The income limits before tax deductions start phasing out are ~$260,000 for singles and ~$311,000 for married couples according to the IRS in 2019.
In other words, after making more than $260,000/$311,000, you won't be able to deduct the full amount of your mortgage interest and property taxes. You will also be subjected to the Alternative Minimum Tax (AMT) as well.
In this post, I will demonstrate to you 1) why the government doesn't believe in equality, 2) reasons why you shouldn't get married if you plan to make a high income, and 3) how much you should strive to make every year as an individual or as a married couple.
It's important everybody understands what type of financial limitations the government imposes so that you can optimize your lifestyle.
Income Limits Until Phaseouts Begin
If the government believed in equality, the government would allow married couples to earn up to $260,000 X 2 = $520,000 before deductions start getting phased out.
Unfortunately, the government believes that one spouse should either give up his/her $260,000+ job to earn just $51,000 ($311,000 is the income max for married couples – $260,000 is the income max per individual), or stop working altogether to be a home maker.
Think about the thousands of studious individuals out there who want to be lawyers, doctors, scientists, engineers, financiers, and entrepreneurs. The government is telling them that as a reward for their sacrifice and hard work, it is disqualifying $209,000 of their income from tax deductions (should be $520,000 versus $311,000 actual) because they are married and not single.
Not only is the government discouraging people to enter these much needed professions where there are already shortages of doctors and scientists, the government is also encouraging higher earning people to not get married.
Financial Burdens On Younger Generations
Repercussions of delayed or fewer marriages include fewer children and an aging society which is creating a growing financial burden on younger generations.
Is it not discriminatory to want lower income folks to get married and have more children compared to higher income folks?
There's already the $1,000 child tax credit that goes to families that make less than ~$110,000 a year. Why not extend the $1,000 child tax credit to all couples?
I asked a very senior US Treasury official in the Reagan administration these questions about why the government creates asymmetric rules that affect our personal lives.
He said that “it was in the government's best interest to keep the American public fat, happy, and under control.”
The government, an entity, created by politicians, which passes laws to govern the people, doesn't want to give the nerds, i.e., the high academic achievers and income earners who graduate from top schools, too much power or freedom. Otherwise, the politicians, would cede
Education: Income Limits For Tax Deductions
Here's a look at the latest income limits for tax deductions if you or one of your dependents is a student.
Child Tax Credit: Income Limits For Tax Deductions
Did you know that if you earn less than $2,500 you are ineligible for the child tax credit? I certainly hope anyone raising a child makes a lot more than $2,500. Raising children can be as expensive or cheap as you want it to be. But it does take a lot more than that to care for a child.
In 2021, you can get a tax credit of up to $2,000 per child. If you don't owe any taxes, the child tax credit is refundable, but only up to $1,400 per child. Due to the pandemic, President Biden is trying to temporarily increase the child tax credit to $3,000 per child ages 6-17 and $3,600 for children under the age of 6.
The child tax credit upper income limits for tax deductions are $200,000 for single filers and $400,000 for married filing jointly to get the full child tax credit. This is referring to your modified adjusted gross income (MAGI).
If your MAGI exceeds these thresholds, the child tax credit amount is reduced by 5% for each $1,000 above the threshold. For example, if you are a single taxpayer and your MAGI is $225,000, you’ll receive a total tax credit of $75o.
How To Fight For Equality
The good thing about America is that it's still a free country. Nobody is forcing you to do anything. Therefore, here are the strategies you can consider if you want to get the maximum tax deductions available to you while earning a high income:
- Don't get married. We no longer need a license to have children. Plenty of couples are raising families without being legally married. They don't need government shackles to dictate what they can and cannot do in their personal lives. The marriage penalty tax is very significant. Once you are no longer married, you can now earn up to $516,000 combined while still getting full tax deductions from your mortgage interest and property taxes paid compared to just $310,000. A $200,000+ income differential is significant!
- Don't get married until the end of life. One of the most evil things the government does is take away a person's Social Security benefits if they die unmarried. Benefits don't go to you because you are dead, nor does it go to a surviving significant other if marriage papers aren't signed. Can you imagine paying $400,000 in FICA tax over 40 years only to get no Social Security for you or your loved ones because you didn't sign a marriage document or find love? Shameful! Therefore, for the sake of getting Social Security benefits that are rightfully yours, decide to get married when you know the end is near. It makes me just so mad that the government has such an unfair provision.
- Don't get married if you have your own homes. The maximum amount of mortgage interest indebtedness you can deduct is $1,000,000 as an individual and as a couple. The $1,000,000 includes mortgage on a second home as well that you can deduct. Let's say you have a $1,000,000 mortgage and you meet someone who also owns their home and has a $500,000 mortgage. If you guys get married, the person with a $500,000 mortgage can no longer deduct the mortgage interest from your combined income! If the person you fall in love with also has a $1,000,000 mortgage, then a whopping $1,000,000 in mortgage indebtedness is nullified. Let's say the $1,000,000 mortgage has a 4% interest rate and the person pays a 30% effective tax rate. The person loses out on $12,000 in deductions ($40,000 X 30%) just because they get married!
- Consider getting married if you plan to sell a home with over $250,000 in profits. If one of you owns a home with over $250,000 in profits and plan to consolidate, or if you've been living together in a home as an unmarried couple for years and want to sell the home with over $250,000 in profits, you may want to consider getting married. Married couples can earn up to $500,000 in tax-free profits upon selling a home vs. $250,000 for an individual. It's amazing how logical this rule is versus the others.
- Defer your compensation. Either add up all your various income in an Excel spreadsheet, or input your numbers into a tax software like Turbo Tax and figure out how much you've made so far. If you're already married, then keep an eye on the $310,000 total income figure. The more you are over this amount, the more you should make a case to defer your compensation or ask for your year end bonus to be paid in the following year.
- Max out your 401k, IRA, SEP-IRA, HSA. You have until December 31 to max out your 401k: $18,000 or $24,000 if you're 50 or older. You've also got until next April to max out an IRA, HSA, or SEP-IRA. Your main mission is to reduce your taxable income as much as possible. You need to be self-employed to start a SEP-IRA, for example. I've highlighted in a post how one can theoretically save over $100,000 pre-tax a year by contributing to a 401k and a SEP-IRA. I would contribute to a Roth IRA last because you're paying taxes on a high income already.
- Start a business. Having a business provides you much more income flexibility. For example, let's say you're on track to make $500,000 one year. Given that you know $310,000 is the maximum income level per married couple, you can have your accounts receivable be paid in the new year, front load your expenses by buying that new 15″ Macbook Pro in December vs. February, or pay people extra income to get your income down to $310,000. Helping family is one of the biggest benefits of having your own business.
- Sell your investment losses. You can deduct up to $3,000 a year from your ordinary income from your investment losses. If you have more than $3,000 a year in investment losses, those losses are carried over each year until it is exhausted e.g. lost $8,000 investing in dog meat Twitter means you can deduct $3,000, $3,000, and $2,000 over the next three years.
- Give to charity. This is an easy one. Instead of giving money to an inefficient government, which wants to meddle in your personal lives, why not give to charities you care about?
Care About Inequality
The only people who really care about discriminatory tax policies are individual or couples who make over $258,000 and $310,000 a year, respectively. But even if you don't make such figures, you should still care because discrimination is wrong even if you aren't being discriminated against.
There is always a chance you could make more as an enterprising individual one day. Or perhaps your own children want to bust their butts going to graduate school for years and years to become doctors. Why should they get discriminated against for investing so much time and money to help society?
My Income Tax Journey
I've paid well into the six-figures in taxes in my lifetime and that's just life. The government may not be the most efficient at using tax dollars. But, I know at least some of my tax dollars have helped the less fortunate.
The ideal income for maximum happiness as an individual is $200,000 – $250,000 because you get to make the most without being subjected to tax deduction phaseouts.
Don't Stress About Income Limits For Tax Deductions
You really don't need much more than ~$250,000 per person to be happy. If you can find the love of your life who also makes around $250,000 a year, then all the better. Marriage is not necessary to be happy!
If you currently make more than $250,000 a year while not loving what you do, know that it's OK to make less. $250,000 puts you well within the top 5% of all income earners.
Ultimately, don't stress too much about income limits for tax deductions. Income tax limits for deductions and credits are constantly changing. Your happiness more important than stressing out if you're not fully optimizing your tax situation every single year.
Take a chance at going after your dreams. You will feel incredibly happy no longer paying an exorbitant amount in taxes each year while no longer being assailed for being rich. The middle class is the real first class!
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