Tax Penalties For High Income Earners: Net Investment Income, AMT, Medicare

Tax Penalties For High Income Earners

If you are making a six-figure income or seven-figure income, congrats! It's a great achievement to earn over $100,000 a year. However, there are tax penalties for high income earners that you should be aware of.

For example, you must pay a 6.2% Social Security tax for the first $160,200 as of 2023. Plus, 1.45% Medicare tax on unlimited income. This FICA tax income threshold keeps going up every year.

Then you have to pay a 3.8% Net Investment Income Tax on income over $200K for individuals and $250K for married couples. Further, due to tax reform, there is a $10,000 State And Local Income Tax (SALT) cap now. It's getting expensive making more money today!

Tax Rules Must Be Followed

Tax refunds are nice. Unfortunately, I don't always get one. When I first wrote this article, I didn't get one because I didn't pay quarterly estimated taxes despite my freelance income. Why didn't I pay quarterly estimated taxes given there's a likelihood I'd pay a penalty if I did not?

Uncertainty and certainty.

I was uncertain whether I'd freelance for the entire year. My freelance work was a new endeavor. But I enjoyed it so much (and didn't get fired) that I decided to commit to at least a whole year. Furthermore, my consulting client was kind enough to offer stock options. So I had an added incentive to stay for at least the one year cliff.

What I was certain about was earning a higher W2 income since my online business kept growing. When it comes to estimated taxes, my accountant suggests following the safe harbor rules and paying 10% more than the previous year's tax liability.

By doing so, even if you earn a much higher percentage in the current year, you're safe from having to pay penalties and fees of any underpayment. If you're unsure about your business outlook, to be safe, it's advised to pay at least 90% of your prior year's tax liability.

Do Your Own Taxes At Least Once

For over 15 years in a row I've been doing my own taxes with TurboTax. Tax software is so good nowadays. Anybody can and should do their own taxes at least once to understand all the nuances.

You'll learn about all the various forms, tax rates, deductions, credits, and tax laws. Every year I learn something new, and this year is no different. If you need more convincing, read this post on Do Your Own Taxes Or Hire A CPA?

By doing your own taxes, you also begin to naturally get smart about all the hollow proposals from our politicians. You begin to question how never-ending promises will get funded, who's left holding the bag, and how to adjust your lifestyle so you aren't constantly getting mugged.

In this post, I'd like to highlight some various tax penalties you must pay if you earn over ~$200,000 as an individual or ~$250,000 as a married couple. If you're not at such an income level yet, now you've got a healthy income target to shoot for. If you're killing yourself at higher income levels and want to take it down a notch, do it. Your life will get better.

Once again, $200,000 – $250,000 a year proves itself to be the ideal income for maximum happiness.

Additional Taxes For High Income Earners

Have a look at this example hybrid model income earner who makes $177,978 from a day job (W2) and and $57,383 from freelancing (1099).

Additional Medicare Tax

Additional Medicare Tax Rate

As you can tell from the screen shot above, there is a 0.9% additional medicare tax for individuals with AGIs over $200,000 and married couples with AGIs over $250,000.

The reason why $200,000 + $200,000 = $250,000 for married couples and not $400,000 is because the government is either sexist or just too inept to recognize that times are different. Fortunately, most marriage penalty taxes have been abolished.

They believe that two high earning individuals cannot continue to earn their wages once married. One spouse must give up a job to stay at home and do nothing or raise kids. This is even though plenty of couples don't have kids.

In the example above, this person must pay an additional $318 a year in Medicare taxes given he earned $35,361 above $200,000. This isn't a huge amount, but it's still additional taxes that keeps on going up the more you make.

Net Investment Income Tax

Net Investment Income Tax Rate

In the above snapshot, you learn that there's an ADDITIONAL net investment income tax rate of 3.8% for all investment income if you make more than $200,000 as a single individual and $250,000 as a couple. The extra tax bill is $978, meaning this person has investment income of $978 / 3.8% = $25,736.

Net investment income includes dividends and CD interest income. Ideally, you want to earn a perfect $200,000 as an individual. Then make as much passive investment income as possible, especially since it is taxed at a lower rate.

Self-Employment Tax

Self Employment Tax Rate

One of the biggest reasons not to be self-employed is that you have to pay BOTH SIDES of the FICA tax: 15.3%. Employees usually only pay half the 15.3% while the employer pays the other half. What's worse is that if you have to shut your business down, you might not even be able to collect unemployment insurance.

Let's say you make $100,000 consulting for one company and another $100,000 consulting for another company. You will pay Social Security tax on the full $200,000 income even though the maximum taxable income for Social Security is $160,200 in 2023. Every year the maximum income for FICA tax (Social Security + Medicare tax) should go up to account for inflation.

Your client and the government don't know about your other income earning activities until you file. Thankfully, you'll get a Social Security tax refund when you file.

Alternative Minimum Tax

Unlike the additional medicare tax and net investment income tax, there is curiously NO clear threshold as to when AMT strikes. If you have one, please share in the comments below.

Tax Penalties For Making Too Much: AMT

In this example, a person making roughly $250,000 AGI and $180,000 in taxable income after $70,000 in deductions (mortgage interest, property tax, business expenses, pre-tax retirement contribution) still has to pay an AMT amount of $6,107. That's an ass kicking that accounts for 3.4% of the person's taxable income.

If the person had an AGI of $200,000 and taxable income closer to $130,000, the AMT would decline by more than half. Based on plugging in various taxable income numbers, I've come to the conclusion that you've got to make under $100,000 in taxable income to avoid AMT.

Manage Your Income To Manage Your Taxes

There is legislation in place to penalize individuals making over $200,000 a year and married couples making over $250,000 a year. We all know that $200,000 for a household isn't exactly living it up in expensive coastal cities.

It's important to understand the opinions of our politicians on who is considered rich. If Republicans are in office, the “rich income level” tends to go up. In a funny way, Republicans might give society more stress by providing people an extra incentive to make more money.

After Trump's exit, I decided to take things down a notch after Biden got elected. With a larger social safety net and potentially more taxes, it's best to take things easier. This way, you have a higher return on effort.

The Most Tax-Efficient Income Amount To Earn

I'm much happier trying to make and maintain a $200,000 – $300,000 AGI than a $400,000 – $450,000 AGI. There's too much work and stress involved at the $400,000+ level. In fact, I think the best income to live the best life is about $300,000 for a married couple.

I've also noticed there's definitely not much more happiness between the two income levels, no matter what the latest gallup poll says!

With the median household income at roughly $75,000, shooting for a $200,000 individual and $300,000 household income. Don't bother killing yourself to make a lot more money. The government will just tax you more than you can save.

Based on my Financial Samurai income poll, roughly 21% of individual readers make over $200,000 and 26% of married couples make over $250,000, so surely there are some of you who have opinions about these extra taxes!

While you're at it, learn how to pay little to no taxes for the rest of your life. Manage your income to manage how much you owe in taxes. And if you're a smart investor who earns the best types of passive income streams, make sure you perform accurate passive income forecasting too.

Recommendations To Minimize Tax Penalties

Do Your Own Taxes And Save Money

There are many benefits to filing taxes by yourself. TurboTax makes it easier than ever. I've been filing my own taxes for over 15 years and couldn't be happier. And my taxes are complex!

Take a look at their latest offerings. TurboTax offer both free and affordable options to file your own taxes.

Manage Your Finances In One Place

One of the best ways to become financially independent is to get a handle on your finances by signing up with Empower. They are a free online platform which aggregates all your financial accounts in one place. This way, you can see where you can optimize your money.

Before Empower, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet.

Now, I can just log into Empower to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.

The best feature is their Portfolio Fee Analyzer. It runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging!

There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.

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73 thoughts on “Tax Penalties For High Income Earners: Net Investment Income, AMT, Medicare”

  1. Been a shadow reader for a while. First time commenting :)

    Interesting net investment income tax. Haven’t heard of it because haven’t had the need/fear of hearing of it. Don’t think I’ll hit that point for at least 5+ years and who knows what the tax situation will be then. If it stays the same or gets worse, unfortunately that’s also when investment income will be getting to a bigger sum. I did manage to have a $3k tax liability for this tax season for the first time ever. They sure took that money real quick. Funny how refunds take forever.

  2. There is also an additional limitation for “wealthy” taxpayers in the form of the PEASE limitation. This is a reduction of your itemized deductions where you receive a 3% of AGI haircut or a maximum benefit of only 80% of your itemized deduction, whichever is lesser. The threshold for joint filers is $305,050 and $254,200. Similar to the Net Investment Income tax and additional Medicare tax thresholds.

  3. It’s always sad to see the state of affairs in the USA. I feel that there are alternatives, but each seems to have it’s faults. My stance is this-I say that we just simplify what we have and start stripping away some of the benefits and entitlements that the politicians get. I don’t mind the taxes provided that they went into things that benefited me (roads in my area are horrid-Democrats and Republicans tend to be pretty bad in my area about stuff so I am not too keen on the parties or the individuals in them).

  4. I came from nothing as well. I can recall, quite clearly, living with my girlfriend and son in 1992, and being down to my last $16. We also had no health insurance. The economy wasnt yet doing great and I was working 2 part time, menial jobs to pay the rent, utlities, food, car insurance and gas.

    We did the right things though to get ahead. My wife became a CPA and I worked hard in my industry to get the proper certifications and licenses. We were persistent. We owe our success to each other and to a host of people who helped along the way. None of it would have been possible without the willingness to work and not rely on the government. There were times when I was tempted to be perfectly honest.

    I have been on both ends of the spectrum. Going forward, I want to dial it down a bit in a year or 2 at the most. After seeing how hard we got hit this year, it just isn’t going to be worth it to me anymore. 250k will work but only because we have a nice nest egg. Again, being a target has gotten old.

  5. Just to clarify, this $200k-$250k limit applies to married couples as well? Can we avoid this by filing separately after getting married giving each of us our own $200k-$250k limit?

      1. Thanks Sam, I found your blog a couple of weeks ago and it has helped us quite a bit with our financial planning. Your posts on investing were particularly helpful. We really appreciate it.

  6. Sam,

    The answer is to make a high income overseas. There is no medicare tax and no social security taxes. You also get a tax exclusion on the first $100K of income or so, and no state taxes. Also, you can offset your foreign taxes paid against your US tax liability. Not sure about the investment income supertax, I’ll have to update you on that after doing my taxes this weekend.


      1. So I did my 2014 taxes… the dividend income tax rate was surprisingly low, not sure if it’s because I am paying high taxes overseas and am able to leverage these foreign tax credits against my dividend income or not… anyway it seems to be a good deal.


        1. To clarify, it looks like I got hit with the 3.8% net investment income tax but that was the extent of the hit on the dividend income… interesting.

  7. So as a landlord would you reject a tennant based on moral conviction? If a very qualified KKK member wanted to rent a home would you honestly allow him to rent even though his worldview is horrifying and morally wrong? How can you truly be called tolerant if you boycott the intolerant?

    1. It’s a good point. And I understand the other side of the bill and to protect one’s religious beliefs.

      “Tolerance is a two way street.”

      The fact of the matter is, discrimination is everywhere. We can do what we want, and we will face the repercussions accordingly.

      Why the hell do we need another government law to tell us how to act and think?

  8. Stefanie @ The Broke and Beautiful Life

    The proximity of that single 200k to coupled 250k really irks me. We need an update!

    My taxes has always been confusing as I’ve done so much work in various states for theatre and now there’s all this freelance income. I keep excellent records though, which is a total lifesaver.

  9. A question on the net investment income tax. Say I am a medical professional with an income of $199k. I also have a stock portfolio that pays $100k/year in dividends. If I decide to pick up an extra shift worth $1500 (putting my income at $200,500) would I then have to pay an extra 3.8% on all my dividend income? If so, by working that shift I stand to gain no net compensation and instead end up $2300 poorer than if I do not work it.

    1. Above Average Black

      Reading through some of these posts, the problems of the top 3 percent of the country is pretty comical. :)

      1. Delivery Boy

        AAB, I just reread all the posts. I know it sounds a little a bizarre and privileged. But please know I came from nothing! I was 12 years old when I started working (hence Delivery Boy!) delivering papers and making tiny amounts of money. A quarter is still meaningful money to me!! I would guess most of us reading this and commenting have similar stories. We are blessed now making much more. We just want to make sure we are good stewards of our money and be in the best position to contribute to society.

      2. AAB,
        I’m not trying to gain sympathy, I’m happy with my situation. I’m just trying to figure out if it is really worth it to work harder when I will not benefit financially, or even worse, have to pay the government for making the choice to work harder. I like my job, but not enough to spend 24 hours at the hospital in return for a $2300 fine from the government. This article was really helpful to me because it helped me realize that it is worth it to work hard and produce up to a certain point, after which there is not only a point of diminishing returns, but an actual penalty for that extra production. I could expand my practice to see more patients. I would need to hire more nurses, technicians and admin staff. I would be creating jobs in my community and be providing a needed service, however it would involve me risking some hard earned capital. I would only want to put in the extra work and risk my capital if there was a clear upside. The current tax policy gives me no incentive to do that, which hurts the overall economy. But, as this article demonstrates, it is pretty easy to be happy on $200k/year. Just don’t try to make more, it’s not worth it.

    2. I sure hope that is not true.

      In your example, with 199K income and 100K dividend, you will be subject to Net investment income tax on 99K since that is the portion above 200K.
      With the added income at 200500, all 100K will be subject to the net investment income tax.

    3. You would think there is a gradual taxation hit as income rises. But what I can tell, once you get to that $200k level, the net investment income tax kicks in for everything.

      Manage your income to manage your taxes!

  10. Sam,

    Good post and great comments section! For the last 5 years, we have been part of the vilified, making over 300K. The last 2 years and this year will be over 400K. I do well in the corp world ( with a ton of stress and bs) while my wife’s own business has grown quickly.

    With all the taxes and the constant fight against lifestyle inflation, I am coming to a conclusion that making more than 250k isn’t worth it as long as you have saved money. Further, I am already tired of feeling like a target.

    I know we are not in a recession currently but our growth is sluggish and below where it should be. I honestly believe that the incentive for those of us in the upper middle class is to not make “too much”. Clearly, this hurts our economy. Why can’t our politicians see this?

    1. Most people, including myself, would love to make much higher income even if it meant paying the current maximum tax rate. I would still take a higher income even if the current max rate jumped from 39.6 to 70 percent for example.

        1. From experience and let me elaborate my earlier comment. As you mention, if I’m earning 200k annually already, then earning 2x or 3x more where l would have to sacrifice my health, take on much greater stress to do something I don’t really enjoy all that much to make that additional income isn’t worth it at all regardless of the tax rate. However, if I got lucky on some investments or some money manager with great investment skills managed my money where I’d get far larger income than I would on my own, tax rate wouldn’t be a factor. I’d still pay more in tax and higher rate to make more money.

    2. Well, the more you make, the more power and freedom you can have, and the more you will see how much the government takes and how much bullshit government rhetoric there is.

      If the government can keep people at a certain income limit, there’s an easier chance to gain votes, stay in power, and control the masses.

      I’ve spoken to very senior government officials during my career in finance and the public will be shocked by how low politicians look of people behind closed doors, “lemmings,” as one politician said. “But necessary lemmings.”

      Like the owner of the Clippers who said racists things towards black people while employing black people, our politicians have two faces when nobody is listening.

      Trust me on this folks!

      1. No surprises there. People in positions of power in any field don’t get to those positions without being ruthless and believing they’re superior to most people

    3. Interesting. Wife and I brought more than 470k this year, with a tax liability of ~150k for both federal and state. While it sucks to see about a third of our income go away, we still got to keep about ~300k of that (20k of interest/dividends/capital gains), about 2/3 of which is saved.

      I don’t see any scenario in which making 250k would be better.

      Maybe that’s because our jobs are not that stressful and we enjoy them?

  11. Ryan Schaap

    When the AMT kicks in has as much to do with disallowed deductions as it does with income. The only deductions most people have that are allowed for AMT purposes are the interest on their primary residence and charitable contributions. As a result, people with large deductions for state income taxes, car license fees, and property taxes will be subject to the AMT much sooner than people that do not have large deductions for these items. As a result, people in high tax states get hit much harder by the AMT than people in states without an income tax. Under the right circumstances, you can certainly owe the AMT with a taxable income less than $100,000, but that figure is a good starting point as a rule of thumb.

    For a married joint filer, the AMT exemption is currently $82,100 and begins to phase out at AMT income of $156,500. During the phaseout, the effective tax rate imposed by the AMT increase 25% from a rate of 28% to 35% (because the exemption is reduced by $1 for each additional $4 in income). The phaseout ends at $484,900 and the AMT tax rate then reverts back to 28%. Until the recent increase in the top regular tax rate from 35%, I always found it ingenious how the government found a way to tax households earning between $200,000 and $500,000, at the exact same marginal rate as the highest earners with very few people knowing or understanding that is what the AMT does. I think Sam is right about the $200,000 income level being ideal from a tax efficiency perspective, but if you do earn more and live in a high tax state, you should shoot for at least $750,000 so you effectively get some AMT relief on the top end of your income.

  12. Delivery Boy

    Sam, your product on this site just keeps getting better. A couple of observations. First, I agree with you that everyone needs to prepare their own taxes. Maybe not every year, but at least once every few years. There is no excuse not to do so with today’s software. I do my own every year. It forces you to understand your household’s cash flow, how different sources of income is taxed, and how moving through various income levels affects net, realized money. Second, and as part of this, I agree that the happiness level is achieved at the $200,000 to $250,000 mark. I have been above and below. The stress level/tax rate above creates a staggering level of diminishing returns. You are exchanging your finite bank of time in return for a reducing sum of money. It is not worth it. By the same token, stress below this level takes the form of worry about not meeting your goals, such as savings targets, college expenses for your children, etc. If you cannot survive on $15,000 to $20,000 a month, you are doing something wrong and need to evaluate your priorities and objectives.

  13. With marriage, babies, job changes, etc. it’s been a crazy few years for us to the point where I’ve stopped trying to manage my taxes. I try to make sure my withholding is enough to make sure I won’t be penalized for underpayment and then see where the chips fall come April.

    Lately it’s meant writing a large check to the government but I’m ok with that.

    As most said, it would be nice if they spent it more wisely…

  14. Sam, I don’t mean to digress, but whenever the topic of high income taxes comes up there is inevitably an attack on the part of the population that receives government assistance in the form of welfare, food stamps, etc. Just today I was reading an article about how the family of the Boston marathon bombers received public assistance as legal residents. I know nothing about how these programs work, who can benefit from it, etc. Have you ever considered writing a post about this?

  15. ParatrooperJJ

    Not quite sure what the RRFA acts have to do w/ high earner taxation but the polls show overwhelmingly that Americans support RRFA.

    1. Do the polls say that? I didn’t realize this. I wouldn’t be surprised if the RRFA was repealed in Indiana.

      The reason why Mitt Romney lost was because his campaign didn’t reflect enough of America. Just look at his concession speech and people in his crowd. Everybody looked the same. He ostracized the middle class, and he couldn’t relate to the majority of people other than his own.

      To win America is to recognize that Americans come from all different types of backgrounds. It’s so simple, yet it’s as if some campaign managers or runners have blinders on.

      1. Bush’s supporters looked similar to Romney and he won in 2004. Romney lost because he was just a bad candidate, a Mormon, and going against an incumbent with a rising economy. 2016 should be interesting.

  16. Honestly, it’s why I’m going to start voting Republican [unless the Republican party nominates neo-Nazis or Tea Party crazies.

    1. Why not experiment with your lifestyle and just make less than $200/$250k?

      I’ve done this experiment now for two tax cycles and life is MUCH better than at $400k+ income levels. Less stress, anxiety, frustration. You’re also not a target for politicians and other people any more. You become a part of the majority, the middle class, the best class!

      1. Because pulling a few levers is much less daunting then trying to engineer my wife and my compensation packages in corporate America. If I had that power readily available, I would.

        I like your thinking along the ‘Laffer Curve’ logic, however.

  17. earlyretired

    Nice post.

    A significant reason I decided to retire early is taxes. When I grew up in the “Reagan” era, I was taught that being successful was a good thing for society. Every American who worked a good job, started a business, ran a big whatever, was making our society stronger.

    A stronger society allows us to better care for the bottom 2% or 3% of our peers. These are the people who because of some legitimate issue, cannot provide for themselves. These people need to be taken care of by the rest of us, and there is much gratitude on both sides for doing so. But when I read that we now have over 50 million people exploiting the system for food stamps, I just shake my head.

    I see these people every day. While there is a small fraction that legitimately needs the help, the majority simply “chooses” to stick their hand out rather than earn the money on their own. (The phrase I’ve heard them say many times is “why bother?”)

    In this new world order under the Liberal regime, everything is different. I found myself vilified and targeted for being a CEO. I provided 1000’s of good jobs in my last role, travelled endlessly to places I didn’t want to go, slept rarely, only to be told by the person sitting in our president’s chair that I needed to pay my fair share.

    This is a tough pill to swallow when the top 5% of earners pays 58% of Federal taxes. Unless you like paying for Nancy Pelosi’s private jet (paid 100% by taxpayers), its better to just quit and tell her to pay for her own jet.

    Given the new “rules”, I agree with your premise that its pointless to make over $200K. My real concern however is how damaging this type of thinking is to our long-term economic interests as a nation.

    I’m still unclear on the “Obama-liberal-democrat’s” goal. Is it simply a narcissistic thirst for personal power that drives decisions to wage class warfare rather than bring us together as a nation? Or is it something more sinister?

    My only advice if this trend continues is to not have children.

    1. How do you feel about the corporate welfare addicts who benefit from the existing tax policies, lobby government for tax breaks, and send American jobs offshore while greatly benefiting from services such as U.S. military overseas the government provides that makes their existence as a multinational possible? Why blame the poorest people in society for taking advantage of the system when the real problems are due to the big shots and the influence they buy in government?

      1. earlyretired

        I’m not blaming the poor for intelligently deciding it’s a lot easier to not work. I’m blaming our government for making that the correct answer. (E.g. “Let me be clear, if you vote for me, I will take money from those who earn it, and give it to those who don’t”)

        As for sending American jobs offshore, I personally dealt with an example of this. We had a large factory in LA. We could build the same product in Brazil. After the last layer of government costs were piled on by the Obama regime, we couldn’t hold out any longer. We had to move production to Brazil. The cost differential was just too great. It wasn’t so much the difference in wages. It was the cost of jumping through all the government’s pointless taxes and regulations that drove the final decision. What would you do if faced with the same decision? Would you let your competition operate in Brazil for half the cost?

        But the real answer to your question is to not fall for Obama’s class warfare game.

        Rich people aren’t evil. Poor people aren’t evil. Businesses aren’t evil. The only thing evil is pitting one American against another in order to get elected.

        We simply need to eradicate this type of rhetoric and reduce the size of government. If we didn’t have an uncontrolled bureaucracy running up a $20T debt, we wouldn’t have to figure out whom to vilify in order to get someone to pay for it.

        1. Most people would agree that we need to reduce govt spending and lower taxes, but Obama, republicans, democrats elected officials won’t do it. The only differences are they spend tax dollars on different areas. Reagan and Bush both went on spending sprees while in office too. Unfortunately there aren’t any easy answers until enough people just become so fed up, that they actually proactively force change rather than just voicing their displeasure verbally.

    2. Your take on the 50 million people on food stamps is borderline offensive. Have you actually looked at the requirements to qualify for food stamps? You need to have a gross monthly income of $1265 (that’s an annual salary of less than $25k for you) for a household of 1, or $2,584 for a household of 4. And then you qualify for $194 or $649 worth of assistance, respectively. These aren’t exactly levels of assistance any human being with their self interest in mind would strive for. Perhaps you should consider the fact that so many people ARE relying on food stamps and qualify for such assistance due to the overwhelming stagnation of wages of the past few decades? Plenty of people do work full time (or as close to it as they can based on their employers wanting to keep them classified as part time workers) and still make such little money that they need assistance. All the while, companies make record profits and the C Suite keeps taking more lucrative compensation packages.

      It’s not the 50 million people that are milking the system – the Waltons and other leaders of corporate America are far more responsible for it, in paying their employees so little and passing the burden on to government assistance programs to keep their workers fed. I won’t even get started on your dreams of the Reagan era…

      1. earlyretired

        People tend to view the world through one of two lenses.

        Some believe that someone, other than themselves (gov’t, employer, etc) is in charge of their lives.

        Others believe that they are fully responsible for their own lives.

        I grew up very poor. I met way too many people in those years that viewed the world through the first lens (e.g. someone else is responsible, or to blame, for your lives).

        I’ve seen first hand that this way of perceiving the world leaves you ripe for being exploited. It leaves you believing that the only life available to you is to get a job at Wallmart. (as you describe in your example).

        And if you don’t like what Walmart is paying, rather than solving the problem by getting another job, starting a business, getting some training, joining the military, etc, you are supposed to complain. Find someone to blame other than yourself. And who better in your example than the evil C-level suite executives.

        I am eternally grateful that I had someone in my formative years explain this to me.

        Obama, and his kind, tend to prey on these types of people. (e.g. “Let me be clear, if you vote for me, I will punish the rich man, take his money, and give it to you”).

        This works great for getting elected. But it wreaks havoc on an economy. (e.g. $20T in debt).

        The only way out of this mess is to change our culture. If you are an adult with influence over anyone, please don’t fall for the class warfare trap.

        If someone doesn’t like what their employer is paying, encourage them to come up with their own plan to move on. Ironically, if everyone did this, that evil employer will have no choice but to raise wages to attract employees in a free market. (Kinda funny how that works, isn’t it?)

        This is what worked for me. I could have accepted my early trajectory of the food stamp lifestyle. And it’s not just “free” food. It’s free housing (section 8), free utilities, free health insurance, free car, free Obama-phone, etc

        But ironically after you add up all that free stuff, it doesn’t make you free. It makes you dependent.

        So be careful when you find it offensive that I am disgusted to find 50 million people on food stamps. While there are a few who actually don’t have a choice, the great majority do. And it’s about time we let them in on the secret.

        Please don’t hold these people back with your pity. Don’t fall for politicians class warfare BS. Just help someone see our country for what it was carefully designed by our founders to be….A place that reflects the sometimes harsh laws of the Universe…A place where the extent of your ultimate success is directly proportional to the misery incurred along the way…

        1. Very good point about the 2 views of the world. Its so prevalent. I believe the latter view is what makes America great and what will keep it strong. The former view I believe leads to complacency and weak countries. It keeps 3rd world countries from developing and degrades the 1st world countries from their former glory. America needs a resurgence of work ethic and can-do attitude.

        2. I believe that I’m responsible for my own life and yet I also believe that external forces have a great deal to do with my financial success or stability.

          We should not dismiss all the external factors that make it much, much easier for some to achieve success than others. To name a few:

          Family – If you do not grow up with family support and love, you’re already handicapped at start.

          Socio-Economic Status – Whether your family is poor, lower middle class,, upper middles class or wealthy will have a huge effect on your education and access to other opportunities.

          Abilities – Even if two children are born to the same parents in the same household and experience many of the same things, their ability to react to these challenges will vary greatly. Abilities that are very necessary for success such as intelligence, determination, will-power are not doled out in equal measure. Some people find it hard to overcome rough circumstances than others.

          Other external factors: Race, Gender, Height, Weight, Health, Appearance / Good looks.

          It’s sad that we often view people who don’t make enough money simply as a burden to society. Even if a person is getting government assistance and/or earning low wages, he/she can contribute to society in other non-financial ways.

          I don’t think class warfare leads to any productive results, but there are real issues related to income stagnation that are creating larger and larger gaps between the top and bottom. Even within the middle-class, there are huge differences in income.

          1. earlyretired

            We aren’t all identical, so what. Not an item on your list of excuses that we can’t both come up with a gazillion examples of people with/without those trait(s) who achieved great success (or not). Whatever your excuse items happen to be, my advice is get over it. I did.

            As for it being “sad”, if someone chooses to be poor for whatever reason, they are not a burden to society until they vote for politicians that steal the fruits of other people’s labor.

            Full circle to Sam’s post on taxes being so high once you reach $200K that its pointless to keep working.

            1. I’m not really focusing on choosing to be poor. I am more concerned about the “every man/woman for himself” attitude that ultimately hurts society as a whole. Aren’t the top dogs “stealing” fruits of labor of employees below them if they continue to keep all the profits to themselves during good times, laying off during bad times even if they drive the business down, and not giving adequate wage increases to all the employees who do work hard for the company? This is a hard issue to tackle, or maybe impossible, but if the sky is the limit for CEO salaries while those in the middle stay stagnant, it creates a bigger and bigger gap between haves and have-nots, when in reality, more people could prosper if they didn’t want to keep all the $ at the top.

              Bpttom Line: This “greed is good” mentality is causing salary inequities that hurt the hard-working and productive middle class. Even those at the top need the support of people below.

          2. Agreed on all points, thanks for your response. But sadly, a lost cause in this case. I’m happy the original poster was able to overcome significant adversities in his life and make a good living for himself, not much more I could hope for from him.

          3. I grew up poor as well (father was just joining the middle class by the time I was 18). My grandmother was a middle school drop out. I dropped out of college at 19. I went and got a job at a retail store making $7/hr when min wage was $5.25. 2 years later I was making 14.5/hr. 3 years later I was making $20/hr. 13 years later I make nearly $100/hr (equiv in salary/bonus/stock). I expect that in another 13 years I’ll probably be making $200/hr. How? I never let my situation define me. I worked my butt off. I asked for extra things to do from my bosses. I asked people how the industry worked and how I could move up. I eventually went back to get a BS in Economics (while working full time) and then an MBA (again, while working full time). While my friends were out partying, I was going the extra distance. While my cousin was out getting knocked up by 3 different guys and hasn’t worked a day in her life, I was bettering myself. While my brother decided to live a shady life (stealing, drugs, etc), I was taking some risks and working long hours. While those people are work were complaining about having to do something that wasn’t in their job description, I was begging my bosses for more work and responsibility and taking initiative. Why should I have to pay an exorbitant amount of taxes to support the lazy? Despite what you think, a HUGE number of those 50 million are lazy and a large portion are abusing the system (its suppose to be household income and a lot live with their parents but file to get food stamps and other benefits just off their non-existant income–my wife’s brother’s wife does this). You wouldn’t believe how many people get hurt at work and then are out on permanent disability after being called from a lawyer. The whole system is sickening.

            You know what I’d do? Get rid of all free handouts. If you want handouts you have to put in a 40 hour work week digging ditches or something equivilent. I’d be OK if you even upped the benefits to something like 30k/year but at least you’d be forced to work (even if the work ultimately accomplished nothing)

            PS corporations don’t pay taxes. Shareholders, employees, and customers pay taxes. All of them.

      2. What I wonder is how many of those “50 million” have legal jobs. A security net for society is good and necessary but I think it gets exploited by those that don’t have legal jobs, such as slinging drugs or hooking, or taking cash-only jobs. Its a shame that those that do need assistance get a bad wrap because of the ones that exploit the system.

        1. earlyretired

          I always enjoy standing behind someone at my local grocery store using food stamps. They usually have two piles. They use food stamps for food. Then they pay cash for beer, cigarettes and lottery tickets.

          1. I’m curious how many times this has actually, truly happened? Your biases and prejudices are showing as bright as day, sir.

            1. earlyretired

              Examples of this scenario are so normal where I live that I’m even surprised by the question. Maybe its better where you live?

              If you Google it, you’ll find the 50 million people on food stamps (out of our total population of ~300M) are spread out everywhere.

              It desperately needs to be fixed, but its just not gonna happen until we get someone in our president’s chair who doesn’t benefit from relying on this group of “dependents” to provide a lot of votes.

              As for my biases and prejudices, if anything I said does not resonate with you as correct, I’d like to better understand your point of view.

              And just to clarify, I didn’t say “politically correct”, just “correct”.

            2. Early retired: I see this very frequently where I live too. I agree with everything you’ve said in this thread. By chance do you have your own blog? If so I’d be interested in following it.

  18. The Professor

    $200,000 + $200,000 = $250,000 . . . That has always annoyed me. Glad you notice as well.

  19. Wife and I had AGI of ~470k and had federal/state tax liability of ~127k/26k respectively. So we are paying about 30% in total. Even though we have an emotional reaction to having to write another check, after having taxes deducted and paying estimated taxes, and having certain deductions/exemptions phased out, we are probably right where we should be. I am ok with paying that amount, although I wish our tax money was better spent. I would not want to get another job to bring our tax liability down.

    The bigger problem with the tax debate is the rhetoric around it. President Obama is a huge demagogue on this issue. You keep hearing “fair share” and “they can afford it”. These terms are designed to appeal to the masses, who only hear “someone else”. He has raised taxes twice and still wants to raise them more. On the other hand, Republicans are just blindly reject any tax increases even when it makes complete sense to do so (e.g. gas tax).

    In reality, the entire tax system is just broken. There are too many shell games being played. The code is too long. I think we should move to a system with no deductions except a large personal deduction, and readjust the marginal rates to get us to where we need to be. I personally think its a little silly to tax wage earners so high and not tax unearned income at the same rate. If the working stiff should have to pay x tax on a high wage, certainly someone who makes the same amount of money off investments can afford to pay the same amount.

    1. What about a luxury tax on non essential items? For example, who needs the $400+ iphone 6+ or Apple watch? Nobody. Just add another 1%-2% tax on the existing state sales tax figure, and voila! Billions raised, budget deficits reduced, more people who have money or like to waste money contribute more to society.

      Apple may hurt at the margin, but demand is so inelastic that perhaps not!

      A progressive tax for non essential items. There is a luxury tax for cars, why not do the same thing for other items?

      Letting people make a choice on whether to pay higher taxes for goods sounds like a great compromise.

      1. I agree with you regarding sales tax “luxury items”. You would get into the whole political mess of what is a luxury item and which items are essential, and lobbies would work their hardest, so things lots of items like phones, which are really luxuries, might be considered essential and escape tax.

        The idea of taxing consumption is also good because perhaps it would get people to save more by forcing them to prioritize what items they truly need. I personally think there should be mandatory savings requirement, like they do in Australia. People like to complain about the widening gap between haves and have-nots, but it’s possible to build serious wealth by just saving $10/day. Plug $3650/yr into a compound growth calculator and you will see that at historic stock return rates that sort of contribution yields over $1MM over the course of a typical career length (45 years).

          1. I think Australia’s system is so cool! One of my friends left the States to move there and she has fallen in love with the lifestyle and the programs they have. It is also so impressive they have such a high inheritance!!

    2. earlyretired

      I was with you completely, right up until you fell for the class warfare trap. The answer is not to increase taxes on invested income. The answer is to lower the cost of government.

    3. Since taxes have become so muddled with nomenclature and nuance, I predict that soon accountants will have the same natural professional protections that lawyers now possess. After all, private citizens used to settle many legal disputes without hiring unneeded attorneys, but laws and procedure are so arcane people fear technical misconceptions that could lead to unfavorable judgment. Legalize is intimidating to the untrained!

      Now, as a person who holds advanced degrees in Public Policy and Economics, I wouldn’t even think of doing our taxes, with many of our K1s not arriving until September of the following calender year. It quickly gets overwhelming. We’ve now deemed it not worth the risk as unnecessary complication has commandeered what should be elementary mathematics.

      The Tax code needs to be dumbed down and simplified before our accountant makes as much money as our lawyer.

      A simpler tax code is both Republican for its conservatism, and Democratic for its populism.

      1. Are you saying 70,000+ pages of tax code should be simplified? Lobbyists and the tax industry would lose so many jobs!

        The more confusing the tax structure is, the more people can be controlled by the government.

      2. What is your take on tying the corporate tax to some sort of jobs basis? My idea is American-made revenue should be taxed directly proportional to American jobs held in the company. Maybe tax incentives for bringing back jobs to America, and heavier taxes on imports. Yes it would be controlling the economy but a free-world economy doesn’t benefit anyone and just exploits poorer countries and robs richer countries of jobs. I also think there needs to be a subsistence provision too: more employees on payroll that have to take welfare means higher corporate taxes. I’d much rather pay for higher prices to increase wages than have to subsidize more people via welfare.

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