Letter: Taxation challenges
A subject being talked about these days is income and wealth inequality. Let’s “peel the onion” of one aspect of this larger topic by examining the taxation challenges to get ahead in terms of aspiring to get into the “middle class.”
First, you need to understand our convoluted income tax brackets. Clearly, as you earn more, you obviously pay more — but at various income-level points you start paying a higher percentage by entering a new “bracket.” You only pay that higher percentage for the dollars in that last, higher bracket — not on the total. Note the tax bracket percentages will be the same for single and married taxpayers.
Then you have to consider the differences between “adjusted gross income” — IRS talk for your W-2 income, possibly coupled with some adjustments — and “taxable income.” For most taxpayers with the new tax system starting in 2018, adjusted gross income minus the standard deduction equals taxable income where the standard deduction is $12,000 for single taxpayers and $24,000 for married taxpayers.
With your eyes now glazed over with IRS talk, we’ll get into the steep federal taxation system that our “protect the middle class” politicians have given us. Let’s just look at the rates of taxable income for single taxpayers, as it gets complicated when married and with children:
- You start paying taxes at a “teaser rate” of 10%.
- At $9,700 it jumps only 2%, to 12%.
- At $39,475 it jumps 10% to 22% — the highest increase in the entire tax system.
- If you manage to climb to $84,200, it only goes up 2% to 24% in a kinder, gentler bracket.
Then you have Colorado state income tax at 4.63% — with minor exceptions everybody pays the same regardless of taxable income level or single versus married. Add to this the Medicare tax of 1.45% on W-2 wages —everybody pays the same until small increases for high earners.
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Finally, you have to consider the little pesky problem of paying the 6.2% Social Security tax — somewhat less than double in practice for the self-employed. Again, as you move up in the 24% bracket, the Social Security tax typically gets paid up at over $132,900 W-2 income — more clear sailing as income goes up? Further, for many in the federal 24% tax bracket and above, they start to accumulate stocks, which get a special tax rate of 15% for many dividends and capital gains.
In summary, the information above should help explain why its challenging to aspire to be in the middle class and that some billionaires say their secretaries pay a higher percent tax than they do.
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