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.

Some people have asked me whether they should file a tax extension (tax form 4868) if they can’t afford to pay their tax bill. Unfortunately, being unable to pay your taxes isn’t a reason the government accepts to file an extension. Neither is procrastination.

The only reason I can think of for filing an extension is if there’s a delay in receiving one of your tax documents that will materially alter your taxable income. The most common form that’s sometimes late is the K-1 form from a business partnership, S corp, or trust and estate beneficiary. You should always be able to receive your 1099s and W2s on time.

The K-1 form from my venture debt investment won’t be coming out until the summer. As a result, I’m forced to file an extension because there’s several thousand dollars in pass through income I’ll receive, which requires tax payments. I’m owed refunds of about $1,000 from both Federal and California, so waiting several more months to file isn’t a big deal. If I owed, then I’d still have to pay at least 90% of what I think I owe to avoid penalties. Extension filers have until October 15 to submit their returns. 

The average tax refund is around $1,850 in America according to the IRS for 2018. That’s down 8.5% from the year prior due to Trump’s Tax Cuts And Jobs Act which raised taxes on Middle Class Americans.

Since saving, or not spending $154 a month is difficult for many, I’m OK with such a refund.

With basic savings interest rates around 2.4%, your opportunity cost is not huge.

If we are to compare the average tax refund to the average per capita income in America of $61,000 (~$40,000 after tax), $1,850, or roughly 3% of income is a pretty meaningful number.

Your goal should be to not only max out all your retirement plans (401K/IRA), but to also then save another 20%+ if you’ve been a long time reader of this site.  With 7% out of 20% down, you’ve only got to find a way to save 13% more!  Not bad at all.

There’s a big debate on whether you should have a tax refund at all, given that simply means you overpaid our incredibly inefficient and wasteful government.

Since most people can’t save for cookies, I’m of the opinion that a tax refund is good for most people.

A QUICK MENTAL EXERCISE ON YOUR TAX REFUND

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This post is sponsored by H&R Block.

In 2000, I paid a CPA $500 to file my incredibly simple tax return because I had no idea what I was doing. Granted, I had a lot of trades in 1999 to calculate since it was the dotcom mania back then.

After realizing $500 was expensive, I paid $250 for an H&R Block CPA to do my taxes and show me the ropes for a couple years. After getting comfortable with all the forms and jargon, I started doing my taxes myself using H&R Block’s tax software. They started with a CD-ROM that I had to buy at an electronics retailer, but now everything is online, thank goodness.

I’m probably never going to pay a CPA to do my taxes again because H&R Block’s tax preparation software is so easy to use from home. It will ask you questions about your situation before getting started so it has the right forms for you to fill out. Further, the tax software is always up to date with the latest tax rules.

For those of you who want to have a H&R Block tax professional do your taxes remotely (because who wants to go to an office), they’ve come up with the H&R Block Tax Pro Go program. I tried them for one year because I had questions regarding a couple K-1 filings from my private investments. It was very helpful to talk to a tax professional who inputted the information for me when I was stuck.