Progressive Tax Code

Here is a little graphic representation of the first 4 tax brackets. The taxes you pay are the area under the curve. Blue is 10% 10% ends where Green or 12% starts at about 20K. I extended each graph to show the progression. 12% is from 20K to about 80K so it’s progression ends when Red starts and it’s 3 times bigger than 10%, but it’s slope increases only a little bit. This is the middle class. Red is 22%. It extends to about 160K 80 to 160K is as long as from 0 to 80K but notice the slope virtually doubles. I put a little black piece at the end to give a feeling of what 24% looks like, 24% extends to about 320K or double again from 0 to 160K. A progressively increasing slope up to 37% plus the 3.8% surtax. This is why it pays to Roth convert a big TIRA. The top of the 12% including standard married deductions extends to about 104K/year and every dollar after that is sloped up as the government eats an extra dime from every additional dollar. If you can avoid the green to red transition the tax saving soon enough becomes NON TRIVIAL. You avoid that by cleaning out the TIRA to a point where it takes a long time for RMD to push you past the green to red transition.

It’s interesting to note once past 600K the graph is no longer progressive but becomes linear at a 37% slope plus the sur tax. What that means is if you are pulling 4% WR in ordinary income on 15M dollars you pay the same “tax rate” as someone who is 4% on 30M or 300M.

4 Replies to “Progressive Tax Code”

  1. Great visual representation Gasem of our tax burden. I’ve been pretty much at the far right of the graph the majority of my career. I’m hoping that when I do retire I can go into more the more favorable color zones.

    1. I should have added a little more comment, but it would drivel off to the political so I just cut it short. It’s enough to see how the government progressively steps you up to paying 4 dimes out of every ten and then accuses you of not paying your fair share. All of my money is invested one way or another, even my cash, and all of that investment is at some risk and all of that investment provides work for someone whether is be the bank teller or Warren. Out of my entire career I had one year, 2017 where I could claim child tax credits for college or get an actual legit Roth contribution in the bank, in fact that was the year I set up my Roth accounts. My Medicare insurance payment normalized to usual instead of triple. Last year because of conversion I’m back out on the perimeter with no college tax break etc, which is OK but annoying when people are hawking all this free stuff I’m paying for. Certainly confiscation beyond 4 dimes per ten is flat out crazy.

  2. Still playing with your wonderful Roth conversion spreadsheet, envisioning scenarios and changing TIRA amounts to optimize buckets.

    Taking steps to save up the taxable amounts in coming years that will enable us to retire optimally.

    Your graph makes the argument that much more compelling.

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