Level 5 Financial Blog
Many people live their lives without wondering if things are different elsewhere. Still others realize that the “world is a big place” and that circumstances and living standards can be very different in other countries. This second group will be interested in a recent analysis completed by economist Christina Enache. Ms. Enache compared government revenue sources in the United States to the typical country within the Organization for Economic Cooperation and Development (OECD). The OECD, founded in 1961, consists of 37 primarily European countries plus the United States. Included as members are Germany, France, the UK, Israel, Norway, Italy, Chile, Japan, South Korea, Canada and Australia among others. Some countries such as China are non-members but maintain working relationships with the OECD.
It has been occasionally said that the political class in Washington resides in an alternative universe. This statement is often true as it relates to the Internal Revenue Code, which of course, is the byproduct of the legislation passed in Congress. Inflation is an economic phenomenon by which the purchasing power of a currency erodes over time. It affects all of us, yet Washington sometimes acts as if it does not exist.
The net investment income tax came into being on January 1, 2013 to defray some of the costs associated with the Affordable Care Act. It is assessed at a rate of 3.8% in addition to normal income taxes (capital gains and ordinary income taxes) that might apply to income generated by investments held in taxable investment accounts. Net investment income includes interest, dividends, capital gains, rents, royalties and non-qualified annuities. It does not include wages, unemployment compensation, Social Security benefits, alimony, municipal bond interest and most self-employment income.
The IRS Code is extremely complex and laden with technical jargon. There are also some “tax traps” that might be avoidable if a taxpayer plans ahead. One of those traps deals with the method that the tax code uses to qualify taxpayers for certain benefits. For example, some tax breaks are “phased out” over a range of income giving the taxpayer a partial tax break. Roth IRA eligibility is a good example. For an otherwise qualified married taxpayer filing jointly (MFJ), 2021 Roth IRA contribution eligibility begins to phase out if the Adjusted Gross Income (AGI) exceeds $198,000. The phase out range is $198,000 to $208,000 so a couple reporting an AGI of $203,000 is right at the midpoint of the eligibility range. They are allowed to make 50% of the maximum contribution that a MFJ taxpayer making less than $198,000 could make. Only eligible MFJ taxpayers with AGI’s exceeding $208,000 are completely ineligible due to income. While this may seem like a complicated eligibility criteria, it is certainly less harsh than “cliff eligibility”.
If you are like most people, you would like to have a dollar for every time you have heard those words spewing from the mouth of somebody in Washington, DC. Generally, these politicos are banking on the fact that the average American has no idea how the tax burden is distributed across our society. And, it is always an easy sell when benefits are promised that will be paid for by somebody else. But what are the facts as they relate to our federal income tax burden?