How To Prepare For Trump’s Middle Class Tax Hike

Trump's middle class tax hike affected millions of Americans. This article was written to help prepare for Trump's middle class tax hike. Now that Trump is no longer President doesn't mean his middle class tax hike isn't here. The Tax Cut And Jobs Act Lasts until 2025.

With Joe Biden as President, taxes shouldn't go up for the middle class, only the top 2% making over $400,000 a year. However, it's too soon to tell what's going to happen.

How To Prepare For Trump's Middle Class Tax Hike

Higher interest rates are already a tax on consumers through higher mortgage rates, higher student loan rates and higher consumer loan rates. Is the economy strong enough to withstand a sudden ~30% increase in borrowing costs? Hopefully yes, since the actual rate we pay takes time to adjust higher, e.g. 5 years for a new 5/1 ARM to adjust.

Given the market determines rates, we can't fully blame Donald for making borrowing more expensive for everybody. But what about Donald Trump's plan to increase taxes on the middle class? Let's learn what's going on here and help find solutions for millions of Americans who are increasingly getting squeezed.

Below is a comparison on Trump's PROPOSED tax plan versus the current plan. Can you spot the tax hike?

Trump Tax Plan
Source: Tax Policy Center

Individuals who make $112,500 – $190,150 will see their federal marginal income tax rate go up by 5%, from 28% to 33%. The closer you are to making $190,150 as an individual, I estimate the closer you are to paying ~$3,000 more in federal income taxes.

The math is simply $190,150 – $112,500 = $77,650 in income now taxed 5% higher at 33% rather than 28%. Therefore, $77,650 X 5% = $3,882.50 more in taxes.

However, due to the the tax cut for income between $9,275 – $37,650 (15% to 12%) under Trump's plan, you get a savings of about $851.25. Therefore, the Modified Adjusted Gross Income after deductions that is subject to taxes really is between $130,000 – $190,150.

Some of you might be thinking $112,500 – $190,500 isn't a middle class individual income, but I absolutely believe it is for 50% of the country who live in expensive coastal cities and other large cities such as Denver and Chicago.

If we believe we shouldn't responsibly spend much more than 3X our gross annual income on a home, then all an individual earning $112,500 – $190,150 can afford is a $337,500 – $570,450 home.

With the median home price over $1M in SF and NYC, you've got to earn closer to $330,000 just to buy something mediocre! Even with a $190,150 salary, you can barely afford the median $505,000 Boston home. You're certainly stretching to afford a $594,600 median home in Seattle as well.

The Democratic rhetoric has recently been that any individual who makes over $200,000 is deemed rich and should be subjected to higher taxes. The Republican party rhetoric has recently defined individuals who make over $400,000 to be rich. Therefore, it is baffling there is a 5% marginal tax hike for those individuals who make essentially HALF these amounts.

Half of $200,000 (Democratic rich) – $400,000 (Republican rich) = $100,000 – $200,000. Half = middle. Middle = middle class. Why is the middle getting penalized?

Trump tax plan versus current tax plan chart
Trump's tax plan hurts middle class income earners (red). Chart by:

Why The Tax Hike?

I'm not sure why Trump wants to raise taxes on the middle class. It's good to hear he plans to abolish the Alternative Minimum Tax (AMT) and the 3.8% Net Investment Income tax on individuals/couples who make more than $200,000/$250,000. But those benefits accrue mostly to individuals who make more than $190,150.

It's nice Trump doubled the estate exclusion limit (death tax) for individuals to $11.4 for 2019. Getting taxed again after you already paid taxes on your wealth sounds like robbery. But given most of us don't plan to die within 4-8 years, any changes to the death tax don't really matter because they'll surely be changed again.

A 5% tax hike on the middle class and a 6.4% tax decrease on the top 1% income earners who make over $415,050 is not helping the majority of people keep their hard earned money. In fact, it's estimated that the top 1% will enjoy ~50% of all the tax benefits.

Related: How To Live Like The Top 1% Without Being In The Top 1%

Why aren't more middle class people upset about this tax hike? Is it possible that most people making between $112,500 – $190,500 are simply unaware they will be paying more a year in taxes? Or maybe the middle class is actually doing just fine and is happy to pay higher taxes? You tell me savvy readers.

After surveying more than 25,000 of you, more than 45% make over $100,000 a year and will likely  be paying more taxes.

How much do you make a year? (individual, not household)

View Results

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Below is a realistic budget for a single father with a child. He works at Mega Corp and will see his year-end money buffer decline to only ~$2,000 a year after paying ~$3,700 more in income taxes under the new Trump tax plan. One miscellaneous expense or mishap and he's in the red.

$200,000 Income And Still Not Feeling Rich
A single father making $200,000 will see a tax hike of almost $4,000 a year under Trump's plan

Below is a more complicated example of a single mother with two children earning $200,000. She saves 15% of her gross annual income a year through her Solo 401k. Her biggest expenses are childcare assistance and healthcare, which is spiraling out of control for those who have to pay 100% of the monthly premium. I've estimated her effective tax rate goes up by 3% after Trump's tax hike, leaving her in the red each month.

Donald Trump Tax Hike On Single Mom

Before you complain about the accuracy of the numbers, they are just rough estimates. Each person has different deductions allotted to them. The bottom line in that the closer you get to $190,150, the closer you will pay the $3,882 in increased taxes. The 3% tax savings on income between $9,250 – $37,650 is only $852.  If you want to save on taxes, you really shouldn't make more than ~$130,000 per person.

The Solution To Lowering Your Taxes

If you are one of the millions of Americans who is facing an impending 5% federal income tax hike, your solution is to get married and make no more than an modified adjusted gross income of $225,000 combined. This way, you can keep on paying a 25% federal marginal income tax rate and benefit by paying 3% less than the existing system on income between $151,900 – $225,000.

Under the current tax plan, household income between $151,900 – $231,450 is taxed at a 28% federal marginal income tax rate.

Here are some sample marriage income combinations for the perfect tax minimization solution:

1) Stay At Home Spouse

Spouse 1: $225,000 income

Spouse 2: $0

2) Two Professionals Who Met At Work 

Spouse 1: $115,000

Spouse 2: $110,000

3) Public School Teacher And Private Industry Professional

Spouse 1: $55,000

Spouse 2: $170,000

Of course, you can make more than $225,000 by the amount equivalent to your mortgage interest deduction and property taxes. If you run your own business, you can make more than $225,000 by the amount equivalent to your expense deductions.

The key is to not stay single. It's bad enough you've got to compete with DINKS, and DINKS + their parent's money to buy a home or pay for other big ticket items. To add on higher borrowing costs and pay higher taxes is just too cruel.

Related: When Does the Marriage Penalty Tax Kick In?

My Solution To Paying Less In Taxes

Trump's Middle Class Tax Hike Compared To Existing Tax Rates
Source: WSJ

As an individual, I've either got to kill myself to try and make as much as possible over $415,050 to take advantage of the new 33% marginal federal income tax rate. Or, I've got to limit my individual adjustable gross income to $112,500 to pay a reasonable 25% marginal federal income tax rate.

Which is harder to do?

The Strategy For Making Less

Because ~70% of my traffic on Financial Samurai is from search engines like Google, the traffic is very passive. In other words, if I do nothing all year my online income would still be greater than $112,500, the individual income level where taxes go up from 28% to 33%. Passive income is one of the beauties of having an online asset. I just write a lot because it's fun and there's always something interesting going on to learn about.

I could sell all my dividend paying stocks and hold cash, but that still leaves about $200,000 in passive income that cannot be reduced immediately because there's an early withdrawal penalty for CDs, tenants with signed leases, and private investments with multi-year commitments.

One solution is to just sell Financial Samurai once new tax legislation passes and call it a nice eight-year run. That way, I'll have no more taxable online income. Let's say I can sell Financial Samurai for $10,000,000 after taxes. I can just hoard cash earning 0.2%, which equates to $20,000 a year. $20,000 + $180,000 in passive income = $200,000. I can then deduct about $40,000 in property taxes and mortgage interest from my primary residence to get to a $160,000 taxable income.

As time passes, I can slowly convert all passive income assets to cash, thereby further lowering my income. Paying taxes on <$160,000 equates to about a 26% effective marginal federal tax rate under the new plan. Not too unreasonable, especially if I can just plunder my cash to live.

Of course, I can actively give money away to reduce my taxable income further while helping other people in the process.

Related: Focus On Building Your Net Worth More Than Growing Your Income

The Strategy For Making More

Making a lot more than $415,000 is not easy. But it's possible with some planning and extra labor.

1) Don't sell Financial Samurai, but continue to grow it. Minimum $150,000 income.

2) Keep passive income portfolio as it is. Minimum $200,000 income.

3) Do more corporate consulting. Minimum $120,000 income.

4) Do more 1X1 personal finance consulting. Minimum $30,000 income.

5) Get a J.O.B. Minimum $150,000 income.

Total baseline income = $650,000

Unfortunately, doing 3, 4, and 5 will require an extra ~50 hours a week, which means my total weekly work hours would sky rocket to 70+. I'll also gain weight, get stressed, start getting gray hairs again and be more bitter at the world.

The tax savings from making $650,000 would equal ($650,000 – $415,000) X 6.4% = $15,040. When I put it this way, working an extra 50+ hours a week to “save” $15,040 in taxes doesn't seem worth it at all! Further, at $650,000, I'll have to pay 13.3% California State taxes instead of “only” 10% on income up to $250,000.

The reality is, if my baseline income is $350,000 ($200K passive + $150K online income) for ~20 hours a week and I add 50 hours a week to get to $650,000, I'm really paying ($650,000 – $350,000) X 33% = $99,000 more in federal income taxes. It's the whole “buy more save more” mental scam. Given I'm already paying over $100,000 a year in total taxes, paying another $99,000 a year in federal taxes + another $53,200 in state taxes would actually start to piss me off.

It seems like highway robbery to have to pay over $250,000 a year in taxes when you're killing yourself and not using massive public resources. And for what? To one day live a better life that's more free and less stressful? I'd rather just kick back, pay less in taxes, and be free right now! After all, happiness does not increase with an income over $250,000 a year.

Obvious decision made: It's much better to go the easier route by making less money to pay less taxes and live more freely. I believe in enjoying life to the maximum because I'll never be able to make another minute of time. I know plenty of deca-millionaires who are no happier than an average person still looking to save for retirement.

For those who object to going the easier route, answer me this: Are you willing to work 50+ more hours a week to try and make $300,000 more just so you can pay $100,000 more in taxes? If not, then you've caught yourself in an incongruent state of mind.

Latest Marginal Income Tax Rates

Here is are the latest Federal marginal income tax brackets to understand a future tax hike. Thankfully, they aren't as punitive as first proposed. That said, there have been plenty of reports saying those who earned between $60,000 – $150,000 in 2018 are paying more in taxes.

The good thing about the latest tax brackets is that it essentially eliminates the marriage penalty tax for singles who make up to $300,000 a year and decide to marry.

2019 Marginal Income Tax Brackets

Middle Class Americans, STAND STRONG!

The middle class is getting squeezed by Donald Trump's middle class income tax hike. Here's how to counteract the force.
The Empire is squeezing the middle class through higher interest rates and higher taxes

Being middle class is the best class in the world. But we're now getting squeezed by higher taxes and higher interest rates. First the government wanted to raise taxes on those making over $400,000 a year. Then they went after individuals making over $200,000 a year. Now they're going after folks making even less. See the pattern?

Eventually, the government will come for us all. Everybody needs to make some pro forma calculations of their annual total income and decide how hard or how smart you want to work.

The only beneficiary of higher interest rates and higher taxes I can think of are those who take advantage of higher savings and short-term CD and bond rates.

If you aren't maxing out your 401k, definitely start doing so ASAP to shield as much income as possible from the impending tax hike. You'll be amazed at how much you can accumulate if you stick to the program. Max out for 10 years in a row and you should easily have over $200,000 for retirement.

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Updated for 2021. Trump's tax plan hurt coastal city income earners the most due to the SALT deduction cap of $10,000. However, with President Biden, there could be a SALT cap repeal, which would help expensive city residents. Just watch out for the income tax hike and capital gains tax hike.

196 thoughts on “How To Prepare For Trump’s Middle Class Tax Hike”

  1. The secret to not paying more taxes is to get married? Hah. That’s a good one. Even though current tax law fixed some of the marriage penalty it’s still very there. You even noted if you earn $200k as single you are subject to 3.8% cap gains tax but if you are married you can only earn $175k per person! So you pay 3.8k more on 50k if you are married. If you make over $500k (which is very possible at middle class in coastal city), your partner has little incentive to work as their income will be taxed higher. I don’t understand marriage tax rates at all. All taxes should consider everyone individually!

  2. Well here we are in 2020 tax season…. Just like many who have spoken out. My son who I have claimed as a dependent joined the military, therefore I can no longer claim him. My taxes went from getting a tax return to owing taxes. This is huge for me because I am a single father and the difference was $6000. I am completely at a loss as to how our tax laws are still gouging the middle class worker who busts their asses off to make a living…. When will our lawmakers STOP giving our hard earned money to foreign countries and look at the monetary crisis right here in the USA…..

    1. Man, that seems wrong. Hopefully it is an error and you can get that $6,000 difference down.

      Seems like tough times are back again with the stock market melting down and the coronavirus slowing the economy.

      Hang tough folks!

  3. We just did our taxes and I instantly took to google because I didn’t know what was going on! This new tax law has hit us hard! We made 137,000 combined which is not rich at all, but we owe 2,000 in Federal. My daughter graduates college this year so next year will be even worse. My wife and I both claim 1, but will now go to 0 and possibly still not break even!

    Worst is the SALT Credit. If my wife and I were divorced and filed separately we would both get the credit, but since we are married we get 10,000 combined? What a way to promote the sanctity of marriage. The Tax law is broken and needs fixed!

    My wife and I are not rich. We busted our ass to raise two great kids. We have never had a handout and for years I worked two jobs. I understand there grown now, and we lose those deductions, but to get a double whammy by this new tax law is upsetting to say the least!

    Thank you for you great article. I know it’s a older write, but you predicted the future! I never thought I needed a financial adviser at our income but I will get one now because they are after all our money, and not just the rich guys!

  4. Just did my taxes and have to pay about $1,000 more on virtually the same fixed income. Retired with social security and annuity income. Married filing jointly 2017 about $75,000 income, $23,000 itemized deductions(mostly health expenses and premiums) and paid about $3,400 in fed taxes. Same circumstances in 2018 as far as income and deductions (new standard deduction was used as it was a bit higher) but because of the loss of the two personal exemptions my new fed tax is $4,350. Thanks for the tax rate cut as it would have been worse.

    You may want to add to your examples that anyone who had itemized deductions between $16,000 and $24,000 will pay more taxes on the same income despite the higher standard deduction-it does NOT make up for the loss of the $8200 personal deductions for my wife and I.

  5. Wished that I had read this article back when the new law was enacted. I was hit with the double whammy of less withholding and loss of deductions, including SALT, and Education expenses. My wife and I have a combined income of $175K (which puts us at 24%) and are paying $5000 more in tax for 2018. I’ve already taken steps to decrease my allowances and increase contributions to my tax-deferred retirement plan. I’m still contributing to charities but this has got to affect charitable giving.

    I didn’t even vote for the guy wonder how some of supporters feel about him now.

  6. bob roberts

    I think the income examples forgot a couple of things on the tax side of things.

    Childcare FSA
    Health FSA
    Health insurance deductions/healthcare deduction % of gross income
    Mortgage interest deductions
    Property taxes etc.

    It doesn’t refute the main point though, but it does change the numbers a bit.

  7. Susie Swillow

    My tax liability went up $500. My son’s went up $12,000. Thanks for nothing, Mr. Trump!

  8. anti-orange clown

    My tax burden went up almost 20%, From 14K in 2017 to 17.5K in 2018. Everything was same, but i lost 21K in deductions. Thanks Trump, you orange clown. Look, everyone with a modicum of intelligence knew the middle class was getting screwed to pay for trumps buddie’s tax gift, i just hope the “normal” republicans who think Dems just want to tax them so they vote R, i hope this tax increase wakes them up.

    1. jennifer stsauveur

      Losing deductions is a slap in the face for my husband and myself. I may not even vote this next election what does it matter, Trumps tax plan is a farce and what the Dems proposed seemed on the surface worse but the final outcome may have been better. We are also paying much more in taxes and see no end. We might be better off to rent not own and work minimum wage that way we could pay our bills. We get NO breaks full price for our kids college, now that they are grown a child tax credit doesn’t help. We are not in any position to retire especially not now. This stinks!!! Retirement in another country maybe?

  9. Matt Miniatt

    Currently, I am a stay at home spouse with a spouse that earns $40,500 annually.
    We reduced the items claimed on the tax form to 0, and still have to pay in.
    According to the guide lines from the IRS an income at $40,000 is taxed at 22%.
    How do they arrive at this number, when you are saying we should only be taxed at 15%?

  10. Are those brackets and %s correct in the article?? I thought it was 10%, 12%, 22%, 24% 32%, 35% and 37%?

    Tax rate Taxable income bracket Tax owed
    10% $0 to $9,525 10% of taxable income
    12% $9,526 to $38,700 $952.50 plus 12% of the amount over $9,525
    22% $38,701 to $82,500 $4,453.50 plus 22% of the amount over $38,700
    24% $82,501 to $157,500 $14,089.50 plus 24% of the amount over $82,500
    32% $157,501 to $200,000 $32,089.50 plus 32% of the amount over $157,500
    35% $200,001 to $500,000 $45,689.50 plus 35% of the amount over $200,000
    37% $500,001 or more $150,689.50 plus 37% of the amount over $500,000

    Married filed jointly?
    10% $0 to $19,050 10% of taxable income
    12% $19,051 to $77,400 $1,905 plus 12% of the amount over $19,050
    22% $77,401 to $165,000 $8,907 plus 22% of the amount over $77,400
    24% $165,001 to $315,000 $28,179 plus 24% of the amount over $165,000
    32% $315,001 to $400,000 $64,179 plus 32% of the amount over $315,000
    35% $400,001 to $600,000 $91,379 plus 35% of the amount over $400,000
    37% $600,001 or more $161,379 plus 37% of the amount over $600,000

  11. I can’t really feel bad for those who voted for trump and now have to pay more taxes. I feel bad for myself because I’m caught up in that. I hope by 2020 the democrats will grow a spine and revert EVERYTHING that trump has made.

  12. Anna Daniel

    My husband made 20K less in 2018 than 2017 yet our refund is much less this year under Trump’s “tax reform”. I see they are robbing from the lower middle class with no child dependants to give the new double rate to all the welfare and anchor babies. Robbing from the lower middle class to give to the poor entitled losers who refuse to work and to the top 1% in tax cuts. THIS IS INFURIATING

  13. Here in MD, if you itemize, the new tax law will likely have you picking standard deduction, which is a loss for us from previous years, especially since this year we bought a new house (high interest payments by 4x previous).

  14. Middle class person here. I checked the updated tax bill, and I’d come out ahead from it by a lot! Most people will get a tax decrease here, I’m pretty excited.

  15. single; no kids; 2 properties in a high tax state; high income tax. I am being robbed
    by this new tax. 12K is nothing. I want to live in a cardboard box by the side of the road
    or just go to jail for noncompliance. :(

  16. Seems like the latest bill negates this, and everyone gets a tax reduction for an equivalent taxable income.

    Of course, those who itemize are unlikely to have an equivalent taxable income. It seems clear that all of those who live in california and have enough mortgage interest and property taxes to justify itemize will get a tax hike under the latest proposal (due to loss of state tax deduction).

  17. Mike Johnson

    Those who earn $12,000 single or $24,000 married pay $0 taxes under Trump’s plan. So it has a positive impact for low income earners. So this changes nearly everything and makes most of your assumptions wrong.

  18. Why shouldn’t the super wealthy do their part since they are usually the greatest polluters with private jets, gas guzzlers and huge homes that produce children that do the same while manipulating our elections and laws for their own benefit! We need to keep the estate tax to even out the damage they do to our Country and planet! As far as home values/expense/mortgage payment to income ratio don’t tell the facts!1st $150,000@$650 home with $100,000@$8,333mth income vs 2nd $200,000@$900 home with $150,000@$12,500mth income ($650/$8,333) ($250/$4,167mth) Payment to income ratio increase) vs 3rd $300,000@$1,300mth home $300,000@$25,000mth income ($650/$16,667) & ($400/$12,500 payment to income ratio increase over each previous figure) vs 4th $400,000@$1,700mth home $400,000=$33,000mth income
    $150k home $100 income to $400k home $400k income ratio increase ($1,050/$24,667) 2nd 300k to 400k ratio($800/$8,000) Not very fair ratio comparison or a wealthy person’s rational!

  19. At one time Trump was proposing the “1-5-10-15” income tax policy consisting of the following:

    * Those making up to $30,000 will pay 1 percent.

    * Income from $30,000 to $100,000 results in a flat 5 percent.

    * $100,000 to $1 million income will be taxed at 10 percent.

    * On $1 million or above will be taxed 15 percent.

    But if I am understanding the situation, now all that is out the window. (Is Trump just another lying politician?) Now many will get a tax increase including single tax filers making between between $112,500 and $190,150, or joint filers earning between $225,000 and $231,450.

    If the above applies to you, you’re going to be kicked into a 5% higher tax bracket. You will also being paying more on capital gains.

    Those in states like California already have to deal with high state income taxes. In California the people above are already in a 9.3% marginal tax bracket. Combined with Trump’s increase they are looking at a whopping combined 42.3% tax bracket!

    You could be paying thousands of dollars a year more than when the DEMOCRATS controlled the House, the Senate and the White House. Yes, more than you did under Obama!

    How can we stop this?

    What can we do besides write or call our Congress Critters?

  20. I did do the math before voting and didn’t vote for him. I’m unmarried, income of $173,500 living in an expensive area with a child due in 2017. I’m paying student loans at 6.875%. I could refinance them, but there are only rate savings on variable rate loans and you’d have to be a fool to lock student loans in to a variable rate product. With Clinton, I had a fair chance at federal refinancing and wasn’t looking at increased taxes. Granted, her childcare proposal is 10% of income wasn’t helpful, but otherwise she was a much better outcome for me personally. Great post, Sam.

  21. Your First Million

    Another solution I would like to add for those individuals earning $112k or more… start your own business. Under Donald’s tax proposal, you would only pay 15% tax rather than 33%. Trump has stated that under his tax plan, all businesses whether fortune 500 companies or small home based freelancers will pay no more than 15% tax.

    1. Exactly even if it is party lite or any deduction. That is what he is encouraging from what I understand the benefits to that are amazing!

  22. Your First Million

    To those single individuals earning over $112k, I suggest getting married! Between my wife and I our taxes will actually be going down thanks to Trumps tax plan, from 28% down to 25%. Thank you Donald Trump!

    The tax code is nothing more than a system of incentives. The government wants you to get married and is willing to give you a tax break for doing so. You should listen :)

    Also I can’t express enough how excited I am about the corporate tax being slashed down from 35% to 15%. The US will finally have a globally competitive corporate tax rate. Here are the corporate tax rates of a few other countries:

    Ireland 12.5%
    Canada 15%
    Germany 15.83%
    Switzerland 8.5%
    Paraguay 10%
    Cyprus 12.5%
    Qatar 10%
    Iceland 20%
    Montenegro 9%
    Liechtenstein 12.5%
    Albania 15%

    Get ready for businesses to start popping up left and right.

    1. It doesn’t make sense for single people to marry for a tax savings because Trump’s married brackets are twice what they are for singles. The only time it makes sense is if one partner doesn’t work, or if kids are involved because head of household is going away. Trump really isn’t giving a handout to married people…its more of taking a benefit away from single parents which I’m all for. Nothing against single parent’s…but I don’t see why I should have to subsidize someone else’s life choices like that.

      As a single guy making six figures if I married a woman with an income close to mine, we wouldn’t save anything as long as we both continued to work.

  23. If middle class taxes do increase I think it’s more important than ever for people to get a handle on their personal spending. There are some things we can control financially, and beyond writing letters to our Congresspeople, taxes ain’t one of them.

    But we can go through our budget line by line and try to eliminate or minimize whatever we can. I’m fairly certain the vast majority of Americans have not done this within the past year. Money saved would more than make up for any extra taxes paid for the year. If you’re going to pay $3,000 more in taxes for the year you just have to save $250 per month. That’s pretty much cutting cable and getting cheaper car insurance.

    And listen to Sam don’t buy a car that’s more than 10% of your income. More expensive car means more sales tax paid and usually higher insurance premiums!

    1. Syed, a lot of people are already maxed out. I’m not sure why you would think that they can eliminate more. $250 a month may not be a lot to you but it is a lot to them. Even if they could eliminate to save $250, $100, or $300, they be able to keep the money and contribute to a 401k for THEIR future instead of always being expected to give it away via taxes?

      As I said, I’m fine and I could find that $250 but because I already pay a lot I think I pay enough. Besides, in my case not only am I putting money away for my elderly years, being that we are a sandwich generation we are also having to help OUR OWN elderly parents and believe me that takes a chunk of money. Hillary and Trump talked about the elderly living in poverty (elderly people who make too much to get government help but not enough to be able to take care of their medical bills). Why should we always have to give our money to government instead of being able to take care of our own.

      I do however agree with your last statement.

    2. If people don’t save and invest for your future today, then you become tomorrows poverty.

      Just because you make enough to live on today doesn’t mean you should be required to give away extra money instead of using your money to build your own wealth to take care of yourself when you can no longer work.

      1. The biggest expenses are medical bills and taxes. We need affordable healthcare and a reasonable tax system. Both of these need to reform, if not, the working class and below will still live on the edge regardless which party is running the country.

        1. This topic talks about taxes however, people in this wage group are paying full ticket price for their healthcare insurance. My premiums went from $450 a month pre-Obamacare to just below $1,200 a month this year with double the deductible. And if you can’t afford the premium you pay a “tax” based on your income. The Obama economy, taxation and policies are a real mess!

    3. yes, when I pay more taxes, I can eliminate all discretionary spending- and how will the small businesses like it when I NEVER eat out, NEVER buy new clothing, NEVER travel, NEVER get anything dry cleaned, NEVER hire any workers for home maintenance….how will that benefit the economy? Thanks Trump. Simple = stupid.

  24. Marginal can go up and you can still pay less in taxes. For the single tax payer:

    Old plan: $18,558.75 + 28% * ($112,500 – $91,150) = $24,536.75
    Trump: 12% * $37,500 + 25% * ($112,500 – $37,500) = $23,250

    Next, to your point, taxes are 0.05 higher per dollar of earned income.

    $24,536.75 – $23,250 = $1,286.75 difference

    So, another $25,735 ($1,286.75 / 0.05) until we hit the breakeven point.

    $112,500 + $25,735 = $138,235

    So singles making $138,235 – $190k pay a bit more. Honestly, that’s a pretty decent income for a single.

    1. Thanks for doing some math. I wish more people did their own math to see what their pro forma tax bill will be.

      $138-$190K pay is not bad, if you don’t plan to have a family and buy a median priced home in an expensive coastal city.

      1. No it isn’t bad income but who are we to judge how much income is justified. There are different situations.

        It’s comparative to people who don’t want to make the pie but want a piece after the pie is made.

        For example, people who gave up years of working to go to medical school, accumulated large debt to go to med school and now because they make good money they are expected to pay higher taxes. What about people who took risks, took on large debt to start a business and once they become successful (and many times they employ others) but because they make good money they have to pay high taxes.

        Again, people who don’t want to make the pie but want a piece after the pie is made.

      2. In the case of living in NY. A friend of mine lives in NYC and he has to make higher income to live there yet he pays federal taxes based on the same income scale that I do in PA.

        Believe it or not, the same issue exists for the elderly where benefits are based on income. A lot of middle class people think there is a safety net for them but they don’t realize how low the income limits are to qualify for help. $1.00 above that income limit and you are disqualified from receiving benefits. In other words the middle class is heading for a train wreck in their elderly years.

        That is why it’s wise to build wealth, understand at minimal the difference between high income and wealth as well as taxation and in the middle class / low middle class case income limits. People seem to be fine letting life just surprise them instead.

    2. “So singles making $138,235 – $190k pay a bit more. Honestly, that’s a pretty decent income for a single.”

      take out the property tax and State income tax and Social Security and State unemployment/disability from the salary and you will see that the $138,235 – $190k
      is not really what you think it is. Then subtract out the cost of health insurance and
      you will see that number get smaller yet.

  25. Thanks again, Sam for the wake-up call that we all need! The ‘best-case-scenario” living on $200,000/year is the best plan ever!! The main component, as you have taught us, is to make sure you have cash reserves in event of an emergency.

    I love reading your articles, and the comments section– I am glad you have a thick skin and can hear views that differ from yours-dialogue is always stimulating!

    One important reason for the surprise Trump victory lies in the “any one but Hillary” voters-people who didn’t strongly support Trump, but also don’t trust Bill and Hillary… also felt like “Hey lets roll the dice here, after 8 years of Democrat power-give something else a chance” I will finish by saying I live “inside the Belt-way’ as we say here, in the Wash. D.C. area…

  26. Sometimes, I can’t tell whether you’re being intentionally obtuse or merely provocative. However, I know you’re a bright guy, so I’ll chalk this up to a good, old-fashioned click baiting effort. Kudos. As you’ve noted, your readership skews toward higher earners (and the balance who don’t self-identify as high earners, aspire to the category). I would venture that the vast majority are also coastal, and live in one of the few hundred counties that tilted heavily for Hillary Clinton. The other 2000 + counties comprise Trump Country. You’re incredulous that the Vast Middle voted against their self interest by voting themselves a tax increase; an honest definition of the Middle Class would reveal the opposite.

    Let me state that I’m a skeptic (ok, maybe an agnostic) on whether Trump’s tax plan will work for the betterment of the USA—too many promises to too many people. However, I can certainly see the appeal for the Vast Middle: the promise of bringing jobs back, made by an actual wealth creator, is too good to ignore. If the media would have provided cover for Trump the way they covered for Hillary, I believe he would’ve won by a popular vote landslide- but that’s another story.

    Trump’s promise to make America great again has already paid dividends in the eyes of some voters. A couple of weeks back, Ford promised to keep auto production in Michigan instead of Mexico; now, it appears that he’s received a similar commitment from Carrier for Hoosier jobs- real, middle class Hoosier jobs-

    The promise of fantastic wealth will still draw people to the coasts, but too often, only a handful get rich. And while 6 figure jobs might be a dime a dozen in Silicon Valley, median home prices are in the 7-figure range. Trump wasn’t trying to win over the young techie in Parkside or Golden Gate Heights; his target voter lived in OH, and PA, and WV, and MI…

    In the end, it does no harm to speculate on what your taxes will look like in the future. But don’t soft-peddle the notion, that the Vast Middle don’t know what they voted for.

    1. I thought Ford was going to keep its plant in America already?

      I actually believe the middle class knows what they voted for and Trump supporters know what they voted for in particular. Given there is a middle class tax hike, it is logical to assume that the middle class is stronger than many of us would like to believe. And that is a fantastic thing. If we can all pitch in to pay more taxes, we can all do much to help support the fiscal stimulus that is planned to help keep jobs and grow employment opportunities.

      When it comes to taxes, I would give myself a B- in understanding the code. there are so many forms and so many phaseouts in so many rules to remember that it’s hard to keep everything straight. This is why I rely on readers to help rectify where I am wrong.

      What is your background?

      1. Regarding Ford’s decision: if you read between the lines, Ford was considering a move to Mexico without advising the UAW . The anti-Trump media glossed over this–

        Regarding the strength of the Middle Class: I believe the upper Middle Class has been resilient and will remain strong. The lower middle class? Not so much (and I mean these as income labels, not behavioral labels). That is the great dilemma for the US, because the nose-to-the-grindstone middle is a disappearing breed, and they have long provided ballast in the US economy. Trump spoke to these people, who have been ignored for the better part of 20 years. In my earlier post, I labeled them the Vast Middle; in reality, they’ve been shrinking for years. Some lower middle class Millennials have “hacked” their life by reading the Gospel according to MMM or Financial Samurai (and believe me, this is not a slight; I sincerely believe you have helped hundreds, and perhaps thousands, see that they can work their way to success). For most, however, a lack of productive work in the heartland has forced many to turn to welfare and indolence, or worse, heroin and meth.

        Regarding the tax code: if a foreign power wanted to provoke an uprising in the productive classes in the US, it would scuttle Turbotax for a month or two.

        Regarding my own background, I am a worker bee in a sales job- not in the vaunted 1%, but not far from it, either. For me and most of your readership, the winner on 08 November mattered about as much as the winner in a sports contest, at least from an economic standpoint. We may have a candidate preference, but we are adaptable to the shifts in the economy. I voted for the President-elect because for too many of the United States, adaptation is not a viable avenue. Trump’s intention, to put Americans first, is a tonic for many who see CEO’s get stock options for shifting jobs out of the country. Whether it is a healing tonic remains to be seen. Please God, bless America.

      2. You said….. “If we can all pitch in to pay more taxes, we can all do much to help support the fiscal stimulus that is planned to help keep jobs and grow employment opportunities.”

        First, it’s better to grow employment opportunity via the people instead of the government. With government employment you’ll always need “just a little bit more” to fund it. It won’t end.

        I am so tired of the attitude of “just a little bit more”. Maybe it’s time gov spends a lot less. I live in PA, yes, there are people who do well here, I’ve fortunate to have done better than many and no, we are not uneducated, toothless, back woods, neanderthals, despicable’s that hate everyone as they portray us to be here in flyover country. I’m surrounded by both republicans and hard working blue dog democrats, both who were once solid middle class but slipped financially and are struggling. Worse, they can’t put money aside for their elderly years, most say they’ll have to work the rest of their lives and sadly they are right. So just “a little bit more” to you is a lot more to them. You can’t help others unless you are healthy and in this case financially healthy yet for some reason politicians think the people are swimming in money that the people can afford to help everyone who extends a hands out.

        So when is “just a little bit more” going to be enough, 2008, 2012, 2016, 2020, … will it ever be enough? It is easy to manipulate people who don’t understand the difference between high income vs true wealth and point to them as the culprit. It’s easy to manipulate people who don’t have a basic understanding of the tax code to gain that support for “a little bit more”.

        Sorry, I got off track but nothing is solid yet and we’ll see.

        1. It’s never enough.

          Now that the hurdle is $112,500 for individuals, a 50% drop, next could be anybody making over $60,000 will see a tax hike.

          The key is to build WEALTH and not income so you can just live off your principal and not pay ever increasing taxes.

          1. I always said… “Never take pleasure in government raising taxes “on the other guy” because sooner or later those higher taxes will trickle down to you”. Another saying is government will always use rhetoric to gain the support of the people to raise taxes on the other guy. I sincerely hope you are wrong in the end :) We’ll see.

            Yes, I agree, the key is to build wealth. High income makes it easier to build wealth but it does not mean you are rich. Naturally we want a better life and nice things but when people get a raise or come into some money the 1st thing most people do is spend it.. and buy liabilities. Hey at one time I was just as guilty. Thank god I grew up and changed lol.

            I read an interesting forum thread and the question was, “If you won $1 million what would you do?”. The answers were interesting. People thought they were uber rich…. they would live it up!.. buy a big boat, buy a luxury car, go on vacations, most interesting was people claiming that they would give money away. Only a few said they would invest it. Then came the catch, (this is income within one year’s time). The OP calculated how much was left after taxes. The reaction was funny.


    I am grateful for this post because I can honestly say I had not looked into the new tax plan, assuming rates would decrease for the middle class. It looks like I will be seeing the 5% tax hike, although it does not affect my desire to create more income. I’m willing to work as hard as I can to make as much as I can, however I have not made it to that magic $200K yet. Perhaps when I’m there my desire to work harder for more money will subside. Currently I am working about 60 hours a week at my day job and spending my spare time getting my new blog up and running. BTW – I have this site to thank for motivating me to start a blog. Financial Freedom, here I come!

    1. Great job hustling! Make sure you save as much as you can while you’re working you’re 60 hours a week. It is hard to keep that up for more than 10 consecutive years. I know I burnt out after 13 years, and I’ve got some pretty good endurance.

      Build your brand online on the side, watch your options to do something you multiply. Only people knew how many opportunities there are once you establish yourself on the inter-webs.

      Just keep going, no matter what someone tells you. Growing athick skin is just part of the business.

  28. Sam,

    A quick and dirty example on how to lower your tax bill without reducing your income. Buy your favorite asset class, real estate. In the suburbs of Denver if you put 20% down on a $400,000 house and rent it out, you will have cash flow of approximately +$400/month, or $4800 for the year. When its time to do your taxes you get to deduct the mortgage interest, which will be about $1000/month ($12,000 for the year) and you will get to depreciate the property, which is about another $1000/month ($12,000 for the year). In this scenario, your income will actually go up by $4800/year, but due to $24,000/year in deductions, your net taxable income will be reduced by $19,200 per year.

    Someone who makes $190,000/year who wants to reduce their taxable income down to $112,500 per year just needs to buy the equivalent of 4 of these properties in Denver, CO.


    1. Meh, the example was too quick and dirty, I double dipped on the income deduction, so remove that from the example above, but you still get the depreciation deduction, so the point I was trying to make is still valid. Buy more properties to reduce your taxable income. You’ll just need to buy more than 4 to get your taxable income down to $112,500.

      1. I don’t think right now is the right time to buy property. Maybe if you can buy it with cash and there is an immediate 4% or higher net rental yield. But to leverage up and buy property now after such a big run I think is risky. I’d rather buy municipal bonds or real estate deals at $10,000-$25,000 a pop.

        but yes, the depreciation and the deductions are great for not having to pay any rental income taxes.


      Back in 2011, if you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. Talk about another overly complicated rule the IRS/government has implemented. –

      See more at:

    3. I was considering investing in real estate but opted not to. Because of my income, even though I had a mortgage I couldn’t take deductions on my mortgage because of the phase out rule, to make it even worse, I got hit with AMT.

      This is a good article that talks about “the sweet spot” and the phase out of deductions.

      The ideal income for maximum happiness is not far off of $200,000 a year. If you make $200,000, the government won’t persecute you, and you will only lose $331 in mortgage interest deduction as your income is $33,200 above the $166,800 phaseout cap.

      See more at:

      1. $200,000 a year is the magic number indeed! it’s enough to live a good life. And it’s low enough to not get incessantly attacked by the government. With a $20,000 gross income and $30,000-$50,000 worth of deductions, the balance is pretty good.

      2. Mortgage interest on a rental investment property has nothing to do with the limitation and phaseout on homes for personal use.

  29. Sam – I don’t think someone making $200,000 is going to save a lot in taxes under the trump plan nor do I think they will pay a lot more. I guess my point was that I don’t think the difference will be all that significant for the few (emphasis on “few”) who might miss out to make it the focus of a post when contrasted with with the vast majority of people expected to benefit. That’s not to say that it won’t suck for the few that do miss out but at least as proposed I think you are searching for needles in the haystack.

    I’m not going to go into all that much detail because 1) I am much lazier than you; 2) I’m not incentivized to do so; and 3) I’ve learned you can make statistics tell whatever story you want. In other words I could find examples to support your argument – I just think they are going to be few and far between.

    That said I will give you 4 reasons (2 already mentioned and 2 new ones) that even single people making $200,000 including small business owners living on the coast like in your example won’t be paying that much more in taxes (if anything) if Trump’s tax plan is enacted as currently proposed, which at this early stage, is far from a sure thing.

    1) Childcare deduction (from your example $25,200 – I am going to assume this amount is the state avg for California w/ 2 kids so I will take this and subtract $6,000 (current tax plan amount used to determine the childcare tax credit) = $19,200 x .20 = $3,840 in tax savings.

    2) Standard deduction increase – I think most single people making $200,000 won’t choose to take the standard deduction, including the person in your example, however, I include it because it may offset some of the additional tax paid by a single person with kids due to the elimination of the personal exemptions. It could also benefit a large number of those who currently choose to rent while saving up for a home. Elimination of Personal Exemption $12,000 x .20 = ($2,400) cost

    3) Elimination of AMT – Although in your example this single person does not look to be impacted – I know many of us in the middle class especially the so called upper middle class are impacted and greatly so. In fact you could argue much more strongly that without the elimination of the AMT tax Trump’s plan won’t have the intended impact on the middle class as it intended as it may just shift more people into paying the AMT. The elimination of the AMT must be a central component to any middle class tax relief. I mention this because if enacted this on it’s own should favorably impact more middle class than all the people negatively impacted who fall in the donut hole under your scenario.

    4) Reduction in Corporate Tax – It’s not clear to me at all how Trump’s proposed reduction in the Corporate tax will work but it if the corporate tax is lowered to 15% as proposed it may make sense for a lot of small business owners maybe even the person in your example to convert to C Corp at least for tax purposes. I realize you defined this business income as “passive” but if truly passive then I see no need for her to be paying for childcare expenses unless she was also running a side hussle which was outside the scope of your example. But lets face it without being forced to pay for childcare the person in your example would be saving $55,200/yr (not an example that will garner much sympathy from the masses). I also mention this because trump’s proposed corporate tax reform could set off a wave of business restructurings. Having the ability to moving income from a personal return to a corporate return would allow many small business owners to save in other ways perhaps in extreme examples by eliminating all other federal income tax (capital gains, dividend, interest income, or even all that income as a result of side hussling). The incentives to work harder should not be overlooked. Sam I think you may find this option might work even better for someone like you. In the end you may be in the sweet spot – you may be able to work less and make more after tax.

    1. Aw shucks. So close to getting a guest post so I can learn what a great post should look like. If you change your mind let me know.

      I am eager to see if the pass-through income for S Corp owners drops to 15%. That would be huge.

      What’s your current financial situation?

    2. For a real world example, I’m single and make about 200k. In my case Trump is increasing my taxes by about 2.5k. I don’t expect anyone to weep for me. I know its hard for people in other areas of the country to believe but I’m definitely middle class. I live in modest 1000 sqft house that is 40 years old in a working class neighborhood about an hours drive out of silicon valley. My commute is 2 hours each day. Two of my nearest neighbors have been in prison within the last year for violent crimes. So I’m not exactly rubbing shoulders with yacht owners. 200k is not the fantasy lifestyle some people might imagine.

      What grinds is that the yacht club folk are getting a tax cut, while my taxes are going up!

      1. Yacht club! Perhaps it’s time to get a second job to try and get your own yacht as well! Just kidding.

        It’s fascinating the American people voted to lower taxes on the 1% while raise taxes on the middle to upper middle class.

  30. OMG – people who have skated away forever as burdens on my tax bill now have to contribute? Say it isn’t so….

  31. Long-time reader, first-time commenter. Let me just say I’m a big fan of you and your website and find many of your viewpoints directly applicable to my situation. That said in my opinion this may just be the laziest post you have ever written (easy for me to say because I find most have considerable value). I hadn’t crunched the numbers on the Trump tax plan so when I saw the title of this post I assumed you had found a legitimate donut hole in the plan that would swallow up the middle class, however, after just briefly looking at Trump’s plan a little more closely it seems unlikely that many people will find themselves paying more taxes. Even in the scenario’s you have drawn up it would seem these taxpayers will find savings because Trump’s plan also includes making childcare expenses an above the line deduction. I also think the increase of the standard deduction to 15,000 from 12,600 will help in examples similar to yours even though I realize people in high cost areas like NYC and SF will benefit less from that. In addition just this morning within minutes of reading your article I saw an excerpt of an interview with Stephen Moore, a Trump economic advisor, who suggested a tweaking of the tax plan should certain situations result in an increase in the tax on some of the middle class. When all is said and done I’d be surprised if there weren’t some losers amongst the middle class once this gets finalized but being that it is likely to be such a select few I don’t think it’s time to inform the middle class as a whole that we need to prepare for this event as if the sky is falling. To the contrary I think your readers would be better served by providing your insight in how we might best spend a sudden increase in our disposable income as the vast majority of taxpayers particularly those who are married and living away from the coasts will be seeing a significant boost in the bottom line.

    1. Now you know the truth and my secret that I really am a lazy person. It’s something I’ve tried very hard to fight ever since I was a kid, but I know I’m not doing a very good job at it.

      I’d love for you to write a guess post for me on why someone making $200,000 a year will save a lot in taxes under the new proposed plan. In your post please include actual numbers and charts so we can follow along and see the math. I think it would be fantastic to help readers in this regard.

      Thank you so much for your contribution. It’s always best to take action and rectify a situation, especially if you are not satisfied with what you’ve read. I think it will be great and I can help you edit the post.



      1. I’ve been meaning to post this but this article starts off talking about mortgage …”higher interest rates are already a tax on consumers”… when it was bound to happen sooner or later. Rates should have increased long ago and this is the Fed.

        Trump has proposed increasing the standard deduction to $30,000 for joint filers, up from $12,600, effectively eliminating income taxes for anyone earning less than that amount.

        Hillary wanted to raise the FICA tax which is the very people you are referring to middle class.

        Currently, pass-through profits are taxed as individual income for owners. In this structure, the businesses aren’t taxed under the corporate rate; the profits are taxed as individual income for the owners. The Trump campaign has not specified which pass-throughs, exactly, would be eligible for the lower rate under his plan.

        This administration has been particularly hard for small business but when small business (pass through entities) gets relief they may invest for growth which would result in hiring and as the need for hiring goes up so may income due to competition.

        1. Elizabeth, you seem to really know your tax stuff. What is your background? I appreciate your insights. Tax it’s something that I try really hard to understand, but I just can’t figure everything out with so many laws and changes.

          Even if the Federal Reserve “should have an “raised the fed funds rate earlier, it is still a punch in the gut for those who are looking to refinance their mortgages or general loans after a 30% increase in interest rates from a low base. Everything is relative.

          I do hope that corporate income can be passed through at the lower percentage rate as well. That would be so huge for small business owners like myself. That will fundamentally change the way people consider making income in the future.

          1. LOL, yes and no. A 70,000 page tax code would make anyone’s head spin. If gov truly wanted to help people they would make the tax code so anyone could understand it, instead they use the tax code not only for revenue but to manipulate people to do what they want. That’s why W2 income is the worst type of income.

            Early on I figured out that it’s not “all” about how much you make, it’s also how much you keep, accumulate then put to work for the right type of income. The accumulation years are very important but if government keeps taking your money it’s hard to accumulate seed money and that’s why people always feel like they can’t get ahead.

            I think of taxes in a different way. Lets say 2 people, married filing jointly, you get to reduce your taxable income by standard and personal exemption. In 2016. That’s a total of $20,700 money you earned without the government taking any of it… It’s as if the gov has determined $20,700 is enough for a family of 2 to live on for that year. Income above is seen as excess money and they can take some of it. As you climb the income ladder and tax brackets, gov take a higher % of that excess off the top earnings.

            Government will always take as much as the people allow them to get away with without causing push back. That’s why this administration went after HENRY’s, they understood the middle class was tapped out and angry. They spun words to mean what it doesn’t mean.. (high income = wealth), to gain their support for taking more money from the other guy, the HENRY’s (High Earners Not Rich Yet). As we both know, high income does not mean you are “rich”.

            At one time I was also of the mindset that “if I could just get that raise then things would get better. The problem is people are always after higher income but don’t do things that allow them to keep a good chunk of that raise, instead they spend it on things that keep them locked in the rat race and round and round they go.

            That’s my history, at one time a W2 worker stuck in the man hole climbing up the ladder to get out of the rat trap, make what is deemed “excess” and instead of being able to accumulate that excess money for my future, had to pay higher taxes and get pushed down a rung or two. Now a small business owner who was shocked at the government’s take. I did the best I could but my business model does not give much in write off’s which is why I’ve considered real estate.

            I like learning about taxes because understanding taxes help me know how and when to spend money while accumulating, and using it to make the right kind of income. I understand that the government needs revenue but just as with anyone with a credit card with no limit, it’s being abuses and we the people are paying for that abuse.

            I like learning about taxes for I might find a little nugget in that 70,000 page tax code that allows me to keep more of my money :-)

      2. PatientWealthBuilder

        For what it is worth I actually thought this was one of your more technical and meaty articles Sam! I think it is also a very interesting and discussion-worthy topic. Its fun to think through the scenarios and by providing numbers and tables you gave us something to think about. Kudos!

        1. Why thank you! Don’t worry, I get called lazy, dumb, and other names all the time but I will continue to try my best.

          I always dream that one day someone who says my writing is no good will just post something great themselves. Just write 2000 words, put up a couple supporting charts and graphs, and write something unique with some new insights. So easy even a lazy person like me can do it.

          1. PatientWealthBuilder

            lol you make it sound so easy. I can vouch for the fact that it is much harder than that. “writing is thinking” and most folks are not up for the hard work it takes to put together a really good 2,000 word post.

  32. PatientWealthBuilder

    What about the impact of the vastly lower corporate tax rates? this will increase earnings of companies and allow for increases to salaries and bonuses. I would think this would more than make up for a slight increase to certain segments of the middle class. Also, with deductions for kids, interest on mortgage, and charitable contributions, does anyone end up paying the marginal rate anyway? I pay an effective tax rate in the low single digits.

    1. Nobody ends up paying the marginal rate, unless you make well over $1,000,000 a year.

      If you really only have an effective tax rate, may I ask you to pay more of your fair share for the greater good of America? We all need people to pay more!

      FICA/Payroll taxes alone are 6.2% for employees. Then there’s Federal and State. Can you share how you are only paying only single digit effective tax rate?


      1. PatientWealthBuilder

        Its a combination of interest deduction on my home, child tax credits for five kids, exemptions for seven people in the family, and contributions to charity. I would have thought a single digit effective tax rate is normal though?

        The great thing about lowering the tax rate for corporations is that it frees up more money for corporations to invest. This is essentially diverting money from welfare programs and allocating it to corporations to help drive our economy. The subsequent increase in jobs, salaries, and bonuses should more than offset the slight increase in the marginal rate for those few who it applies to.

        Killing the AMT will be great as well!!!!

        1. Wow, 5 kids! are they expensive to raise? I feel like kids are not that expensive because so many families have so many kids with a very average income. I thought the child tax credit was only available for couples making under $100,000?

          1. PatientWealthBuilder

            They really aren’t all that expensive. It’s like most things – if you try to keep up with the Joneses it is tough but if you are frugal it isn’t bad. You can send to private school and pay for after-school care and buy your kids all new clothes. Or you can homeschool/public school and buy your kids pre-owned items. The difference in those things is thousands of dollars but doesn’t have too huge of an impact on the child. Actually, I would argue the more expensive options can sometimes be worse. Kids need to learn to work for success.

  33. Don’t forget your “other” 401k… if you’re eligible for an HSA at work, take it. An individual can put away $3,400 pre-tax in 2017. Families can go up to $6,750. If you’re 55 or older, add $1k to those numbers in catch up contributions. Most accounts these days have investment options, too.
    Sweet thing about HSA money is in addition to paying for medical care essentially on a pre-tax basis, you can pay your Medicare part a,b, c and/or d premiums out of it when you’re ready. Long term care insurance premiums, too.

  34. Hi Sam

    First off – love the post! Like all of your articles, it’s a great conversation starter.

    Generally speaking, I don’t think it’s completely correct to have the mindset of working below capacity just to pay less taxes. In most cases, paying more in taxes means you’re putting more in your pocket too (unless you’re not minimizing your tax liabilities). Everyone here would agree that more money is better, but that time is of equal or greater value to money. For people that don’t believe time > money, people can gain perspective by putting themselves in the shoes of a 50yr old billionaire on his deathbed as his grandchildren fight over his money. He/she must be thinking that he’d rather have another 10 years of life and be broke – atleast he would rest assured knowing that no one would fight for his monstrous wealth!

    I earn about $800k/yr, my marginal tax level is 51.8% (married, living in CA), and I work 1,800hrs/yr (25 vacation days), which works out to be $444/hr using my pre-tax comp. While I want to make more, I definitely subscribe to the idea of working smart and efficiently. It’s usually true that higher income usually correlates with higher stress, but I would say that correlation does not imply causation. A few lucky people earn a lot doing something that they love and don’t consider themselves stressed. I earn a lot doing something I really enjoy, but it comes with a stress-package. So when I think about side-hustles that could make money, I like to use my time value/hr (call it tv/h) to decide if it’s worthwhile. I used the <> and tweaked the answer a little bit based on personal situation and age. What I found is that I value my time at about $100/hr post-tax.

    Below are some examples of how it’s helped my decision making – YES/NO for more profit
    1) YES – Spent 30min doing a survey for Prosper P2P lending to receive a $100 Amazon Gift Card. Earning $200/hr
    2) YES – Spent 1hr signing up for 2 (me and my wife) Chase Sapphire Reserve credit cards to get 200k bonus points and save about $4k on travel. Earning $4k/hr
    3) YES – Spent 3hr gathering paperwork and communicating with new bank to refi $1m 15yr fixed 3.375% to 7/1 interest-only arm at 2.5%. Earning about $10k/hr using first 7 years of post-tax deduction interest cost.
    4) YES – Paying someone $50/hr to clean my home. Saving $50/hr
    5) YES – Researching new investment opportunities. Unknown, but hopefully positive earnings.
    6) NO – Driving Uber during down time
    7) NO – Scalping tickets. Even if I get tickets cheap, I’d rather give them to friends.
    8) NO – Going out of my way to meet people that aren’t important to me.
    9) NOT SURE – Buy a fixer house in Bay Area

    The main trend is that I jump on tax-free opportunities.

    Reasons my tv/h might increase: have more children, I find out I have a terminal illness, aging, my net worth increases, etc
    Reasons it might decrease: my opportunity cost is lower due to lower income

    Hope this helps people make better financial decisions!

      1. I’m in finance, target NW 8m by 45. I just recently entered my 30s, so if anything, I enjoy working harder with the mindset that it’s about the journey, not the destination!

        1. Sounds good. Might as will shoot for 10 million instead of 8 million net worth. Then there is the special welcome Club you get to join with a special gift as well. It’s worth it.

          All about fighting inflation!

          Do let me know in 10 years whether you still feel you have the same amount of enthusiasm for work and wealth creation. I think it’ll be very interesting.

  35. The Alchemist

    Arrgh. Sucks to be single and making a “middle class” salary in Silicon Valley when a decent house costs a cool $1m. I had just begun the process of evaluating what I could afford to buy, anticipating pulling the trigger in the next couple of years. Now we get rising interest rates *and* a tax increase. Oh joy.

    Guess I’d better find something to start blogging about, eh, Sam?

  36. Interesting that you don’t mention the case for small businesses. It’s in the tax plan that small businesses (including LLCs, S Corps, and even Sole Properietors) will have a 15% tax instead of a top marginal tax rate of 33%, so it’s a huge incentive to start your own thing!

    1. It’s unclear so far. As a business owner with the S Corp., the K-1 income is a pass-through and it is treated as normal income tax. So I need to figure out what exactly is going to be positively affected or not.

      But for investors, this is a good thing as the S&P 500 should see a 10% or so boost to earnings, bringing down the PE multiple. All else being equal.

      What business have you started or plan to start and how are you planning on making top 1% business income?

      1. It’ll be interesting to see how it pans out! I agree it will be good for investors. I’ve been consulting as a sole proprietor. According to the tax plan this counts as “pass through” income and business income to be taxed at the 15% rate.

  37. Excellent breakdown Samurai! Thanks for taking the time to do what few others will – break down the proposed changes with several data scenarios, in order to find the “tipping points”.

    As a middle class earner, you are under fire / in the kill zone. Ducking for cover and deliberately earning less than the single earner tipping point of $112k a year is (sadly) unrealistic for most folks that are currently embedded in their lives earning more than that. They’re comfortable there, which lowers the motivation to aim higher – which makes it even harder for them to shoot for more and get above that the top range of $415k a year.

    It’s their “achievable comfort zone” (sweet spot) and for most folks, they’re likely to just sit there and take the shots the government sends their way. When you’re in your “sweet spot” you become blind to the negatives of staying there, you’re lulled into complacency somewhat. Which is why the government can and will keep coming for you. You’re just sitting in that big tub of warm water, enjoying a bath. Little do you know, it’s a cooking pot and the water is slowly coming to a boil. When do you get out? Eh, later. This feels pretty good.

    Oh, and for anyone who actually considers marriage as a tax avoidance strategy? Sure, short term you might save a few bucks on taxes. But be VERY careful in your analysis, and focus on the overall financial downside risk potential as well. i.e. “divorce” – which is the single most ruinous financial event in a lot of people’s lives. The #1 cause of divorce is marriage. :)


    1. “Divorce is the #1 cause of marriage” is such a great line.

      All folks have to do is take their tax savings from marriage and discount it by the divorce rate (50%) to get their expected true tax savings and see if it’s worth it.

  38. Great post, certainly making the case to get married for taxes! I’ve never met anyone who weren’t in love, but got married just to save on taxes. I’m curious how they would handle a budget or who gets what in a divorce!

  39. The Green Swan

    I’m definitely not happy about the middle class getting squeezed more. It seems like the worse place to be from a tax perspective! You have to pays considerable amount in taxes while a number of tax deductions that lower income people qualify for get means based tested and reduced when you make certain amounts. Not good! And to see the tax come down for those making over $415K…hmmm….

    But I won’t be resorting to municipal securities or anything like that to lower my tax. I still think that equities will give me the greatest long-term return net / net.

    As far as you are concerned, I’d vote for you working less and paying less tax and maximizing life enjoyment. It is a total trap to stress yourself out to get to the high tax brackets to take advantage of the relatively lower rates…on a dollar basis you will be paying through your nose!

    I’m considering a move to London for work right now and higher domestic taxes makes it easier to make the jump to the higher taxes in the UK. I’ll be able to take advantage of Foreign Tax Credits when I return which will be more valuable in a higher federal tax environment. Perhaps more folks will be motivated to jump to higher tax countries for work like me…

    1. Paying no federal income tax on the first ~$96,000 working abroad would be great! Which state will you domicile? Hopefully one of the 7 no income tax states as well.

      London will be an AMAZING journey. GO FOR IT! I wish I bought a flat in London when I visited in 2002. Damn…

      But London is so darn expensive it is ridiculous.

      Go to Aldgate East and Brickfields to eat the best Chicken Shashlik Bhuna in the world!

      Related: London: You Are The Most Expensive City In The World!


  40. “Why aren’t more middle class people upset about this tax hike? Is it possible that most people making between $112,500 – $190,500 are simply unaware they will be paying thousands more a year in taxes?”

    No, its because I won’t be. I’m a single person making 130k a year. Under current tax rates, I’m putting 18,000 into my 401k, 3,350 into my HSA, and claim a standard deduction and personal exemption of 10,350. This lowers my taxable income to 98,300.

    10% of 9275 = 927.50
    15% of 28375 = 4256.25
    25% of 53500 = 13375
    28% of 7150 = 2002

    So my total federal income tax liability under current brackets will be 20,560.75.

    Under the Trump plan, he does away with the personal exemption but my standard deduction will be increased to 15,000. With the same 401k and HSA contributions my taxable income will be 93650.

    12% of 37500 = 4500
    25% of 56150 = 14037.50

    My total federal income tax liability if the Trump plan was enacted as is will be 18,537.50. Trump’s plan would save me 2023.25 a year.

    His plan will also cap itemized deductions at 100k/200k for single/married filers. I doubt many poor and middle class people will be hitting these numbers…this will clearly be a tax increase on the rich. Obviously its on a case by case basis as far as what the rich have for deductions, but for some of them I think this will definitely negate some of the benefits of a lower top bracket.

    Additionally, I’ve seen a lot of people focused on single parents and doing away with the head of household status, which funny enough you used a single parent for your example in this article as its obviously a way to show the most extreme example of who “loses” under the Trump tax plan. Well, here is my take on that…GOOD! Marriage rates are plummeting with my generation(millennials). Not only have we watched divorce wreck many of our parents financially, but under current tax codes if I have a kid with my girlfriend, I could file head of household as the higher earning of the two since I’d save more in taxes, and she could file single, and we would pay less taxes than we would pay if we married and filed jointly or as singles. How the heck does it make any sense at all to give us tax breaks just for refusing to marry?

    Additionally every single parent I know is either receiving child support from the ex, in which case they are still effectively financially mingled and basically the equivalent of married filing as singles, or they are on welfare, in which case they are already subsidized by the tax payers and I see no reason to subsidize them further through the tax code. Adios head of household, I won’t be missing you!

    1. GREAT JOB doing your own analysis! This is what I want everybody to do. Run your own numbers to see how your tax bill shakes up BEFORE tax legislation passes. You want to be armed with information to make the right move.

      Since most people would rather not work, these incremental expenses or benefits may help persuade people to CHANGE THEIR LIFE.

      And I’m not kidding about changing people’s lives. Once I decided to cut my income by 80%, my life was changed for the better. So much happier. So much less stress. So much more fun.


      The Fear Of Running Out Of Money In Retirement Is Overblown

      Overcoming The “One More Year Syndrome” To Do Something New

    2. Fantastic post! I did not realize itemized deductions would be capped. The middle class is truly better off under this plan. By eliminating or reducing loopholes wealthier folks will be paying more but this will be accomplished without the introduction of a new tax or demonizing them.

  41. As a single taxpayer making between $112,500 – $190,500, thanks for getting the blood boiling! Once I account for Trump’s proposed standard deduction of $15,000 vs. the current standard deduction of $6,300 my overall taxes decrease around $1,300.

    Maybe it’ll be time to propose to the girlfriend? Trump’s tax plan would have an even better outcome for us when compared to the current marriage penalty tax we would face.

    1. Yes. Stop wasting her time. She ain’t getting any younger!

      And try to stay away from making $190,500 if you decide to delay the wedding.

      Relax at work! Take 2 hour lunches. Enjoy life more.

      1. I already “paid my dues” earlier in my career so I am probably in the office less than my entry level employees…although I work from home from time to time outside of normal office hours.

        Sure I could exert less effort and make less money…giving a smaller percentage of my money to the man, but I would probably be at the office about the same amount of time. That being said, I don’t find it beneficial to avoid a higher level of income that requires about the same amount of my time.

        I’ll take the extra $100K, perks, and ability to take 1.5 hours lunches. Maybe 2 hours someday!

  42. Sam,

    I think you should take the route of earning more without putting in so many extra hours if you can. Or write another book on website optimization.

    If FS is earning $150K a year after tax, how can that be sold for $10M after tax? Who pays a P/E of nearly 100 for a website? Or am I out of touch on how this is valued? Please educate me.



    1. Hi Mike,

      Selling for $10,000,000 is only a P/E of 66, not 100. If the site is growing at 66% a year, that’s a PEG ratio of just 1. Not too unreasonable if the grow rate keeps.

      I’ve used $150,000 as a base level income for my calculations. You can see this post as an estimate of how much you can make online.


      1. I was using before tax of 15 million dollars but if the gain is based on capital gains then it’s more like 13 million.

        Impressive that you are able to maintain that growth rate even though you are so large already!

  43. The fiscal cliff bill brought back the Personal Exemption Phaseout, commonly known as PEP, as well as the “Pease limitation” for taxpayers earning $250,000 (for individuals) and $300,000 (for couples filing jointly).

  44. The core of society is built on the nucleus of the family… time to get married and do your part to raise contributing members of society!

    1. If I had a kid with a woman, we are better off for tax purposes to stay single so one of us can file HOH and the other single as compared to marrying and both filing single or jointly.

      Additionally if my baby mama wanted to be a stay at home mom and we never wed she could qualify for various welfare programs. Why would I want to marry her and take that “free” money off the table in the event she wanted to be a stay at home mom?

      To top it off, marriage opens me up to a potential divorce in the future. I’ve seen way too many guys get wrecked in divorce courts to ever want to do that to myself.

      So what do I get for marrying, I get to pay more taxes, lose potential government benefits, and open myself up to the risk of a future divorce. Sad as it may sound, marriage is a dying institution that serves no purpose these days.

      1. Marriage serves mostly as an emotional / nostalgic attribute that people attach meaning to. They’re taught (programmed) to strive for achieving it, without questioning the logic of the decision or the potential downside risks. People get into marriage without fully understanding the financial implications, both positive and negative.

        Replace “marriage” with “home ownership” and the argument still applies. :)

  45. “A 5% tax hike on the middle class and a 6.4% tax decrease on the top 1% income earners who make over $415,050 is not helping the majority of people keep their hard earned money. In fact, it’s estimated that the top 1% will enjoy ~50% of all the tax benefits.”

    That is exactly the way it should be, considering the top 1% account for almost 50% of the taxes paid. The general public does not care when tax increases disproportionately affect high earners, but they sure get upset when tax cuts give those same high earners the biggest benefit. If we have to accept a progressive tax system, then we have to accept tax cuts being applied in a similar progressive fashion with the benefits favoring those who get punished the most with the increases.

  46. Go Finance Yourself!

    I think the reason you haven’t heard more about this is people haven’t realized this. Many are so focused on the large tax cuts to the super rich that they haven’t looked at the impact on everyone else. The biggest impact seems to be on single parent families as Trump is doing away with the personal exemption for everyone in the household, as well as head of household status. Thus, a single parent with 2 kids currently receives $21,300 in deductions ($9,300 standard + $4,000 x 3 personal exemption), while under the new plan proposed by Trump they would only receive a standard deduction of $15,000.

    Keep in mind that this is by no means the final plan. Paul Ryan’s plan has been said to be similar to Trump’s but doesn’t raise taxes on single parent families. My guess is we’ll see plenty of modifications to Trump’s current proposals before it’s all said and done.

    1. Fiscal cliff’ bill

      The fiscal cliff bill, passed by the House and Senate on Jan. 1, 2013, did something very close to what Obama pledged in 2008. The bill brought back the Personal Exemption Phaseout, commonly known as PEP, as well as the “Pease limitation” for taxpayers earning $250,000 (for individuals) and $300,000 (for couples filing jointly).

      The personal exemptions begins to phase out when AGI exceeds $305,050 for 2014 joint tax returns and $254,200 for 2014 single tax returns.

      Each tax exemption is reduced by 2% for each $2,500 by which a taxpayer’s AGI exceeds the threshold amount until the benefit of all personal exemptions is eliminated.

  47. It’s an interesting analysis, but I think a year from now it will have been an academic one. A campaign tax proposal does not equal legislation, and a Republican Congress isn’t going to raise income taxes on anybody right now. More likely we’ll see a more modest simplification of the tax brackets that ends up being an across the board tax cut. And Trump will sign it.

  48. Unless I made a mistake, your post is misleading when it comes to couples. Ran a data table in 10K increments looking at federal income tax current rates vs trump without considering AMT.

    Individuals with federal taxable Income from ~140k-450k single (and some super low income) pay more tax.

    Married at all levels above $30916, pay less tax. Zone of higher married tax bracket is 225K-231.45K At 225K, savings under trump are 3486, At 231.45K savings under trump still 3163. Savings are stable until 413.35K then increase again after that.

    So really, this is a penalty for individuals (worse case 2596 penalty) in a pretty wide income range, but except for extremely low income, only affects married couples positively, regardless of income.

  49. I ran an analysis on your numbers ($112,500 and 192,500) and although I see a loss for head of household filers I actually saw those making $112,500 paying less tax and noted that married filers making 192,500 would actually pay about $1000 more a year in taxes. I didn’t take into consideration deductions and exemptions so if those were taken into account the numbers would be different but obviously differ by individual.

    I would think living in California, State taxes (income tax, sales tax, property tax, tolls, etc.) would be a significant concern for you personally.

    My wife and I are retiring in 2017 and the tax change will have minimal impact on us financially.

    Just want you to know I appreciate your website and the information you provide. My favorite is your article on stealth wealth and how the public perception of wealth is causing the wealthy to live under the radar. Something I adopted early in life.

    1. Run the numbers with individuals making $200,000. The closer you are to $190,000, the closer you get to $3,000 in extra taxes. Right at the breakpoint of $112,500 you’re paying marginally less taxes I agree.

      We don’t know exactly what will transpire. All we can do is make some best guesstimates as you have done. And then decide our actions accordingly.

      Thx for reading!

  50. My analysis is not yet complete but it tells a different story.

    First, when you account for the reduced taxes at 4 tiers along the way to the “5% hike tier”, the impact is significantly reduced.

    Second, when you account for the proposed increase to Standard Deduction, the impact is further reduced and even switched to positive for the new tax plan.

    Again, my analysis is not yet complete but for an individual with max income in the 5% hike tier and, obviously, one exemption and who uses the Standard Deduction, I get $47,684 in taxes due under the current/old tax code and $46,555 in taxes due under the proposed/new tax code. So a reduction of $1,129. *No other deductions or credits used.

    1. The important point is to do your own analysis. You haven’t stated what you make, so I have no idea about your numbers.

      The closer you are to $190,000 as a single individual, the closer you are to paying $3,000 more in taxes.

      1. Well well well. After further research, it looks like the Trump plan may do away with personal exemptions which would hit my math a fair bit, especially as you have more kids.

        It is hard to do a detailed analysis of “proposed” tax changes. I really applaud you for putting this out here for discussion. Based on all the comments, it is a very healthy discussion indeed.

  51. It’ll be interesting to see what actually gets approved through congress. I can’t imagine he’s actually going to increase taxes on the lower income folks, but that is what he proposed.

    I know several very high-income people that voted for Trump because they knew they would win BIG under his new tax plan. Many of his supporters, however, were lower income and I wonder how many of them checked the two tax plans before deciding who to vote for?

    1. I wonder whether clinton supporters checked the fact the clintons enriched their net worth from practically $0 to $250 million in 10 years? Sure they did, but they post online ‘it’s just money. no biggie’.

      It’s interesting Trump supporters care more about bringing industry back to the USA than ‘a couple thousand dollars under the two tax plans’. ‘it’s just money. no biggie’ right hilliary?

    2. trump supporters obviously did not look at any of his policies. why? because he didn’t have any plans. just a bunch of spin and rhetoric that changed with each passing wind. there’s a reason he won the uneducated vote. anger.

  52. You forgot to take into account the tons of tax breaks he plans to have such as childcare tax break and others

  53. I think it’s confusing (although likely intentional) that different polictial parties and candidates use such different definitions of what they consider middle class. I would wager that many people do not realize this.

    I don’t plan to make any drastic changes next year but still hope to utilize whatever ways I can to minimize my tax liability. Lots of great insights in this post. Thanks!

  54. Sam, in answer to your question I am no more or less motivated to increase my income due to the tax cut. The change for married couples wouldn’t change the sweet spot much. Also for where I personally live, non costal suburb, the only paths forward for significant pay increases for me are enterprenurial, become an executive, or move. Given I’m already making great money and like having some time with my family, beyond some light side hustles massive income change are simply not a reality. While I take no political stance on Trump other then to state I didn’t like either candidate, I’m astutely aware Trump campaigned as directly targeted at my demographic, middle class rural. I suspect in an interview with my peers results would be decidedly different.

  55. Who says we shouldn’t responsibly spend more than 3x our gross annual income on a home?

    11 million renters spend more than half their gross annual income on shelter and get zero return on their housing dollars. Are they renting irresponsibly?

    Homeowners have 2x the median income of renters and enjoy principal reduction and price appreciation, so they are better situated to be able to afford to spend 3x their gross annual income on housing, plus they tend to enjoy a desirable ROI.

    1. It’s usually the banks who lend money who say so. They have a pretty strict income to debt ratio.

      How much did you spend on your home as a multiple of your gross annual income?

      People can leverage themselves to the hilt if they want to, I just don’t advise it. Never forget the financial crisis in 2008 – 2009, no matter how much all of us are making now that the bull market is going so strong.

      And yes, renters who are spending 50% or more of their income on rent are renting responsibly. It is very hard to build long-term well in this scenario. Share a studio with somebody else like I did for the first two years and save. Crash at a relative’/ house, or your parents’ basement, or find the cheapest place that can be got to with a three dollar bus fare. Spend as much time outside of your apartment working to generate more income.

      Related: Immediate Solutions To The Housing Affordability Crisis

      1. I understand Terry’s frustration but agree with Sam. When I was stuck paying rent I would see the homes friends bought and wondered what I was doing wrong. About 5 years before the crash I looked into getting a mortgage. Wow, having excellent credit but the amount of money they would approve for a mortgage, very little down was crazy. Then the banker said, “if you want a bigger house, you could get a mortgage that you pay interest only for the first 5 years. At that point I understood something was very wrong. Banks had policies to protect themselves before this. They are taking a lot of risks. I understood that I wasn’t doing anything wrong, I decided to wait to buy. It would have been so easy, so tempting to buy and sign that mortgage, a carrot that may have put me in financial trouble.

        All I can say is Sam’s advise is good and if he is smart while he’s crashing at a relatives house save for a down payment. If you buy with little down (I hear these mortgages are out there) then you’re ALSO paying extra money on top of the mortgage payment to insure the bank with PMA. Although I believe the banks were responsible for the crash, I also think people who bought a house they couldn’t afford (with no emergency cash) are also partly responsible for taking the carrot.

        1. “Banks had policies to protect themselves before this. They are taking a lot of risks.”

          Don’t forget – the bank “covers” their risk by retaining the right to foreclose on the home if the buyer doesn’t pay. Don’t worry about the banks too much, they know what they’re doing. :)

          1. You’re obviously misunderstanding my post at the same time you got the first part right. Of course bank policies protect themselves but when banks are making loans that don’t even make sense to me it told me something is wrong.

            When a bank protects itself and approves my mortgage application it tells me they consider me to be a good risk, it tells me they think I have the ability to pay them back. If they reject my application the opposite. In other words, good bank policies help protect me from me…. buying too much house (at least that’s the way it was before the “everyone deserved a house mentality”).

            When a bank requires 20% down I don’t see anything wrong with it because naturally they would want me to have skin in the property. Having that downpayment tells them a lot of about the applicant too.

            I’m not worried about the banks. I’m just using common sense when observing the scheme of it all…. the purpose for policies based upon making profit, not a social institution.

  56. It looks like single people pay more in this range, but not married people in a lot of cases. We’d pay ~9k less overall. It’s as if single people earning decent but not stellar incomes are a tiny segment of voters that no candidate bothered to court. :)

  57. Hi Sam –
    Let me first preface that I am not a tax accountant. With that said I know not everyone could do this but couldn’t you reclassify your company (FS) as a partnership and then pay yourself a minimum salary and then the rest would be considered dividend distributions from the company to ensure that you pay less in taxes since you are getting so much from passive income? I would think that’s at least one way to potential pay less in taxes and not worry about the Trump tax increase on the middle class.

  58. Oh thank God! When I read this, I thought you meant the commonly accepted “middle class” based on the median household income of ~$50,000. As someone who makes less than that, I was saying just the other day that I can’t afford to see the government take almost a quarter of each paycheck (even after saving 20% in my 401k). I got nervous when I saw the title of your post; I can’t afford to pay MORE.

    I am disappointed, though, that I’m still staying in the 25% tax bracket. Paying the government a quarter of every penny I make is something more appropriate to the super rich, not people whose incomes would be considered poverty wages in some cities. Especially when no government official came in and worked 1/4 of my hours, made 1/4 of my sales, or fought with 1/4 of my nasty customers. Or even drove me to and from work 1/4 of the year. A**holes.

    As for what to do regarding taxes, I’m not saying to disregard your tax burden or anything, but that the same time though, try not to let that guide your income producing efforts. You pay more taxes by making more money, and the spread is always wide enough that those who make the most will come out ahead. I’d rather pay 75% taxes on a $100,000,000 income than 10% taxes on a $100,000, and I’d rather pay THAT than 1% on a $10,000 income. Working 70+ hours/week to take advantage of lower tax rates (from 39.6 to 33% is not a huge decrease) or leaving hundreds of thousands of dollars of potential income on the table to avoid a tax bill is not the way to go, in my opinion. Finding tax advantaged ways to grow your money is the best way to go at it. Thankfully, the choices aren’t so binary, and that third option does exist.

    For me, even after recently doubling my 401k contribution to 20%, I’m still considering upping it to 25% just to lower my tax burden. If I can get my taxable income under $37,000, I’ll go right back to the 15% tax bracket. Or 12, if Trump has his way. I’d do more, but I’m trying to buy property within the next year and need every penny I can get.

    Hopefully, the Trump tax plan will be modified to call for lowering EVERYONE’S taxes, not just the super rich while raising the taxes on the super poor (as you can see in that chart). I’m not holding my breath.

    ARB–Angry Retail Banker

    1. Hi friend, awesome to hear that you have increased your 401(k) contribution!

      I want to say one thing I’ve noticed after all these years:

      First the government comes after those who make more than $400,000 year. Then the government comes after those who make over $200,000 a year. Now the government is coming up for those who make over $112,500 a year.

      Eventually, they will come for you. When they do, be prepared by owning a lot of assets that you can draw from and set of making a high income. So far, the government has been less aggressive and going after people with assets. You can be worth $10 million and still get subsidized healthcare, for example.

      Fight on!


  59. Apathy Ends

    Great breakdown Sam, we will be in the 25% bracket under either plan but Trumps plan gives us more runway to stay in it – fine for us but definitely see the group right above us getting squeezed.

    We closed a a 7/1 Arm refi at 2.75 on Tuesday – glad we locked in a few months ago (thanks for sharing your experience it was definitely a factor and we are saving 1000s)

    the difference in salaries across the country makes setting these rates really difficult – cost of living *should* be a factor but I can’t even imagine the complexity that would take place.

    1. Congrats on locking in a 2.75% 7/1 ARM! That’s a pretty good rate in light of what’s happening with interest rates. Your 7/1 ARM now costs about 3.25% – 3.5%.

      I believe a 25% tax bracket is reasonable. 20% is the ideal, but 25% is OK. I’m tried to keep my income in that tax bracket for a while now and it feels wonderful. An optimal amount of pride, balance, contribution, and take home pay.

  60. Nice post- its interesting and eye opening. While I may not have voted for the man, I was happy to see a tax cut coming my way. Now, however, after looking at your chart I see I will only see a tax cut of 3% on my income over $151,900 and a cut on the income between $225,000 and $231,000. Definitely not as exciting as I once had hoped, but every dollar helps.

    Thanks for the insight. Definitely a good article.

  61. I’ve got to agree with RetiredJapan’s comment. Reading this feels strange… you say you HAVE to either make a lot more or reduce your income. That seems silly and feels like it would create more stress than it’s worth.

    Why not just do nothing and continue being happy. So you pay slightly more in taxes, that’s not ideal but would reducing your income to avoid paying a bit more in taxes be smart? Seems like killing the golden goose to get all the eggs to me.

    I’d either do absolutely nothing and not worry about the extra taxes, or if it REALLY bothers you that much, make just enough more to cover the increased taxes. Those seem like the obvious choices to me while the options you laid out seem extreme. I kept waiting for you to refute the options you were laying out but you actually were serious about them.

    1. I think it’s important to have mental flexibility in various decisions and scenarios. I’m always serious about thoroughly considering different financial options. Going through financial pro forma calculations is a great way to understand your options when changes are finally made. They aren’t end all be all rigid resolutions. You got to keep an open mind here.

      It seems that the section on highlighting what I would do with my money is causing a lot of angst and is detracting away from the main points about the middle class tax hike. This is something I need to consider for future articles.

      I’d love to know if you plan to change your financial behavior. Will you start working more? Why do you think Donald Trump has raise taxes on the middle class? Is the middle class stronger than we realize given they voted to raise taxes on themselves? What is your current Financial situation?

      1. SavvyFinancialLatina

        OR people don’t realize that by voting Trump they are effectively raising taxes on themselves. I could name a couple of people who always talk about/complain about paying more taxes and how Democrats are always raising taxes on them. So they vote for Trump because they believe Trump will lower taxes for them. When in effect, it’s the opposite. Let’s see what they say in a year.

      2. Why does Trump seek to raise tax rates on the middle class? Tax increases target – or punish – the middle class in areas that did not support Trump, and bypass those areas that supported him. Look at the political map, blue versus red. $112K to $190K is middle class in many blue states, CA, OR, WA, NY, NJ, IL, CO, etc. $112K to $190K is upper class in most red states. Perhaps Trump’s proposed tax schedules deliberately punish middle class masses in blue states and hits smaller numbers in red states. Bleed the wealthy, Democratic states dry, and punish their residents. Give a break to Republican states that voted for Trump, and reward more of their residents. Don’t read this as partisan grandstanding, as I am completely serious with this explanation.

          1. Interesting, I’m jettisoning a NJ investment property and am looking where to put the proceeds. Red State RE – maybe it’s time to go long, though I remain pissed at WI, MI, PA….

      3. Looks like I’m getting screwed from all directions since I’m single, live in nyc where the cost of living is very high and work crazy hours to earn $190K. You forgot to mention the other huge tax increase that disproportionally hits people who live in areas with high state and local taxes like nyc. Thumps plan also elimitates the deduction for state and local taxes so I’ll be double taxed now on that amount as well which will cost me another 10K on top of the 5% rate increase. I’ll also get hit when they raise the ss age and when the healthcare risk pools seperate by age and prexisting conditions. Instead of getting married, a lot of people including me will have to quit my fulltime job and go back to consulting with an s-corp to drop down to the 15% rate. I may also have to move to a state that doesn’t have state taxes. I’m also getting screwed with very high property taxes here in nyc not to mention common charges. I know a lot of people reading this won’t be sympathetic to someone who makes 190K but I work long hours and spent my whole career getting to that level, and the salary just reflects the high cost of everything in nyc including services, almost 9% sales tax, and everything you buy locally. Rstaurants cost 2 to 3 times what similar ones cost in other markets so people in nyc making between 100K and 200K are in no way rich like people making far less living in mansions in less expensive markets. I don’t have the luxury of doing the thpe of work I do outside a big city so these changes might force me to retire early rather than being forced to get married as you suggest which I’m sure would be even more expensive in the long run despite the tax savings. Just remember the significance of losing the state and local tax deduction that disproportionally hits people living in high cost locations like new york, new jersey and probably california where at least housing sounds cheap to me by new york city standards.

        1. I hear you. Check out: Scraping By On $500,000 A Year: Why It’s So Hard For High Income Earners To Escape The Rat Race

          The key is to start a business and earn S-Corp/LLC income, not W2 income under Trump’s plan.

          For example, you could terminate your full-time employment, incorporate yourself, and get hired back on as a contractor for a higher hourly rate, and then do more contracting work with other clients.

          Related: How To Be A Rockstar Independent Contractor

  62. I’ve never really thought about analyzing tax brackets before. I was always just told to make as much money as I can, because even if you pay higher taxes, you’re still walking away with more money in your pocket.
    Maybe that’s how it works for those of us who are still making a less-than-stellar salary and still struggling to meet savings and debt-payoff goals. But still, it’s an interesting way of looking at it for those earning more!

    1. Terry Pratt

      D.E.B.T. is notorious – literally – only if you wear it around your neck like an albatross.

  63. Really? Am I reading this from a financial blog? Choosing to make less money to pay less taxes is not something I expect to hear from people who know about finances. This is about like all of the people who say they don’t want to make more money because they will be in a higher tax bracket and think they will bring home less.

    1. Welcome to bizarro world!

      Empower yourself with knowledge. It’s always good to work through some calculations and mental exercises to see what it will take to do either, and then make a more informed decision.

      The path of least resistance is to keep the status quo. Like corporate inertia.

      My question to you is: would you be willing to work 50+ more hours a week to try and make $300,000 more a year to pay $100,000 more a year in taxes if you are already happy with what you make?

      1. I personally wouldn’t be willing to work anymore than 40-45 hours a week to earn more money. I believe in working smarter not harder and increasing my skill set so I get paid more per hour. If we can’t accomplish our goals with a combined income of around 150K we need to adjust our lifestyle choices.

        We work to live. We don’t live to work.

        1. There you go. Not everything is just numbers in personal finance. I always bake in marginal utility/reward and one’s happiness. Congruency in mind and action is key.

    2. At one time I would have thought like you but being that I climbed the income ladder (working day and night), I was shocked how much money I had to pay in taxes. I could support your + households and yes of course I consulted with CPA’s.

      I’m assuming you work for W2 income? If your boss asked you to work overtime but told you that you’ll make less money would you? Your decision would be based on many things including your financial situation and your ability to work more. You’d weigh it all out.

      If you owned a small business but if you invested (risked) “your” money or borrowed money to grow the business but IF your investment proved profitable but a big chunk of that profit went to taxes would you invest and work longer hours? It all has to be weighed out between risk and reward. For me, I have and keep working to position myself to earn passive income.

      I can retire today and live a middle class lifestyle but I have not accumulated enough to live “the good life”. The question is do I risk my money, or take on more debt, to grow the business, which would result in having to hire more people as well as my having to work a lot more. We have only so much time on earth (particularly time where we are healthy). It’s not always about money especially if the risk / reward doesn’t make sense.

    3. Terry Pratt

      On the ground, individuals frequently think this way in making working and earning decisions. Utility theory suggests an additional dollar of income is worth less to a person earning $1M than to a person earning $20K. Marginal tax rates reinforce this behavior.

      As Sam suggests, a marginal dollar is usually harder to come by for someone – e.g. someone fully employed, fully self-employed, and fully invested – already making $415,000 than for, say, someone earning $100K with room to increase productivity, and it’s easier for that $415K earner to pass on expending additional effort to earn marginal dollars.

      This mindset can kick in at any income level, which helps explain why many poor and unskilled workers fall far short of working as much, as long, or as hard as they theoretically could. To an unskilled worker, nearly all jobs are menial and tedious, and the low wage does little to incentivize work. To the menial worker, the psychic costs of crummy jobs – I’ve had jobs I hated so much that pretty much all my time off the job was spent decompressing – outweigh the meager gains of a minimum wage paycheck in the long run, making full-time year-round work unsustainable.

  64. Am I reading your chart wrong? I see the increase on single filers but for married jointly it appears the rate is unchanged from 75-150 and reduced from 150-225. It appears to me more like a reversal of the marriage penalty. Not saying it’s a good plan, just not sure it’s all middle class focused.

    1. You are reading the first chart right. I’m focused on individuals as the baseline. Here is the entire section on good income combinations for married couples to help counteract the tax hike.

      “If you are one of the millions of Americans who is facing an impending 5% federal income tax hike, your solution is to get married and make no more than an adjusted gross income of $225,000 combined. This way, you can keep on paying a 25% federal marginal income tax rate and benefit by paying 3% less than the existing system on income between $151,900 – $225,000.

      Under the current tax plan, household income between $151,900 – $231,450 is taxed at a 28% federal marginal income tax rate.

      Here are some sample income combinations for the perfect tax minimization solution:

      1) Stay At Home Spouse

      Spouse 1: $225,000 income

      Spouse 2: $0

      2) Two Professionals Who Met At Work

      Spouse 1: $115,000

      Spouse 2: $110,000

      3) Public School Teacher And Private Industry Professional

      Spouse 1: $55,000

      Spouse 2: $170,000”

      Where I messed up was creating two charts where I used two married couples earning $200,000 a year, instead of labeling them as single parents. I’ve updated the charts.

      1. Full Time Finance

        Much clearer with the second section redone. That being said I think in a full survey you’d fine the majority of those making greater then 100k a year are already married simply because sub 100k jobs are more plentiful then higher paying ones. It might skew people’s opinions.

        1. Glad the charts helped.

          Out of the ~24,400 people surveyed, 45% make over $100,000 a year individually. If you live in a coastal city, six figure jobs are a dime a dozen. Many of San Francisco’s city janitors make over $100,000 for example.

          So it does make sense that the majority of people who voted for Trump’s middle class tax hike do not live in a coastal city and do not make over $112,500 individually.

          BTW, what is your definition of a full survey, and how many people are required to participate in the survey to be statistically significant? Gallup does 1,000 person surveys and extrapolates, for example.

          And will you be changing your behavior in light of a tax hike?

          1. Already married so in my case no change. Your sample size is good though a little bias based on self selection. We as personal finance readers are definitely anything but a cross section of the public. However what I really meant was a full survey more in the context of many questions to dig differ into the demographics. For example does individually more then 150k mean you are not married or are you a sik? Like you pointed out the cities didn’t vote for Trump demographically. So where are people from? I’m more thinking about the control variables for the data.

          2. Terry Pratt

            I have two nickels (1963 and 1964). If I rub them together, can I get one of those dime a dozen six figure jobs?

            1. Move to a coastal city and do something for more than 5 years straight. Congrats, you’re now qualified for a dime a dozen $100k+ job.

            2. Terry Pratt

              Re: Matt is misguided. I live in a coastal city and I have a half a dozen co-workers who have been at this workplace for 10 years and they’re all earning 25 cents per hour above minimum wage, with no $100k job in sight.

  65. I voted to keep my taxes higher, but you’re right – under this tax plan my taxes will go down and people making between $112,500 – $190,150 will see an increase in their federal income taxes. That seems generous of those taxpayers. I think the economy would do better if they kept the money and invested it in down payments and their kid’s educations, but maybe trickle down economics will work this time.

    1. This is good stuff. I wonder how many more people making over $112,500 a year realized their taxes would go up and voted in such a way. If millions knew, then the economy and middle class are in much better shape than we realize. I’ve been ignoring mass media and political rhetoric about how the middle class doesn’t have enough saved and is financially struggling. Now I might ignore them even more!

      Depending on how much money you make over ~$400,000, your income taxes might go up or it might go down.

      1. This is a really good point. I try to ignore the mass media, but unfortunately I think I’m influenced by what they have to say. I’ve also been thinking that the economy and middle class are in bad shape, particularly with the slow job growth after 2008-2009 and the relative stagnation in wages. Many in the media have said this election is about people that have been hurt by this economy. On the other hand, there have been 15 million new jobs created since 2008. So, it could be that we’ve all been misled and that the middle class are in fact doing quite well and have voted to increase their tax burden to make needed investments in American infrastructure. If so, that is fantastic news for the country and it bodes well for the next four years. It would be great if everyone is doing well enough personally such that they feel comfortable investing in the greater good. We will all benefit from it.

        So far I’ve run my numbers through Donald Trump’s proposed plans and it looks like I will come out ahead. I could see using the money for an extra foreign vacation next year, since I do not need it for my regular living expenses.

  66. Action Economics

    Your situation is certainly a difficult one to take action on to get to a lower tax bracket, but getting to over $415K by working 50 hours per week seems like counter productive as well, because each dollar you earn extra is still getting taxed at a high rate. From a lifestyle standpoint as much as I hate to say it, paying the tax is less harmful than trying to avoid the tax.

    From a macro standpoint, raising taxes on the middle class, or the upper middle class if you believe that is a thing, is much more effective to the federal budget than raising taxes on the 1%, because there are so many more people in that income bracket. I’m not a fan of increasing federal government revenue, but to balance the budget at some point in time there will have to be both spending reductions and tax increases, and those tax increases to be effective will essentially need to be across the board.

    Another tax hike I noticed on the proposal is on those with a lower AGI, Individuals with AGI under $9,275 and couples with AGI under 18,550 will be paying more in taxes, going from a 10% bracket to a 12% bracket, People earning this amount won’t benefit from the 15% bracket being reduced to the 12% bracket.

    1. AGI under 10k and 20k married would pay 0 taxes (15k standard deduction personal under his proposal, 30k married). In fact, the increased standard deduction would virtually guarantee no tax increase or a decrease for nearly all low income. You’d have to have a weird situation where itemize a LOT relative to very low income.

    2. It definitely does make sense for more people to pay more taxes to shore up the foundation of our budget. I’m just surprised after doing some deeper thinking and analysis how much lower the income hurdle is and how much more people will be paying.

      A person earning $190,000 will pay ~$3,000 more in federal income taxes all else being equal. That is A LOT! Usually when taxes are raised, middle/upper middle income people end up paying hundreds more…. maybe $1,000. But $3,000 is the most I’ve seen in recent memory.

      Now that the hurdle is $112,500, even w/ inflation and $271,000 a year earning janitors, perhaps the hurdle gets lowered to under $100,000 in the next election. We started at $400,000+.

      At least more people are paying taxes!

  67. RetireJapan

    I don’t get the antipathy to paying taxes. So you’d rather reduce your income and potential, stop doing interesting work, just to avoid paying a higher tax rate on your marginal income? The taxes aren’t even that high, eh?

    1. Let’s turn your question around by asking you: Would you rather work 50+ more hours a week to pay $100,000 more in taxes if you can live comfortably off $350,000 gross income? How much money do you make? And how much money do you really need to be happy?

      This is why karoshi, or death through overwork, is a common phrase in Japan.

      1. RetireJapan

        Oh, I make a lot less than that (maybe $60k?) :)

        Incomes over here seem to be much lower than US ones.

        But tax, and avoiding paying a higher rate of tax, isn’t a huge factor in my thinking. I agree that knowing what makes you happy and working towards that is the key. At some point you should be aware that you have enough money and then you can just do interesting things with your time (that may or may not result in you earning money).

        But you write “I’ve either got to kill myself to try and make as much as possible over $415,050 to take advantage of the new 33% marginal federal income tax rate. Or, I’ve got to limit my individual adjustable gross income to $112,500 to pay a reasonable 25% marginal federal income tax rate.”

        I don’t see why that would be a binary choice. What’s wrong with making $150k and paying a bit more tax on the extra over $112,500? And how does that magically become fine after you’re making $415,050?

        I’m genuinely curious because I don’t understand your reasoning in this case. Love your work and read everything you write.

        1. Yes, doing nothing is definitely a choice too. I just love thinking about ways to maximize my time and money, and also help other people think about their own situation as well. There’s always an optimal balance.

          Figuring out potential outcomes and choices is very fun for me. Who else would write this post and respond to comments before 7am on a Sunday? Given I make more than $112,500, I’m one of the 45% of 24,000 voters who will pay thousands more in income taxes each year. I can either do nothing, or do something about my behavior.

          If you’re making $60,000 and happy, that is awesome. It feels good not to be subjected to increasing costs, that’s why shifting from income to wealth might just be a great plan for the future!

          So are you willing to work 50+ more hours a week than you are currently working to try and make $300,000 more a year and pay $100,000 more a year in taxes?

          Related: Focus On Building Net Worth More Than Growing Income

        2. The Scholar

          Is there a reason why you don’t work harder to try to make more than $60,000 a year? Or are you showing your antipathy for working harder and paying more taxes?

    2. If 50%+ of any incremental income is going to be taxed (federal, state, local, sales tax, et), why work harder than I need to? The incentive to produce and add value goes down substantially. I may want to take an additional exotic vacation, buy a vacation home and give a family member money for college, but not if I have to put in that much extra time (and the last 5, 10, 20 hours are always the most stressful since I’m already working a lot) just to pay for taxes.

      Same is true for business formation. If my hurdle rate for a new business or project is say 15%, it’s a lot easier with a corporate tax rate of 10-15% than it is 35-40%.

      1. I’m very looking forward to seeing whether this corporate tax rate gets reduced to 15%. I don’t quite understand the details yet for those of us with S-Corps and pass through income. Maybe someone can elaborate.

        If corporate taxes do get cut, and you can make $415,000+ in operating profits and pay 15% instead of 33%, 35%, or 39.6%, that is going to be HUGE!

        1. Sam,
          Here in Canada we already have 15% corporate tax rates for corporations.
          15% for your first 500,000 in profits
          26% for any profits above 500,000
          But any pass through income or income taken out of the corp by shareholders/owners gets taxed so the effective total tax on earnings = the taxes you would have paid earning that money as an individual. WHAT it does do is make it very attractive to leave your money in your Corp to reinvest in more jobs, equipment etc because you get to reinvest 85% off your profits instead of about 50% – 70%. Actually here in toronto the top marginal tax rate is over 50% on federal and provincial combined.
          Bottom line….. if you want to get the money in your hands for consumption…. you get nailed with the taxes, but keep it working for you in your Corp and you defer a whack of taxes and make money on the portion you would have paid to the government.

        2. Hi FS,

          My understanding is that the proposal aims to treat all passthroughs, including, sole proprietors and LLCs, as generating a new class of income called “business income”. Such income will be taxed at 15%.

          This will hold true for even your small Sch C filers!

          Whether this is enacted or not remains to be seen.

          1. This will be the biggest gift to entrepreneurs everywhere! Fingers crossed. If this happens, OMG! Seriously….. America is made up of small business owners. Best thing ever.

          2. This would drastically alter my take home from my small business. Definitely looking further into this when more details are apparent.

  68. I’m guessing by the time the details get ironed out, no one (or very few) will see a tax increase. I think the 33% proposed top rate will end up being 35% and move up to a higher starting point but we’ll see.

    Also to be fair, as proposed it’s a 5% increase on half (or less) of your income, meaning at most its a 2.5% increase in taxes, partially offset by saving 3% on ~20k of income (91k to 112k). Also, net standard deductions/personal exemption would be increased significantly for a single household meaning it’s probably closer to 1% higher taxes net even if you are making near the top end of the bracket unless you already have itemized deductions well in excess of the standard deduction. Not insignificant but not terrible either.

    Personally, I’d leave the top bracket alone and instead make sure corporate tax reform and reduction to 15% top corporate rate come first. I’d also make dividends tax deductible to the corporation (and instead tax as ordinary income for individuals like REITs). The gains in net wealth to the top 1, 5 and 10% would be massive from this scenario (due to the increase in value in stocks) far outweighing any tax savings in income.

    Do you ever model in NQ Def Comp plans for tax savings in addition to 401k? I can plan around with my NQ Def Comp in order to make my income hit just about any income threshold I want since I can def up to 100% of my bonus and I think 50% of my income (can’t defer RSU stock comp unfortunately).

    1. Financial Samurai

      Hi Rob,

      I hope you’re right there won’t be a middle class tax hike when all is said and done. In the meantime, everybody should be thinking about what to do if there is one before it happens.

      I’m not familiar with the NQ Def Comp plans. Can you elaborate?



      1. I’m a retired single who itemizes. My total itemizations are higher than the proposed std deduction for a single. Plus I will lose the personal exemption. Bottom line is my taxes will go up approx $1000 with the new plan. Hoping when it all settles, they decide to keep the personal exemptions but I’m not counting on it.

        1. Rochelle Simon

          Ended up that my taxes go up $1800 since I found out I am also losing a deduction for interest on home equity debt. Joy. I’m at the point where I’m better off taking my measly $12,000 standard deduction and ending my cash charitable contributions. Sad day for me.

      2. Dood, el Farbe

        Non-qualified deferred compensation plans are a way of kicking the tax can down the road a few (or more) years for HC employees (usually exec level), hoping that the tax rates will decrease or that you’ll move to a new, lower-compensated position, or (if married) that the spouse may stop working by that point and thus have lower overall family income by then.

        Most plans permit the employee to defer up to 50% of salary and 100% of bonus into a separate account. Those monies are liable for FICA but not income taxes. (An unfortunate wrinkle in the guidance from IRS is that the amount paid to FICA should itself count as presently earned income, so you do have to pay state/fed income taxes on that and it increases your gross income received by the amount paid as FICA that year.)

        If you have 401K matching at X percent of your salary, then the portion of the company match that would have gone into the 401K goes to the defcomp account instead.

        You have to elect when the money will start being distributed to you (e.g., 5 years after the deferral start) and over what period of time (can be broken up over many years).

        I do believe death or separation from the company results in “immediate” repatriation of all monies deferred. I put “immediate” in quotes because it can’t come back sooner than the 01January or 01July that is at least 6 months after you separate. So someone planning an early retirement would likely separate around 30June so as to get the deferred money in the next tax year, particularly if they had elected it to come back as a lump sum. I think also that plans permit the person who separates to still be paid out over time, if that’s how they elected it.

        1. Dood, el Farbe

          Sorry for the disconnect in my final paragraph, as between the first and last sentences. I took a call while typing that and after the call remembered that the distribution doesn’t have to be lump sum but can be set to begin 5 or more years after the deferral year, in which case it wouldn’t all come back in the Jan/July that’s 6 months after separation. But I forgot to go back and fix the first sentence!

        1. Pretty amazing how I telegraphed this result 2.5 years before it actually happened right? Hopefully this article helped at least some people figure out their tax situation to pay less taxes.

          Damn, it feels good to do detailed analysis and be right! Go #USA!

          1. Jim Johnson

            Reading this, I just broke 120k for the first year of my life as a software architect. I’m trying to understand all of this shit. Sounds like I’m fucked? Am I fucked?

            I’m single but def have a hot girlfriend and could propose if it would help me. I dunno wtf to do. Are you saying that’s my best option right now? Dammit. I need a CPA.

          2. Can we start a petition, to abolish this tax law IMMEDIATELY and return to the previous year rules?

    2. Most of the comments here are from a year or more ago. In theory this tax plan sounded good. In fact however, it is a disaster. Home interest deductions are lost, your state, local, property, school taxes are all rolled up into one 10K deduction which crushes any of the school districts in the US and, the tax payers who fall into the low end of a particular bracket end up paying the same percentage of tax as those at the top end of the same bracket. This is not good for the American taxpayer. As a GOP supporter, I’m very disappointed to the point of switching parties.

      1. I am disappointed as well, its a complete bait and switch. Get more in your pay so we can take it at the end of the year. I also got my military separation pay back , you know the one that was double taxed, and they just tax the interest again…. so basically they take 50% of that double taxed separation pay back in another tax on the interest…

        Its a con job

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