FREE NEWSLETTER
Go to main Forum page »
HD contains numerous articles and comments about taxes, many of which talk about avoiding or minimizing those taxes. There are some like FICA that are certain. But income taxes are far more complicated and I guess you could say flexible.
I have the impression that Americans are unique in complaining about taxes, in part because they don’t see the connection between taxes and what they provide, at least not as much as many Europeans do.
The United States is not a high tax country, in the lower one third in taxation as a matter of fact.
Many people I talk with confuse the tax brackets with the taxes they actually pay. I had one friend complain about the withholding taken from a bonus, assuming the withholding percentage of 20% was the taxes he would pay.
What really matters is a person’s effective tax rate. Have you ever calculated your federal effective tax rate?
In 2024 mine was 18% which actually surprised me because it felt much higher.
Should we be complaining?
Even the IRS knows it😎
“IRMAA is not considered a tax by the IRS.
IRMAA (Income-Related Monthly Adjustment Amount) is a Medicare premium surcharge, not a federal tax. It’s treated as part of your Medicare Part B and Part D premiums.”
It’s one thing to consider federal and state income taxes, it’s quite another when you add in city taxes, property tax (on homes and vehicles), sales tax, gasoline tax, tax on phone bills, internet bills, IRMMA, and on and on.
My Federal effective tax rate is 16%, plus plus 4% state. This is not bad for a single retiree with a very large income. Of course, I’m paying IRMAA too.
IRMAA is not a tax, it’s an income based deductible health insurance premium. I think I mentioned that before so it’s no different than standard Part B premium except the 💲💲💲😎
IRMAA is a tax. The IRS doesn’t call it that, but it is a means-tested levy on income used to fund a public program, which is the functional definition of a tax. While it is labeled a “premium adjustment,” it behaves exactly like a progressive income tax.
Couldn’t you say the same about the basic Part B premium? It’s a levy on income with an identical purpose- funding health care insurance.
Everyone pays the same standard Part B premium regardless of income.Don’t they? Income only comes into play through IRMMA which is an add-on surcharge. Without IRMAA, your income does not affect the Part B base fee at all.At least, that’s my read. Think of it another way: Do you know of any other health insurance provider/adminstrator that sets your premium based in part on your income? I don’t.
Many employers do. I implemented income based premiums 25 years ago and was not the first to do.
As I said do you know of a federal tax that the IRS allows to be deducted as an expense.
If people want to call it a tax, fine, but that does not make it so.
This is one topic where I think you are spot on. If you are paying IRMAA, take a look at your SSA 1099 for 2025. You will find the IRMAA surcharges showing as part of the premiums you paid in Box 3. Therefore, like the Part B premium, if you are able to itemize deductions, and have medical expenses high enough to get over the 7.5% of AGI hurdle, you can deduct them from your taxable income.
If you pay IRMAA, 7.5% of you AGI is likely to be $20-50K.
Only one topic? 😁
Definition of a tax, from Investopedia:
“Taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national. Tax revenues finance government activities, including public works and services such as roads and schools, or programs such as Social Security and Medicare.”
IRMAA is a tax.
Then why is it deductible as a qualified medical expense subject to all the health care deduction rules?
Your SSA-1099 lists “Medicare Part B premiums deducted from your benefits.”
Call it what makes you happy, but they are all premiums.
Never heard of a federal tax deductible on a federal tax return.
I never thought of Medicare premiums as a tax, but by definition, I concede that they are. I guess that’s three ways people think of IRMAA; a premium, a penalty, and a tax.
Sorry, nope, not a tax. FICA is the tax portion.
You know what, Dick, AI agrees with you. AI calls FICA a tax, and Part B a premium.
If we look at our SSA-1099R, the money deducted from our SS benefit is identified as a (drum roll) premium.
Still, if someone wants to refer to it another way, I’m okay with it.
I choose to think of it as a ‘good deal’.
Yup, call it anything, the result and affect is the same.
Elsewhere in the thread, you say the definition of “effective tax rate” is wrong because it is expressed as a percentage of taxable income, while to you it should be tax as a percentage of gross income. Now you say IRMAA shouldn’t be counted because it’s not a tax.
I personally agree that measuring effective tax rate using gross income can make more sense than using taxable income, and it also seems reasonable to me to include IRMAA. Including IRMAA when considering marginal tax rate makes even more sense. Regardless of whether it’s a “tax,” it’s additional dollars paid to the government as a direct result of higher income. So, if one is managing income to manage tax, it makes sense to me to include it.
I said it didn’t seem to accurately reflect the true effectiveness of tax rate. If all your income is from a Roth, but a Roth is not part of the MAGI, what is your effective tax rate? On the other hand if your income is all municipal bond interest which is part of MAGI but tax free, what is your effective tax rate.
Just doesn’t seem to represent what I would think is the effective tax rate for a person.
Yes I understand that point. That’s why I said, “I personally agree that measuring effective tax rate using gross income can make more sense than using taxable income…” even though most measures I’ve seen use taxable income.
My point is that likewise, even if stipulating that IRMAA isn’t a tax, it makes sense to treat it as one if managing income to keep effective tax as low as practical.
living in fla with an income of almost 400k and 20% eff tax rate-whats better
Our preliminary estimate for 2025 is 13.5% Fed and 4.4% State effective/average rate. Looking back at our earnings history, most of the funds we are living on today were deferred into our pre-tax 401(k) accounts at marginal 28% or 25% rates before 2018 and 22% after. It seems our tax rate in retirement IS lower than while working if you compare on that basis.
A key reason your federal effective tax rate is usually lower than your marginal tax rate is that your marginal tax rate only applies to income above that income level. Your earnings at levels below that are taxed (or not) at the respective rates for those levels.
You may also be getting dividends and capital gains in the 15% or 18.3% bracket, which is less than the 22% or 24% you might otherwise pay. This will lower your average rate.
That and deductions and credits that may apply. Although apparently not technically accurate, I also include any tax free income in the calculation, that is, start with gross income not AGI. That seems more accurate to me.
My “Effective” tax rate, including federal and state income taxes was 7.5% when I calculated it in early 2025, after all income was accounted for. It seems last year’s taxes might be a little less.I’m retired, so I no longer pay FICA tax or the Medicare tax. For workers, this increases tax paid significantly. To get a better understanding in the past I would also include real estate taxes, but we now only pay a “property tax” which is less than $400 annually (we do own a home). Including sales tax paid would increase our taxes paid by about 1%. (Some states have none). Our county is 8.7%. We’ve done things to manage the taxes owed. As a retiree, one factor which has lowered our taxes is our Roth-IRAs.We live most of the year on a resort property and we pay an annual resort fee, but I don’t consider it to be a tax, as we get direct value for this. For the rest of the year we travel in an RV and rent a site with another stationary RV, which we own.Tax management would probably be an interesting topic. But to really do so it might be necessary to relocate, and many people won’t do that. We’ve lived for the past 25 years to minimize taxes paid, and that includes our locations.By the way, the budgets I have run for the past 30 years have been very helpful in determining all taxes paid, and then taking steps to minimize them, as well as other costs.
Like many other discussion on HD, we have wandered into the badlands of word definitions. I think anyone who pays FICA would clearly think of it as a tax on income. However, it is not an Income Tax nor part of its calculation. Likewise, anyone who received muni bond interest, or dividends on a ROTH account, (just to name a couple of examples) enjoyed collecting these items, while knowing that they were not going to be taxed.
Perhaps the entire financial system in the US, is a kind of electronic game which only the well off can win.
Those who are not well off (to be defined) pay little or no taxes or in some cases are in a total credit position.
While the gap between the wealthy and the poor continues to grow.
We should be focused on raising the poor not pulling down the wealthy, that doesn’t help the lower income folks.
That’s a fair point regarding the gap between perceived and actual tax rates. However, your effective rate depends heavily on your home state and where you sit on the income spectrum.
For high earners in states like Minnesota, California, or New York, the math shifts significantly. When you layer a top federal bracket of 37% with state income taxes that can exceed 9% (and even reach 13% in some jurisdictions), the combined effective rate can quickly climb toward 50%.
At those levels, tax planning isn’t just about complaining—it’s a matter of stewardship. This is especially true for those who hit these high brackets for only a few years in a decades-long career (like during the sale of a business or a peak-earning window). For them, executing strategies to move an effective rate back toward 30% is a necessary step to protect their family’s long-term financial well-being. While the U.S. may be “low tax” on average, the burden is highly concentrated at the top, which drives the intensity of the debate.
Very well said Bob.
A form of “ stewardship” we were able to employ in peak earning years was “voting with our feet” to another state. While it’s not possible in all scenarios, we were lucky and it was game changing in the long run.
Further, I’d hate to have to calculate the “ effective tax rate” with estate tax included for our heirs in the state we evacuated from years ago.
Already filed my taxes. TurboTax calculates the effective tax rate. Ours was 7.43%. Our “spending” income was 52K. That is why I decided we needed to spend more this year and thus we pulled the trigger on a week in Barbados staying in a nicer hotel than we usually do. 12 K of “income” was to pay taxes due to a large Roth conversion. Unfortunately I under converted by 10K despite posting, and had confirmed, on HD the maximum income to stay in the 12% maximum tax rate. I had already thrown out my calculation sheet. Man am I kicking myself!
David. Your mention of Barbados, is there still a problem with seaweed on the beaches?
We aren’t there until next week. I have read about intermittent problems with it.though.🤞
Fingers crossed for you both. We were there two years ago and hit a lucky period, with only a small covering on parts of the beach.
Our Federal tax rate as a percentage of AGI was 12.6% for 2025.
Including State taxes, the total tax burden was 15.04% of AGI.
I can’t complain about that.
AGI calculation, for non-US peeps:
How to calculate AGI
Don’t you think it would be more accurate to calculate a persons real effective tax rate on gross income, not AGI. If a person gets half their income from Roth account, not counting that income seems to distort the effective rate which at some income levels even including SS could be zero percent.
I always thought the US had very low tax rates…18% doesn’t seem that low considering I pay 21% which includes all healthcare premiums with no deductibles or co-pays.
The US is in the lower third of developed countries in terms of total taxation. We are delusional not recognizing we need higher taxes or do away with much of what they now provide.
When I add the amount of money we pay in a year for medical coverage (premiums) to the annual income tax, our effective tax comes out to about 3% higher. 2025 Effective Tax: 14.1%, 2025 Effective Tax which include Medical Premiums: 17.07%.
I don’t see the connection.
The connections is with Mark’s taxes. Mark mentioned that his effective tax is 21%, however part of his taxes pays for his health care premiums. If I were to add my yearly medical premiums to my tax liability it turns that the effective tax would be about 3% more.
The lower 50% income wise have an average effective tax rate of 3.7%
Maybe only for those that actually pay income tax. I think the lower 50% income wise population have average effective tax rate even lower. There is an ever increasing number of people that really have a negative effective tax rate. They are receiving so many transfers and refundable tax credits that they don’t even pay income taxes.
I created my own effective tax rate. I call it Dan’s Effective Tax Rate. It differs from the real rate, by including all income, such as non taxable Social Security, tax free interest, dividends, and capital gains. This method results in a very low tax rate.
Regarding the conversation you had about the guys bonus check. I can’t even guess the number of times I had that conversation with a client who had gambling winnings or an early distribution from a 401k, or similar. “How come that’s on there (the tax return), I paid taxes when they gave it to me”
Actually, I thought that’s the way the real effective rate is supposed to be calculated. Tax credits factored in too.
It’s actually based on dividing your tax liability by your taxable income. So the non taxed SS, long term capital gains and qualified dividends that may not be taxable for many folks, are not included in the calculation. The standard or itemized deduction also reduces taxable income. I add all that stuff back in.
I see now you are right, but in that case the effective tax rate is meaningless in my view.
The real effective tax rate is overstated if gross, including non-taxable income is excluded.
What if a person lived on SS and Roth withdrawals? They could have an effective tax rate based only on a portion of SS. That doesn’t seem accurate.
With the increased availability of the Roth 401k, I bet there will be more and more retirees whose sole income will be from Roth and Social Security. In that case, even if part of SS becomes taxable, their standard deduction may result in zero taxable income.
In some respects, while taxes are the fuel for keeping things running (generally), I tend to believe there is far more angst over the way the money is purportedly used. Can’t say the volumous tax code thrills many taxpayers either. But like others, I have yet to submit my proposed tax code for consideration. To many, this is what taxes feel like:
Line 1: How much did you make last year? ___________
Line 2: Tax due – copy the amount from Line 1 here. ____________
Submit the amount from Line 2 to the address provided below.
GW, I think your comment, angst over the way the money is purportedly used, is right on. We’ve all heard stories about the $300 hammer, or the $1000 toilet seat. No doubt there is plenty of waste occurring, but hopefully not as much as we think there is. At least I hope not🤔
Every society has used taxes of some type. Even the Bible tells people to pay their taxes.
The code is indeed too complicated and too long. I suspect there will never be agreement on how all the money is used. But what I might object to others see desirable.
I’d like to see a flat rate income tax plus a VAT, but the people like Dan would not have a business. 😢 Imagine the vested interests who would be opposed, yikes‼️
To your flat tax comment, I always ask “what percentage rate would you use and, to what income would would you apply that rate?” We have TI and more than one AGI/MAGI. There is a snowball’s chance of politicians resolving those questions. The first page of the IRC states “Thou Shall pay taxes,” every page thereafter provide exceptions. Committee Reports provide interesting reading.
Jeff, you ask a key question; what % would you use? Advocates for a flat tax have to be careful what they wish for. Many clients who sang the praises of a flat tax, had effective tax rates well under 10%. I wonder how they would react if the flat tax was 15 or 20%?
Like the ‘post card’ tax return of 2017, which was actually worse than the 1040 it replaced, the ‘special interests’ would have a flat tax so carved up with exceptions and exclusions that tax preparers would end up with more job security than ever. One beautiful piece of paper, 🤣🤣🤣🤣🤣🤣🤣