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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?
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.
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.
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.
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.