Why American Workers Pay Twice as Much in Taxes as Wealthy Investors • Hacker News Board

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#191

Post by hippich » Tue, Sep 12, 2017, 4:36 PM UTC

jermaustin1 wrote: post #128

alexlongterm wrote: post #93

Earlier quoted context omitted.

^^^ this. In fact in the US the IRS will flag abnormally high salaries for small businesses (millions per individual) if no or very few dividends are paid out because income tax is less favorable to the government in the total amount the IRS receives when looking at multi million dollar salaries. Beyond the first $110kish FICA stops making a dent as social security caps out. I'm sure there are possible loopholes for…

People often forget about S-Corps. As the owner you W-2 yourself, then what is "left over" is a dividend. Since an S-Corp is a pass-through entity, you don't pay corporate taxes, and aren't getring the C-Corp double tax on your dividends. On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%. IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants…

i went through calculating it. that works only for narrow range of revenue/profits per year. if you max out fica taxes, you are at loss, since s-corp still pays its half of employee taxes. on top of it whole uncertainty of "right" amount of salary and possible audits made me steer away from converting my llc into s-corp.

So while it might work for some - it is not a major "loophole" for top 0.1% (not even for top 1% i think)

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#192

Post by JamesBarney » Tue, Sep 12, 2017, 4:38 PM UTC

SilasX wrote: post #113

chollida1 wrote: post #8

> Americans in the top 1 percent, and especially the top 0.1 percent, have seen their wealth and income multiply in recent decades as the rest of the country’s share of the economic pie shrank. Since 2000, a recent study found, the top 1 percent have made those gains almost entirely on income from capital, especially corporate stock—not on labor income. One reason may be the financial options of the wealthy: Business…

>I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual. I don't think that's right. If you look at the dividends in isolation, it looks like a low tax rate. But if you ask "what's the tax rate on capital income?", then you…

That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%.

Also you're dividing by 200 when you made 250.

My calculation with those two corrections give 27.6% which is lower 13%

20018.6% + 200(1-18.6%)15% + 5015%

37.2 + 24.42 + 7.5 = 69.12 / 250 = 27.6%

Marginal Tax rate for 38k-90k = 40.8%

                      90k-110k = 43.8%

                      110k - 190k - 28%

                      190k- 420k - 33%

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#193

Post by jjeaff » Tue, Sep 12, 2017, 4:38 PM UTC

JamesBarney wrote: post #171

solotronics wrote: post #158

Earlier quoted context omitted.

no but instead of taking out the money to pay yourself, you just buy things as assets of the company therefore reducing tax exposure.. at least thats the way I have heard of.

This is called "piercing the corporate veil" and will not only get you in trouble with the IRS but will also mean if you're ever sued you won't get any of the normal protections to your personal assets that you would expect from doing business as a corporation.

Protecting yourself in a single owner corporation or LLC would require extraordinary discipline and bookkeeping. The protections offered by an LLC or corporation to a single owner are generally overstated.

In other words, the corporate veil will be pierced either way.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#194

Post by guelo » Tue, Sep 12, 2017, 4:39 PM UTC

fulafel wrote: post #115

cgore wrote: post #2

Because politicians sell progressive income taxes as a way to screw the rich, when it actually just screws the upper middle class, since the actual rich don't have jobs to tax the income from.

The Obama tax hikes were largely aimed at high capital incomes, though the accompanying high pay tax hikes was hardly "screwing the voters" either. See http://money.cnn.com/2015/01/30/pf/taxes/obama-taxes-rich/in...

Pretty sure the proposed taxes in the article you linked to did not pass. The only major tax change Obama was able to get through was the Obamacare related 3.8% Net Investment Income Tax.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#195

Post by bradlys » Tue, Sep 12, 2017, 4:39 PM UTC

kazagistar wrote: post #81

fortythirteen wrote: post #17

If capital gains taxes are raised, then someone who invests outside of a 401k or IRA gets double screwed.

Where does the double come from? Each dollar only gets taxed once... only the profit gets taxed when investing, not the principal, right?

Taxed when you get your income (income taxes) and then taxed again when you withdraw (capital gains). Traditional 401k and Traditional/Roth IRA allow you to only be taxed once. (Defer income taxes until you withdraw or you take the income tax hit upfront but are not taxed on withdraw)

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#196

Post by random023987 » Tue, Sep 12, 2017, 4:39 PM UTC

tanderson92 wrote: post #168

random023987 wrote: post #129

Earlier quoted context omitted.

Tax shelters are not made for people like you. The middle class is best served by collective bargaining to increase their wages and benefits, strong consumer protections, and access to affordable health care. Up to about your first 5-10 million (depending on where you live) you need to play by the rules. After that, you can think about hiring a tax advisor to start scamming the system. But the downmarket financial ad…

There are tax shelters and loopholes for upper middle class workers. The whole tIRA -> Roth IRA conversion is a trivial way to avoid the Roth IRA income contribution cap. The 401(k) system is itself a tax shelter, and is a larger portion of middle class earners' salary than it is for those with tens of millions. Need I mention HSAs which are like triply-tax protected?

Retirement savings is tax advantaged, however most people consider that a feature of the tax code, rather than a loophole. The traditional to Roth conversion will be of benefit only to those whose post-retirement income puts them in a higher tax bracket than they are currently in. Most middle-class wage earners would not be in that category unless they keep working well into retirement age.

Health Savings Accounts are highly dependent on the circumstances of the individual. Many people with employer-provided health care plans receive minimal benefit from an HSA.

That being sad, you've made you point, in that there are portions of the tax code with deductions accessible to the middle class, like home interest deductions and deductions for charitable giving.

But the, "I'm going to start 12 shell companies and park my money offshore" kind of tax dodges are not really feasible until after your first ten million.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#197

Post by bduerst » Tue, Sep 12, 2017, 4:40 PM UTC

hippich wrote: post #186

solotronics wrote: post #158

Earlier quoted context omitted.

no but instead of taking out the money to pay yourself, you just buy things as assets of the company therefore reducing tax exposure.. at least thats the way I have heard of.

assets are not expenses. (that's why it called assets) some assets can be depreciated over years. some small assets (like printer, laptop) - can be written off in one year... but amount you would save on it is negligible.

Asset purchases are expense. It's a way to get cash out of a company to avoid paying taxes.

Money launderers will sell themselves electronics at a 5-10x markup on Amazon, for example, to get the cash out.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#198

Post by hippich » Tue, Sep 12, 2017, 4:40 PM UTC

brianwawok wrote: post #166

dougk16 wrote: post #160

Earlier quoted context omitted.

The OP mentioned starting their strategy when they were 25, implying they are/were a "normal" person, which is why I asked, since my vague understanding of the situation in the US matches what you describe, that you have to have gobs of money to begin with before you can really start gaming things.

It sounds like what they are doing may not be 100% audit proof. Do you want to play the shady taxes game and hope you don't get caught?

I will agree with brianwawok. Amount of BS I hear from friends "optimizing" their taxes is staggering. Be very careful about any advice you receive from such entrepreneur. Most of them either breaking laws, or breaking IRS rules, which, unless you got plenty of time and money to challenge in the court, is equivalent of laws for you (I guess until you get to these 10m+ where you can afford to fight IRS - I am not there yet, so can't comment)

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#199

Post by jjeaff » Tue, Sep 12, 2017, 4:41 PM UTC

gnicholas wrote: post #143

ryanmarsh wrote: post #137

Earlier quoted context omitted.

That's why you pay yourself a small, but not alarmingly small, salary W2 and take the rest on your K1 or such.

The IRS routinely audits people for not paying themselves a market salary in order to shift income to another category. So in playing this game, you have to factor in the likelihood of audit, cost of defense, and cost of penalties and interest that could be assessed.

In the hypothetical scenario of the op, he has 100k as a salary. Which the IRS would not ever likely contest. Since it gets you close to paying out your full ss tax anyway. (since ss tax cuts out somewhere around 115k or so).

And it is also enough for almost any profession. Even CEOs of small companies earn in that range.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#200

Post by adamlett » Tue, Sep 12, 2017, 4:41 PM UTC

walshemj wrote: post #15

URSpider94 wrote: post #9

Earlier quoted context omitted.

It's not the progressive tax structure that's the problem, it's the fact that cap gains are taxed at a much lower rate than other forms of income.

That's to encourage money to be invested and also to compensate for the risks.

Ostensibly, but really it's hard to look at it and not conclude that it's simply to ensure the rich don't have to pay taxes.

What do people imagine rich people would do with their money instead, if capital gains were taxed like income? Stuff it their madrasses, and be at the mercy of inflation? Probably not.