Are They Paying Too Much in Taxes?
The deficit reduction and tax rate increase debates are currently consuming all of Washington, but they’re also consuming the minds of those people living in households with adjusted gross incomes of $250,000, or more—the wealthiest 2 percent of income earners who would see their taxes increase if the president was able to successfully pass his plan. Our pals at LearnVest have an essay from a couple who are on that threshold of high-income earners, who argue that they aren’t wealthy and already pay high tax rates:
“We’re in a weird place: We don’t have enough money to invest in a house or the stock market, which would get us tax exemptions. So we pay the full 40% of our salary in city, state and federal taxes.”
The couple also admit that they realize they pay a premium for living in New York City, which has a high cost of living, and that they’re contributing very little money into their 401(k) plans because they’re trying to set aside as much money as they can to buy their first home. They also admit that, yes, they are indeed wealthy when compared to many other people.
I understand what this couple is saying, and that, yes, it sucks to have nearly half of what you earn paid in taxes. But I also think they could approach their financial situation much differently. As high-income earners, they should definitely contribute to their 401(k) plans and max it out because those are tax-advantaged plans, and having those deductions available to them could possibly put them in a lower tax bracket, and they’d also have money put away for their retirements—it’s win-win (LV’s certified financial planner agrees: “if they maxed out their 401(k), they would not pay taxes on $34,000 of their earnings, resulting in considerable deductions”).
They also choose to pay around $3,000 a month in rent for their one-bedroom apartment. They could look for a cheaper place, and throw what they’re saving in rent towards a down payment for their first home. I believe they have options available to them that could help them achieve their goals, and sitting down with a financial planner to talk about those goals, and how best to achieve them, would be a thing they should do immediately.