Month: January 2013

If you are under age 59 1/2 and you need money now, you may be tempted to pull it from retirement funds (401K, IRA).  I get it – the money is there just waiting for you to use it.  But it is an EXPENSIVE source of money.  For the typical middle class family with kids, about 1/2 of the money is lost to taxes when you pull it out.  You pay Fed tax, IN tax, the 10% Fed penalty….but the extra income also typically causes you to lose a child tax credit, phase you out of a refundable credit, make you phase out of deductions, etc…all causing you to pay more taxes than you expect and end up with 1/2 of the money that you pull out.

I don’t have any bright ideas on where you are going to get the money that you need to live, but keep this in mind the next time you wonder about accessing this easy money.

Who pays taxes and why?  There was a lot of talk during the election about the “47%” of Americans who pay no Federal income taxes.  Now that the inauguration date has passed, let me give you some detail on that figure.  The breakdown of the 47% of Americans that pay no tax is (based on 2010 and 2011 figures):

• 22% – Americans over age 65
• 17% – Students, disabled, or long-term unemployed Americans
• 50% – Americans who earn less than the standard deduction and exemption amounts (incomes basically under $20,000/year)

This accounts for 89% of the 47%.

That leaves 11% of the 47% as those Americans that take advantage of the refundable earned income tax credits and refundable child tax credits, the daycare credit, etc….basically those credits designed to “motivate” the working poor to actually work or to give the working poor a break.

With 3 Trillion of projected Federal budget deficits to close over the next 10 years, we Americans wonder who should be picking up the tab?  Do we ask this 47% to pay more than $0?

Keep in mind that this group of Americans, like the rest of us, likely pay (or have paid, if retired) Social Security taxes, Medicare taxes, state taxes, property taxes, sales tax, fuel tax, excise taxes built in to products that they purchase, etc.

I have been following individual tax law since 2000.  The 2010 and 2011 overall average Federal tax rates were the lowest I had ever seen.  Other organizations that I follow said that the current tax rates were the lowest (measured broadly) that we had seen in the last 60 years.

The bottom line is that all of us paid the lowest Federal tax that we ever would in 2010 and 2011. 2012 wasn’t too bad either.  2013’s rates are only slightly higher (maybe 3% higher overall, mainly due to the repeal of the 2% social security tax cut) for the average family earning under $150,000.  I expect average Federal tax rates to go up in 2014 and beyond…so enjoy it while it lasts.

Most of this information was gleaned from the Center on Budget and Policy Priorities, which is one of the lobbying groups (left and right) that I follow.  Regardless of what slant that you put on the numbers, numbers are numbers…you can put your own slant on them.