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RDQ kicked off what I’d call a ‘good ruckus’ with his Billionaires, taxes and you post. I thought I would dive deeper into the “and you” aspect of the conversation.
What about the rest of us? Below are the results of two 2025 tax returns I processed, and one based on the AARP calculator for tax year 2026. Two are retired couples over age 65.
I included a hypothetical worker-bee couple as well, because not everyone reading HumbleDollar is leading a life of leisure like me.They have no kids, are under 65, and earn the median household income. All use the Standard Deduction.
Couple #1
Total Social Security benefits received $47,000
Total Pension Income $15,000
Total IRA distributions $12,000
Total Interest Income $5,500
Total income, all sources $79,500
Total Tax Liability $240
Couple #2
Total Social Security benefits received $77500
Total Pension $5500
Total IRA distributions $31,000
Total Interest and dividends $1700
Tax Free Interest $800
Long Term Capital Gain $1200
Total income, all sources $117,700
Total Tax Liability $2700
Couple #3
Income from W2 $84000
Total Household Income $84000
Total Tax $5723
Do you think these couples should pay more tax, less tax, or is this just about right?
Do you think the tax paid by these couples is commensurate with the benefits and services provided by the federal government?
How about a flat tax? Back in my tax preparer days, it wasn’t unusual for clients to express a desire for a ‘flat tax’. I always would ask them what flat tax rate would be fair. The answer was usually 10% or 15%. What would a flat tax rate look like for the three taxpayers above? Would those tax rates balance the budget, or make things worse?
I find it hard to compare these three cases, since there are some things that are unclear. Social security payments mean that there was money paid for that in prior years. What are “taxes” in the third example, and does that include Social Security withheld? Should Medicare payments fit somewhere, especially IRMAA? Is the third example for someone who is also funding an IRA for the future? We have a complicated tax code, and it is always in one’s interest to figure out how to pay the lowest tax once can, consistent with the law. I think someone in the third example might have ways to lower that tax.
One of the lessons from the last bipartisan tax code revision – way back in 1986 – was that a “flat” tax may not serve all the purposes we need to serve in structuring income taxes, and that a “flatter” tax (as opposed to a flat one) is more achievable. And there is one economically important rule that strongly promotes that “flatter” income tax. The more credits, deductions and offsets the government can eliminate from the tax code, the lower that a “flatter” income tax rate can be. A lower rate is fundamentally good for everyone. It is also more likely that there can be a more level obligation across all taxpayers, though a group may wind up paying more.
Is there anything that still should justify favoritism? Does capital gains deserve a lower rate than other income? Should we continue to incent retirement savings with deferrals of earned income for IRAs and 401(k)? How about charitable deductions? For every favored interest, there is a cost.
Martin, I should have said “income tax” rather than “total tax”; good point. Lots of good questions in your final paragraph.
I have paid taxes since 1959 when I was sixteen. Over my working life I paid $132,818 in SS taxes and $98,080 in Medicare taxes. My property taxes are $13,900 a year. I pay IRMAA premiums and 85% of our social security benefits are taxable income. Our effective income tax rate is 18% in part because of RMDs, interest and dividends.
I am not complaining.
Ten years ago we had received in SS benefits an amount in excess of 50 years of payroll taxes. Now our combined benefits exceed both my and my employers FICA taxes paid.
Unfortunately, our benefits under Medicare have exceeded the taxes paid and the premiums by many times over. Connie’s eye injury alone cost over $300,000. Currently, we are incurring between $14,000 and $20,000 a week in expenses for one of several treatments.
I am not complaining about taxes. I really don’t think Americans understand the value we receive for tax dollars.
Yes, the purpose of my post is to help people consider the relationship between taxes paid and benefits received. I probably should have left out the question about a flat tax, as it got us a bit off topic; and we are never going to see flat tax anyway.
Slightly off topic, but how do you know how much tax you’ve paid over your lifetime? Does the IRS keep a running total, or have you kept your own records? I’m just curious, as I haven’t a clue what I’ve paid over the years.
As Dan said you just log on to your Social Security account and your and your employers payroll tax payments for our Social Security and Medicare are listed by each year you worked. Not income taxes though.
The Social Security Administration keeps track of our annual earnings as well as the tax we pay for SS and Medicare. Since our SS benefit is based on the best 35 years of earnings, we are able to check the records for accuracy. It’s interesting for a nerd like me to be able to see my history all the way back to my first job.
This is only SS and Medicare taxes paid, not our federal taxes.
All those tax amounts seem very low to me. Over 57 years of taxes my overall average is 14%. Therefore in my mind a Flat Tax rate of 14% is probably a reasonable amount. In 1968 my tax from was 2 sheets of paper, now it is over 50 sheets. I vote for a simple Flat Tax and a one page tax form, let’s Simplify.
Yes, those income taxes, especially for the retirees strike me as crazy low.
Wouldn’t a national sales tax scheme cease Roth conversion planning (Yaaaa) but then tax spending from Roth account withdrawals (Yeeee)?
I always consider the “Flat Tax” argument to translate to: “Why does this have to be so complicated? The IRS knows what I made, just charge me my fair share.” Seriously, why is it so complicated? Incentives? Penalties? And why, in this world of supercomputers and AI, does IRMAA still have a cliff(s)?
I suspect IRMAA has a cliff because that is what generated the targeted income. No cliff and the cost sharing goes up.
Rob, great observations. I’m not a flat tax guy, but I sure agree that the argument for flat tax comes down to complexity; so many pages in the tax code. And maybe the CPAs can explain to us why those tax cliffs still exist, because I sure can’t.
Thanks, Dan, for sharing. It’s always interesting to see how different sources of retirement income affect a retiree’s tax bill.
My reaction to the question of whether these couples should pay more tax, less tax, or whether their tax bill is about right is that I don’t think we have enough information to know. Based on the information provided, I assume the returns were prepared correctly and the taxes owed under current law were calculated accurately.
But whether someone should pay more or less tax is a different question. A single year’s tax return doesn’t tell us how much tax they paid during their working years, how they saved for retirement, or how much tax they may pay in the future. Without that context, it’s difficult for me to judge whether their tax burden is too high, too low, or just right. In fact, even with more information, I’m not sure it’s my place to decide whether someone else has paid “enough” taxes. That feels more like a personal and societal judgment than a tax calculation.
As for a flat tax, I can see arguments on both sides. On one hand, taxing everyone at the same rate seems fair. On the other hand, I understand the argument that those with higher incomes have a greater ability to contribute. I don’t know enough about the broader implications to have a strong opinion.
Flat Tax (KISS)
Dennis, what if the powers that be, in order to fund all that the government does, determined that a flat tax needed to be set at 20%. Would you be content to increase your taxes by 8% (if your marginal rate was presently at 12%)?
The average income tax rate in the U.S. is 14.5% so I’m assuming that’s all they would need to run the government. Being that I am in the 12% bracket I’d be willing to pay the extra 2.5% for what I think is fair.
I’m also at 12%, and would not complain about another 2.5%. Sadly, considering the national debt is $39 trillion and counting, 14.5% doesn’t seem to be enough to run things.
How about state tax, in TX property tax of 10K plus a year is popular for many retiree regardless of income. Then there is sale tax and 20% plus tip on decent restaurant bills.
So true that the states need to get their money from somewhere. That said, I’ll take my higher Texas property taxes any day over the nearly 10% income tax I was paying in the extremely poorly run state we left over 10 years ago. That state also has a similar sales tax to Texas on top of that. Tipping (which is generally getting out of hand everywhere) is no different based on visits back to the poorly run state. The lower annual car registration tab fee in Texas vs the poorly run state is also a bonus.
Hi, Hung, it seems that the states get you one way or another.
These folks are subject to Ohio state income taxes. In the case of the first two couples, neither had any Ohio tax liability. The flat tax in Ohio is 2.75%; I didn’t calculate this for the third couple. They would have had some liability after deductions and the joint filing credit.
Couple 1 has PT of approximately $4000, Couple 2 pays $6000. The combined state and county sales tax here is 7.75%.
Here in NH the only significant tax is on property, we also pay a tax to the town on vehicles based on their value. After the vehicle is 5 years old the minimum tax is the same for all vehicles. That’s one of the reasons we try to replace our two vehicles every 10 years so one staggered on five year purchases, so one is always at the minimum value.
Is that really true about the minimum tax on older cars? I always have older cars, and this year I paid:
2005 Sienna: state: $66, town: $82.50
2004 Sentra: state: $48, town: $42.50
2012 Focus: state: $54.50, town $48.00
1980 man lift: state: $40, town $30.50
2003 popup camper: state: $13.20, town $35.50
various one-axle trailers: state: $13,20 (one was $3.30), town $10.50
David, I would probably do similar (with cars), perhaps even more slowly in order to enjoy some years without any vehicle tax. I know, I’m cheap that way.
Dan, there is always a tax, but after five years you continue to pay only the minimum. My Tacoma I bought new in 2002 I owned for 18 years, mostly the years we were raising our children and paying for college. The plan I mentioned started creating a financial plan for retirement.
Tax policy gets most of the attention, but tax administration affects more people.
Whatever our views on tax rates and deductions, we would all benefit if the government prepared returns for most taxpayers, as is done in many countries, leaving tax preparation to those with complex finances.
Reducing the filing burden would allow enforcement efforts to focus more squarely on tax evasion, strengthening confidence that everyone is playing by the same rules.
That is the first step IMO.
Never gonna happen as too many CPAs/ tax preparers would be out of a job.
Right, the tax prep lobby is probably very robust. I’m also not convinced that having the IRS process tax simple tax returns would free up personnel for enforcement efforts.
Yes, in many cases the IRS has ALL of the information necessary to complete a simple tax return. Still, I don’t think there’s any guarantee of increased enforcement of the tax laws.
#1 and #2 should pay more taxes. I filed MFJ in 2025 and paid 12% of my AGI. I did a large Roth conversion which caused a much higher tax liability. My wife passed away last year. In 2026, I estimate an AGI of $126k and a federal tax of $17k, or 13% of AGI. They must know something I do not know.
Well, they both have an excellent tax preparer🤣. Couple #1 once asked me if they should do a Roth conversion to save on taxes; I suppressed a laugh. Keep in mind that those numbers don’t represent actual AGI. For example, I used total SS income, not taxable SS. The other factor was the new $12K Senior Tax Deduction.
I took the senior deduction and still paid a bunch. I have done a lot of Roth conversions in recent years which will benefit my children and grandchildren because I live off of a pension and SS. I have no complaints but was amazed they paid so little. It must have been their tax adviser.
The US tax system works best for retirees with high incomes who take advantage of tax breaks like the favorable rate for dividends and capital gains. You can be single, have an income of $450K, and pay $75K in Federal income tax. Of course, there’s state income tax, property tax, IRMAA – maybe another $50K at most.
Out of curiosity, I ran the UK tax calculations for the same three couples — makes for an interesting comparison.
Couple 1: $9,970
Couple 2: $14,400
Couple 3: $16,480
Worth noting: all three couples would have zero healthcare costs — no premiums, no co-pays, no out-of-pocket expenses whatsoever. Those costs are already baked into the tax figures above, though I can’t break out exactly what portion that represents. (I kept everything in dollars rather than converting currencies — I just applied the UK tax calculations directly to the dollar amounts.)
My examples did not include premiums for Medicare or Medicare Supplemental insurance. The retired couples are paying $203/month (per person) for Medicare, with monthly premiums for the supp to typically cost between $100 and $300. A ball park estimate for those couples would be a cost of $10,000 per year. Employees and employers pay a combined 2.9% of earned income to fund Medicare as well.
I assume your calculations don’t include the 20% VAT. Whether they come out ahead with health care costs is highly variable. Health care spending is most often unrelated to income.
We pay far more in premiums than most American retirees, but virtually no out of pocket costs. The other side of the coin is we as retirees have total freedom on where to seek care.
What other UK benefits might be built into those taxes that we pay for?
The great issue which we can’t seem to deal with is the trade off between high taxes and peace of mind when it comes to paying major family expenses, including healthcare, education, etc.
While working, we paid modest taxes toward retirement health care, in retirement we pay high premiums, but no worries about out of pocket costs which for us now would be astronomical.
Of course, that relationship is not always true.
The benefits it funds go far beyond just healthcare. There’s a strong social income floor that acts as a genuine safety net, preventing real destitution. Free in-home care packages are available to those who need them, and below a certain wealth threshold, all elderly and memory care is completely free.
University tuition is capped at around $12,000 per year, and repayments only kick in once you reach a certain income level — if you never reach that threshold, which is common in the arts and humanities, you simply never pay it back. Over-60s get free public transport, and low or part-time workers receive income subsidies to guarantee a minimum standard of living. Parents also receive a regular child benefit stipend to help with upbringing costs, alongside up to 30 hours a week of free early childcare. These are just a few highlights — there’s much more besides.
As for VAT…that’s a sales tax not a payroll tax.
I have several friends in the UK who have private health insurance as well as NHS. How would the addition of that affect your calculation?
That’s a discretionary payment you’ve chosen to deploy from your own resources, no different from paying a mechanic to fix your car when you already have a prepaid plan with another provider. So from a tax position, it has zero impact.
Maybe— but I’d see it more like medigap insurance. Discretionary, but I do feel obliged to pay for it. True, it’s not a tax, but if necessary to assure health care, I’d take it as an essential expense.
To my mind, the similarity is conceptual only. Both systems use private insurance as a secondary layer on top of a universal, government-backed foundation.
UK insurance is about speed of access, with no need to mitigate financial risk. It is definitely not required and is 100% elective. Medigap, if my understanding is correct, is strictly about financial insulation.
I’d guess it’s all about perspective. My husband’s aunt lived in London ( his mother was one of 10 kids born in Ireland; a few stayed in Ireland, 3 came to the US, and the rest went to the UK. The aunt desperately needed a hip replacement— she was barely mobile but on a “wait list.” She eventually got the replacement — after the hip broke! I don’t see this as a real choice. If I couldn’t function for more than a year, I’d see the situation as inadequate access that paying more — either with a higher tax or private insurance.
I think it works the same in Canada.
You weren’t just talking about payroll taxes, but income taxes weren’t you or is it semantics, we make a clear distinction
As you say, I think we might be talking about different things when it comes to “tax deductions” (it’s a bit of a semantic issue).
In the UK, a tax deduction is your total tax burden. It’s not a reduction you claim (it’s the actual tax taken from your income). There’s no tax return required for the average person, because it’s all handled upfront.
To give you a real example, I employed 70 to 80 people, and every month I was responsible for calculating their tax deductions and sending that information directly to the tax authorities. My employees never had to file a tax return. What hit their bank account each month was their net pay, already with tax taken out. That was it. No further tax implications from their employment whatsoever.
The same principle applies to the average retired person here: their investment or pension platform handles it the same way. The deduction is the tax. Done.
So when I say “payroll taxes,” I mean the total tax burden, not a partial payment, not a reduction, and not something you later reconcile on a return. It’s the full picture, settled monthly.
The tax liability for couple #1 seems low. I am retired and married filed jointly and took the standard deduction and have similar a similar income and my taxes were much higher.
$3400 interest
$3900 qualified dividends (not taxed)
$8300 ordinary dividends
$63,000 Social Security (taxable amount $36,800)
$40,000 Pension
-$3000 capital loss
Adjusted gross income $85,000
Tax liability $3690
The standard deduction was $34,700
The over 65 deduction was $12,000
So my taxable income was $38,700
I paid more than couple #2 as well.
Couples 1 and 2 get reduced tax rates on Social Security and also get the $6000/person deduction for being over age 65.
Couple #3 has access to tax savings as well, 401K, IRA, Roths. The example does not show if that couple took advantage of their tax savings opportunities.
While I do agree that income taxes are too complicated, a flat tax with a standard deduction would be OK if it were set at 10% which is the current lowest tax bracket. But what would be even better is eliminate income taxes completely and replace it with a nation sales tax.
Neil, your situation is actually quite different from the examples. When I posted “total income from all sources”, I was not talking about AGI. Their actual AGI would have been much lower.
Apples to apples, your total income from all sources would be $115,600, not at all similar to couple #1.
Couple #2 had substantially more income from SS, and substantially less income from pension and IRA than you do. Though your total income is very similar, the sources of the income are not; that makes a difference.
As for couple #3, total income is from a W2 with $84,000 in box one.
Do you think a 10% flat tax would fund the government?
A national sales tax? That is an option/alternative. What do you think that would have to be to pay the bills?