Remember all the commotion regarding tax reform in 2018? It was supposed to be a silver bullet which would save the middle class? Trump knew what was best for us, he’s a businessman, right? If you’re like me, an evil high-income earner, you’re in for a treat. A big tax bill. There seems to be an ongoing anti-wealth movement that’s catching wind in America. Except it’s targeted at the wrong group of people. The tax reform which took place in 2018, and continues into 2019 will not impact the ultra-rich who sit at the top of the socioeconomic ladder, looking down from their ivory towers at the plebeians who try to make ends meet with a 9 to 5. No, tax reform will continue to impact high wage earners in exceeding high cost of living cities like California and New York. I’m one of them, and here’s my case study.
My 2019 tax bill is the most i’ve paid in taxes, ever.
In 2018 I made approximately $263,000 and had a tax bill of $64,337. Over the 12 months 2018 window, approximately $57,739 were paid via w4 withholdings. This left a defect of $6,598 which I owe to the IRS for the tax year 2018. See below for an example.
This post is not an anti-tax, pro-rich “i’m-not-willing-to-pay-my-fair-share” rant. America is the best country in the world. The reason it continues to be the premier destination for immigrants across the globe is due to the government’s ability to levy taxes to be used for the public at large. I use public roads, police services, and other government-funded entities. I want to pay my fair share, I really do. But when is the anti-rich movement going to end? The table below depicts my income earnings from 2012 through 2018. I’ve had an effective tax rate of around 25%. This means that of the $263,000 I earned, I paid $64,337 in federal income taxes…and we’re not even talking about the additional taxes I have to pay to California and the city of San Francisco!
The problem I have with this is the cap of the “State and Local Tax” deduction (SALT). SALT lets income earners deduct their state (California) and local (San Francisco) income tax as an itemized deduction which would reduce their tax liability. So in previous years where I paid over $25,000 in state and local income taxes, I would be able to reduce my taxable income by that amount. This is what happen in 2017. I had an income of $224,751, but via SALT, was able to reduce it to $198,617, the amount through which I was taxed. This was a fantastic way to keep an individual’s w4 withholding at “1” and meet their tax obligations at the end of the year. This benefit ended in 2018 when the IRS implemented SALT tax reform which capped the SALT deduction to just $10,000, while increasing the standard deduction for single filers to $12,000. The net result? An increased taxable income. We can visualize the impact below.
With only $12,000 in deductions my taxable income is almost $13,000 higher than anticipated.
Since the SALT cap is only $10,000, if an individual lacks other deductible expenses (e.g. real estate)…which is the case for most people in California and New York, we now default to our new 2018 standard deduction of $12,000. If there were no SALT cap, my taxable income would be $238,360 and with an effective tax rate of 25%, I would owe approximately $59,657. Through my w4 withholdings, i’ve paid approximately $58,554 which would reduce my tax payment from $5,783 ($64,337 – $58,554) to $1,103 ($59,567 – $58,554), a tax bill easier to digest.
Taxing income earners is not the path to tax reform nor will it solve America’s $22 trillion dollar tax deficit. Force large corporations hoarding billions of dollars in offshore accounts to repatriate their earnings to America and pay their fair share in taxes. Implement equal taxation policies for everyone. We have US Senators earning $218k and paying only $29k in taxes or an effective tax rate of 13%. How is that fair? When is this insanity going to end?