10 Reasons Why I Pay Less Tax Than Mitt Romney

Transcription

1 10 Reasons Why I Pay Less Tax Than Mitt Romney Mitt Romney took a lot of flack in the last election because his tax bill was only 14.1% of his income (despite the fact that he paid millions of dollars in taxes.) I took a look at that and thought Heck, he s paying way more than the vast majority of Americans, both in terms of dollars and percentage of earnings. Of course, he probably ISN T paying a higher percentage than most physicians. In my opinion, most doctors pay way too much in taxes. It s unavoidable for some, but many doctors pay too much simply because they don t understand the tax code. Some of the more interesting s I ve had in the last year have been from people who couldn t believe that I only paid 8% of my income in federal taxes last year. That surprised me, since it was the highest percentage I had ever paid up until that point in my life. It turns out that lots of docs are paying 20-30% of their income in taxes. Since I made partner halfway through the year and thus have higher income, my percentage is higher this year than last, and will be even higher for 2013, especially with the recent tax increases. But my effective tax rate is still far below my marginal tax rate.

2 I have to confess, I actually kind of like doing my taxes. It s like a game, me versus the IRS, and my sisters will tell you I ve always been a little on the competitive side. The IRS tries to make the rules really complicated, and I try to pay the least that I legally can. I m not into tax evasion, but I m certainly not going to leave the IRS a tip. My Tax Bill After recently completing my taxes, I added up the damage. Now it s important when you do this that you understand the difference between paying taxes and having money withheld for taxes. These two amounts aren t necessarily the same. I care little how much is withheld (or paid in quarterly estimated taxes), I just care how much I actually end up paying when all is said and done. The other thing that is important when figuring out what percentage of your income you re paying in taxes is what number you re using for income. Since the way you reduce your tax bill is by reducing your taxable income without reducing your gross income (who wants to do that?), nobody cares so much what percentage of your taxable income is paid in taxes. So I use my gross income. Mitt Romney Paid 14.1%

3 of his income in federal and payroll taxes in 2011 For 2012, on more income than the average physician makes, I ended up paying 9.0% of my income in federal tax, just 3.6% in payroll tax (thanks to my employer paying most of my SS tax), and 2.9% in state tax for a grand total of 15.5%. That s actually a slightly lower percentage than my overall total last year. Now, to be fair, I really probably ought to adjust that gross income denominator a bit. Let s reduce it by the expenses on my rental property (I was actually able to erase all income from that source) and my malpractice insurance and worker s compensation premiums. That would increase my taxes to 9.8% federal, 3.9% payroll, and 3.1% (state) for a total of 16.8%. 10 Reasons I Pay Less Tax Than Mitt (And Most Doctors) How is it that I pay 16.8% in taxes when many doctors are paying 25%, 30%, or even 40% in taxes? In short, I do the things that Uncle Sam subsidizes. 1) I got married (and to a stay-at-home mom.) Married couples pay at a much lower rate than a single taxpayer. For example, at $200K of taxable income, the marginal rate for a married taxpayer is 28%, but it is 33% for a single taxpayer. Believe it or not, I managed to stay in the (much larger) married 25% bracket for Plus, I got an exemption of $3800 for her. All told, I d be paying another $7K just in federal tax if I were single. The fact that only one of us is working also means we re only paying

4 one set of Social Security taxes. 2) I have kids. Each of them is worth a $3800 exemption. All together, they saved me over $3K this year in tax. Too bad they cost me a lot more than that. 3) I save for retirement. By maxing out my 401K/profit-sharing plan and my defined benefit plan I reduced my taxable income by $65,000, saving me about $20K in state and federal taxes. This is easily my biggest tax break. 4) I pay for health care. By maxing out an H.S.A. I get a $6250 deduction. I also get to deduct the health insurance premiums I paid, another $4K+. Between the two of them, I reduced my tax bill by over $3K. 5) I own a business. That allows me to deduct all kinds of expenses, many of which I d have whether I had the business or not- like internet service, a cell phone, and a computer. Those deductions reduced my federal, payroll, and state taxes by over $1K. 6) I own rental property. I collected almost $13K in rent for it in None of it was taxable. Between expenses and depreciation, the IRS thinks I took a loss on the place. But when you include appreciation and the paydown of my mortgage, it was actually somewhat profitable. But I don t have to pay taxes on any of it. If I didn t have such a high income I d be able to offset some of my other income with that loss, but unfortunately I ll have to wait until I sell to capture that.

5 7) I own the house I live in. I paid $14K in taxes and interest on it. That reduces my tax bill by over $4K. 8) I give money to charity. That reduced my tax bill by about $7K. 9) I invest in retirement accounts was a pretty good year for my investments. They are almost entirely inside of tax-protected retirement accounts like 401Ks and Roth IRAs. I made about $47K with my investments (not included in the gross income figures that I used to calculate my tax percentages incidentally), almost none of which was taxable. 10) I save for college. This didn t reduce my federal taxes (although the gains in the account are federal tax free), but I saved over $500 on my state taxes by contributing to three 529 accounts. There you go- 10 reasons why I pay a lower percentage in taxes than Mitt Romney. What percentage are you paying in taxes? What have you done (or plan to do) to reduce that percentage?