So, my accountant finally wrapped up my various tax documents and for the prominent Federal Tax Return, I was surprised once again to see just how low my Effective Tax Rate is – under 5%. That’s my net tax rate after all deductions, credits, etc. Not that I’m complaining, but the tax system is so convoluted that someone that makes what I make pays less than 5% in Federal Taxes. I mean, we are a single income household and I’m not raking in huge bucks, but we’re solidly upper-middle class and paying just a fraction of our actual “tax bracket” amount. This just further illustrates that if I’m paying this little in Federal taxes, people closer to the national average income are pretty much paying nothing.
Why Is My Tax Rate So Low?
There are so many deductions available that with relative ease, one can get down to a virtually non-existent tax rate. Here are a few financial drivers for our family:
- I’m a routine contributor to my company 401K plan. Any dollars contributed reduce your taxable income by an equivalent amount.
- We just had our third child. That’s a $1000 tax credit for each child until you start to get phased out based on income limits.
- We make various charitable contributions each year, which reduces taxable income.
- We have a decent sized mortgage since we live in a relatively high cost area. Mortgage interest is deductible, as are real estate and school taxes. Even though I have an incredibly low mortgage rate at 4.625% for a conventional 30 year, it’s still a 5-figure amount lopped off income each year.
- I established an LLC for my blogs. While I brought in a decent amount of money last year, it was still in the growth phase and I had expenses that were either fully or partially deductible.
- I utilized a Flex Spending Account for health and medical expenses.
- I took my lumps last year in my taxable trading account during the market meltdown. I had recognized some losses throughout the year (here’s my Current Portfolio which is doing remarkably well this year, even in the context of the 70% in the broad market from March last year).
- There are probably a few other considerations I missed as well.
More Tax Tips and Deductions
- Cash for Caulkers $3000 Plan
- 7 Year End Tax Tips
- New Car Sales Tax Deduction
- Cash for Appliances Plan
- Deferred Compensation
For my state taxes, I’m actually getting a refund if you can believe it, because in our state, 529 plan contributions are deductible as well. So, that’s like beating the market by a few points each year in that college plan account for the kids as well. Not only does it grow tax-deferred, but I also get a refund back from the state up to something like $15K per year (I have to check that).
Who’s Paying the Taxes?
Well, most of the country isn’t. It’s pretty much the top percentage of earners. I get the notion that a family of four making $40,000 in a medium cost part of the country would struggle with a $5000 tax bill on top of the myriad state taxes and cost of living. But shouldn’t most families at least pay something? 1%? I mean, we’re all sharing in the services and expenditures of the federal government from Defense to social programs to now, healthcare, but the full burden is being borne by such a small portion of our constituency. With more tax increases on the way, this equation will only become more lopsided. It just begs that question as to how far it goes and the fairness of the whole system.
So, with a rather large tax deduction, some may question why I don’t run and adjust my W-2 immediately to make sure I’m not giving the government one of those free loans all year, but the reality is that it’s really not a big deal to me – Here’s Why.
What Was Your Effective Tax Rate?
Do You Feel It’s Too Low or Too High?
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