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Good Lord, I just turned to AI for a few fun facts. It answered by asking me if my question was in reference to the piece I submitted to HumbleDollar today. While I find that a bit creepy, it gave me an interesting factoid. Here it is, word for word:
The “Hidden Surcharge” Fact: > Most people think the highest marginal tax rate in the U.S. is 37%. However, when you factor in the MAGI “cliff” for Medicare Part B and Part D (IRMAA), a single dollar of additional income can effectively be taxed at a rate of over 1,000% for that specific dollar, because it triggers thousands of dollars in higher premiums for the entire year.
Wealthy people complaining about paying their fair share while poor people being denied food because of SNAP cuts and thrown off health insurance (including independent business people and elderly under 65) because of Republicans…nice!
MAGI has an impact on low wage earners. It affects Affordable Care Act subsidies, Medicaid and Chip, the Earned Income Tax Credit, education credits, child tax credits, the deductibility of student loan interest, and probably some others that are escaping my old brain right now.
It helps determine if someone can afford a doctor’s visit, and if a struggling family is eligible for refundable tax credits that help put food on the table. It’s important for everyone to understand how these things affect their own situation. I helped many clients to make full use of tax credits and deductions that were available to them.
Your politics and mine are pretty much the same, Joe, but this ain’t the place for those discussions.
We are well into IRMAA premiums, for 2024 and 2025 our effective income tax rate was 18% including, of course, RMDs. The effective tax rate is what counts as far as I’m concerned.
Dick, yes, when income rises to a certain level, and when the types of income are such that there is no way to lie and cheat your way out of paying tax, MAGI can become irrelevant. MAGI has much more meaning to someone with lower income. And to be clear, I am not suggesting that you would ever file a fraudulent tax return. All of your income is reported on things like 1099Rs and DIVs. Like an $1,000,000 per year employee whose income is reported on a W2, you are going to pay your fair share of taxes.
Well-off retirees are usually smart about taxes. If you play your cards right, you can pay less than 20% total Federal tax, including NII and IRMAA. Assuming $6500 addition premiums for IRMAA, I’m still paying about 18%.
Of course, if you first RMD is $900K, you’ll pay more – a nice problem to have.
Ormode, yes, a $900K RMD is certainly a first world problem.
There was a time when the top rate was 70% and those writing the tax laws brought that down to 37%. But government spending never came down. The tools to collect just changed.
I see a strange parallel to retirement, the sources of income change and life goes on.
AI is too low, as the marginal tax rate can be as high as 28,000 percent on the next dollar:
https://humbledollar.com/2023/04/that-28000000-tax/
I remember this one now. Thanks, John
When you include the Net Investment Income Tax (NIIT), the highest U.S. income tax rate goes to 40.8%. It’s tough to get to 37% without having the NIIT come into play.
Amazing!