2019.

In other words, those lucky enough to have jobs and earn $132,900 or more will have to pay $8,240 a year in Social Security tax. This tax would be fine if Social Security was fully funded, but at the current rate, retired citizens will only get about 70% of the expected payout by 2040.

But of course, you can’t forget about Medicare, which is 1.45% of all income earned. And Medicare doesn’t have an income cap. So the reality is that a $132,900 a year laborer will have to pay $8,240 in Social Security tax plus $1,927 in Medicare tax for a total of $10,167 in 2019. That total taxation number is likely to go up in 2020 and beyond.

If you are “unlucky” enough to be your own boss, you’ve got to pay the 6.2% Social Security tax + 1.45% Medicare tax times two (employer plus employee)! In other words, a self-employed individual making $132,900 will now have to pay over $20,300 a year in Social Security + Medicare tax.

And the great irony is, good luck trying to collect unemployment benefits if your business goes bust.

Out of the estimated 173 million workers who will pay Social Security taxes in 2019, about 12 million (7%) will be paying more. But as I’ve shown you before, anybody who makes between $100,000 – $200,000 and lives in a large city is considered middle class. Therefore, we can conclude the middle class is getting punched in the face even harder.

Don’t forget, there’s also the 0.9% Additional Medicare Tax on employees that went into effect in 2013. If you make more than the below thresholds, you’ve got to pony up 2.35% in Medicare taxes (1.45% standard + 0.9% additional).

The semi good news is if you’re self-employed, the employer Medicare rate stops at 1.45% and is exempt from the additional 0.9% even if you make more than these thresholds. The bad news is these income amounts aren’t being adjusted for inflation, so more and more people are getting subject to the additional 0.9% every year.

• $250,000 for married taxpayers who file jointly.
• $125,000 for married taxpayers who file separately.
• $200,000 for single and all other taxpayers.

John F. Kennedy once said, “Ask not what your country can do for you, ask what you can do for your country.”

I took his message to heart when I came to America as a teenager. As soon as I started my first job out of college, I was proud to pay taxes to help our country thrive.

Starting around age 26, I began paying more than $100,000 in Federal and State income taxes a year. I distinctly remember coming home after a 14-hour day exhausted and finally analyzing my pay stub.

25 percent of my pay went to Federal taxes. 6 percent went to State taxes. 7.65% went to FICA taxes. After contributing to my 401(k), more than half my gross paycheck was gone.

It’s one thing to pay taxes when you’ve got a pleasant job with relatively comfortable hours. It’s another thing to pay lots of taxes when you’re often miserable at work. The desire to be so patriotic like JFK said declines.

Making W2 income is the most inefficient way to earn money. High taxes is why some CEOs gladly accept a $1 salary in exchange for earning stock grants that are taxed at long-term capital gains tax rates.

Let’s look at my three favorite ways to earn money and pay less taxes.

For the past several years I’ve filed a tax extension. A tax extension allows taxpayers to file for a six-month extension if they need more time to prepare their tax returns.

The neat thing is that you can obtain an extension for any reason, so long as you submit Form 4868 electronically or on paper by the April filing deadline.

By filing a tax extension, you’ll also avoid failure-to-file penalties, which can add up to 25% of the tax due. That said, you must still pay your estimated taxes if you owe anything by the April deadline, despite getting an extension.

So why the heck would anybody file an extension? Here are the main reasons.