Working is overrated: Why it no longer makes any financial sense to try to work hard in our country: Taxes: The Largest Hurdle on your FIRE path, taking over 50% of your annual income!

I cannot count the numerous articles I’ve seen over the years from “experts” that have mistakenly claimed things such as housing costs, healthcare, utilities, or childcare are the largest annual expenses for the working class American, when in reality, taxes are the largest annual expenditure of nearly every working class American.  I get so tired of listening to these “experts” tell us that if we just live in a smaller home and switch to LEDs we will save enough money for us to “get ahead” when that simply isn’t true, and will never be true.  In fact, the truth is not only are taxes your largest annual expenditure, they also are progressive in nature and largely unavoidable.  The only way to legally avoid them, is to be smart enough to learn to play the system, legally as I have.  

Taxes suck.  Nobody likes taxes; however, we all need to pay them in order to live in a civilized society.  Contrary to what it may sound like in this blog, I don’t have a problem paying taxes.  In fact, after sitting on our local city assembly, I discovered we need to pay more local taxes, in order to avoid pitfalls in the future in this community.  My issue with taxes, especially on the federal level is simply waste.  In 2017, the federal government received over 3.3 TRILLION dollars in federal tax revenue.  Over 83% of that, came from income and payroll taxes, otherwise known as the working class, while corporations paid less than 10 percent of all taxes: https://www.cbsnews.com/news/tax-day-where-the-government-gets-its-money  While I am not for higher corporate taxes, its absolute bullshit that the government can take in over 3.3 trillion dollars in revenue, while at the same time continuing to increase the federal debt year after year to 20 trillion dollars currently, not including the 2 trillion “stimulus” Congress recently passed. 

Sometime when you want a good laugh, and to make your blood boil at the same time, hop on the internet and search “wasteful government spending.”  There you will find thousands of results of wasteful spending from studying the effects of cocaine on sexual habits of the Japanese quail, to hamster fights.  While these projects alone may not account for a significant amount of money from the perspective of the federal government, they add up to hundreds of billions a year in simple waste.  My personal favorite is a program that was designed to catch disability fraudsters.  Although the program was effective and recaptured many times the amount of money spent on the program, Congress in its infinite wisdom, defunded the program. Throughout our lives, we’ve all had that one friend or relative that simply couldn’t get their act together.  We’ve done things like loan them money, fill their gas tanks, and pay their bills year after year.  Eventually, we realize it’s futile, so one day we have a heart to heart conversation with them and inform them we can no longer support their poor decisions.  Well, consider this blog my heart to heart discussion regarding taxes. However, with federal, state and local taxes, one simply cannot just stop paying taxes, so I’ve spent years researching how to effectively reduce, but not totally quit paying taxes. Now that we have identified why I have issue with taxes, let’s look further at the actual structure of how taxes work. 

Most people don’t have a clue how taxes work.  We simply go to work, fill out some papers when we start our job, and at the end of the year get some weird form called a W2 in the mail which we take to our nearest budget tax preparation center, and pay someone with a few weeks of training to be responsible for our income for the last year.  This used to be me, but not anymore.  From now on, I refer to taxes, user fees, and exclusions from government programs such as Medicaid, Penalties of Success, or simply “POS’s.”  One of the most important things to understand about taxes, is they are progressive in nature.  Not only are income taxes progressive in nature, meaning the higher your gross income the larger tax bracket you’re in, but more importantly, these taxes come “off the top,” resulting in you having fewer dollars to pay the following taxes.  For example, let’s say you make a gross income of 50k after all deductions, well congratulations you’re in the 22% tax bracket.  What does this mean?  Well since taxes are progressive, it means you pay 10% tax on your first $9,700.00 of income, 12% on you remaining income up to $39,475.00, and then finally 22% on your remaining income up to 50k.  In all, you would pay $6,858.00 in federal income tax on this 50k of income, or roughly 14 percent.  Next comes state income tax since it comes “off the top” as well.  I’m going to use North Carolina, as it’s the state we fled for Alaska.  The state of North Carolina charges you an additional 5.25% state income tax for the pleasure of working in the state, so now you pay an additional $2,625.00. Doesn’t sound too bad right, after all you’ve only paid just under $9,500.00 of income tax on your 50K income (after adjustments.) Well it really isn’t, but here is where the problem comes in: this is just the first of hundreds of other taxes you will pay, each taking progressively more from your income, and we haven’t touched FICA taxes yet!

Now here is where things get interesting. Let’s take the next tax, property tax. Whether you rent or “own” your home, you pay for the property tax.  Again, I’m going back to North Carolina, since we escaped their high taxes by moving to Alaska.  The property I owned just before moving to Alaska had a “value” of 234k according to Wilkes County.  Although I only paid 170k for the place and later sold it for a loss at around 160k, when I contacted the county in regards to the artificially inflated value, I was simply told that was their assessment, and there was nothing I could do until assessment time came around in another 5 years or so.  So, I paid the county $1,616.00 in property tax on this parcel while I lived there.  The issue is that this $1,616.00, even if not inflated, takes a significant larger chunk of my remaining income, thus making it progressive in nature.  Here’s how it works:

Original income after deductions: $50,000.00

After state/federal income tax: $39,475.00

Property tax: $1616.00 or 3.2% of the original income, but 4.0% of the after-tax income! This means that every following tax continues to take a larger and larger percentage of your remaining expendable income, resulting in less and less money for you to save, or put towards your cost of living.

Next let’s cover FICA tax, or another “penalty of success” tax. FICA taxes in my opinion are the most crucial and overlooked taxes, as they come “off the top” and most people have no idea they exist. They also account for the majority of Federal tax revenue by source.  Most people have no idea what FICA tax is or what it even stands for, yet alone, what it represents and how much of their paycheck it actually eats up.  FICA stands for “The Federal Insurance Contributions Act,” AKA FICA, or payroll taxes. FICA is simply a combination of Social Security and Medicare taxes.  Social security represents 6.2% while Medicare is 1.45% of each paycheck.  However, Uncle Sam also requires your employer to pay an additional 6.2% Social Security, and 1.45% Medicare tax.  Together, the total of all employee and employer FICA contributions comes to a whopping 15.3% of your paycheck!!  Now some people will say, “but wait, the employer pays half of that figure, so you truly don’t pay 15.3%.”  My response to those people is sure, you’re right, but since your employer has to take this into account before they even hire you, Uncle Sam effectively guaranteed you a 7.65% pay reduction since the employer KNOWS they must pay “their portion” of FICA tax! The same goes for health insurance premiums!  So just like any other tax the government tries to place on employers or companies, the cost is passed along to the employee.  

So, lets revisit our hypothetical income above to see the effects of FICA taxes. Remember, above our annual income was 50k AFTER DEDUCTIONS!  Simply put, deductions will vary from person to person and is too complicated to try to cover here, that’s why were looking at a 50k income AFTER all DEDUCTIONS.  The important thing to realize here is FICA taxes come off of GROSS income, not net income or after-tax income.  Why does this matter? It matters because since it comes off the top, it is not recaptured in income taxes: FICA and income taxes are two separate things.  For example, let’s assume that the gross income in this situation was 62,200.00, the person was single and took the standard deduction only, resulting in a taxable income of 50,000.00.  Since FICA came “off the top, the 15.3% total, or your 7.65% employee contribution came from the 62,200.00 figure meaning you paid $4758.00 in FICA taxes, while your employer paid the same for the privilege of having you as an employee, for a grand total of $9516.00 in payroll taxes on your behalf sent directly to Uncle Sam with no ability to recapture any of those dollars. So now on your original income of 62k, you have effectively paid over 15k in federal taxes alone, leaving you less than 47k of your income to pay for other POS’s.  Add in your employer’s contribution to FICA on your behalf, and you have paid almost 20K of your hypothetical 62K income to federal income, FICA, and state income taxes alone.  The key takeaway here is that FICA taxes and income taxes are two separate things, but both have a major negative effect on your overall income and are progressive in nature. 

The next POS I would like to cover is health insurance, and Medicaid.  Since you work, unfortunately you most likely make too much to qualify for Medicaid, thus requiring you to have your own insurance, or face a fine thanks to the “Affordable Care Act.”  This particular issue is a double whammy so to speak, because it literally takes money from you via taxation to pay for medical care for others, while exempting you, and instead requiring you to pay even more out of pocket for your own healthcare!  Also working in healthcare for the past decade, its even more infuriating to see how our government intentionally neglects the very working class that supports all their subsidized healthcare plans. Refer to the above, where most taxes collected come from payroll and income taxes, AKA the working class.  Currently, the average cost of healthcare insurance premiums alone for a family in the United States is over 20k per year!!! Now your employer picks up most of this tab, but as with any “penalty of success” your employer must pay, they REDUCE your income by that amount before they even offer you the position!

https://www.investopedia.com/how-much-does-health-insurance-cost-4774184

TWENTY THOUSAND DOLLARS!!!  Thankfully, these premiums are deducted before any state or federal taxes, so they are truly pretax dollars, but still!  20 thousand dollars of your hard-earned money just went out the window just for the ability to have health insurance for your family, while simultaneously excluding you from Medicaid!!!  These are premiums only and do not include any co-pay, deductible, or other related expenses, simply the ability to have the insurance available in the first place.  To me, this 20k figure, and the intentional exclusion from Medicaid, is the reason we should have true appropriately implemented universal healthcare, but that’s a topic for another day.  What I know after working in the field for a decade is the current system cannot support itself under its own weight, and as more and more working class Americans leave the workforce, or intentionally reduce their workload to qualify for Medicaid, it will simply continue to pour gas on this already raging wildfire.

Should you be lucky enough to have any money left over after these above taxes, and numerous ones I couldn’t cover in 3 lifetimes, the state of North Carolina will now take 4.75% of any of the remaining dollars you have left to spend on necessities such as food, clothing, shelter and transportation via a sales tax.  But remember, due to the progressive nature of taxes, the fact that you now have less of your true income, this 4.75% tax is actually significantly higher, as you have fewer dollars in your pocket to spend.

Let’s do a quick recap of how much taxes, or “penalties of success” have cost the average person so far.

1. A progressive income tax on all taxable income of $4543.00 plus 22% of your remaining income up to $84,200.00.  Anything over the $84,200.00 will be taxed at 24% up to $160,725.00!
2. A state income tax of 5.75% of taxable income in North Carolina.
3. 15.3% total or 7.65% individual FICA payroll tax, and unlike income taxes which can be reduced to some extent via things like the standard deduction and other deductions, FICA comes from every paycheck! The only way to reduce FICA taxes is to reduce your hours worked.
4. Health insurance premiums, of 20k per family on average. This doesn’t include deductible, co-pay, travel or other healthcare related expenses.  This is simply the premium.  Period.  This on average represents about 6k of out of pocket expenses for you, the remaining for your employer.
5. 4.5% sales tax on any remaining necessities such as food, water, clothing, electricity, and transportation costs. 

In Conclusion:

The 5 things listed directly above don’t include the numerous local taxes such as city sales and property tax, as well as hundreds or thousands of other POS’s that aren’t listed here and vary from place to place.  How much all POS’s actually cost you will depend on multiple factors, specifically your filing status (married or single), children, and any other deductions, as well as where you live and what you “own.”  By the time all of these POS’s are tallied, you will pay well over half of your income in some form of POS. A 5% state sales tax is more like a 10% tax since now you only have half of your original income to spend.  Remember since FICA takes dollars from every paycheck with no way to recapture them, they can have a larger effect on your take home pay than income taxes and represent a guaranteed 15.3% payment of every dollar you make going straight to the federal government. Therefore payroll taxes are a larger proportion of all federal income, vs income taxes.  Remember the “experts” told you your single largest monthly/annual payment was your mortgage, not state and federal taxes, and I’m just some farm boy from Southwest Virginia.  Most importantly, learn to understand your local, state, and federal tax rates and the impact they have on you and your family.  A CPA is a great asset to help you understand and will pay dividends compared to some roadside tax preparer.  Remember, you only have one life to live, don’t waste it working so you can pay the government a larger percentage of your income, than you pay yourself.  Penalties of Success are also progressive in nature, and our government will continue to add more POS’s every year, making working for a living that much more futile every year as well.