Whats Fair When it Comes to Taxes?

[saden1]

Originally Posted by jdlea

The bolded portion is the main thing I have a problem with. It's fashionable now to complain about the capital gains tax, but I actually have a real problem with it. Here's an example:

Let's say, for instance, I'm able to invest $10k of my after tax income in a given year. In that year I make $1k on my investments and I sell off my stock. I don't think I should then be taxed again because I earned $1,000 after I already paid taxes on the money I invested, and if I am, I certainly don't believe it should be at the same rate as I already had been for earning the money I invested.

Now, that example doesn't address folks like Warren Buffett who don't really do anything other than invest, but it illustrates the issue that lots of normal people could face. So, what would be a solution to this? Progressively tax higher capital gains earners? I'm not exactly sure, but I can tell you if the capital gains tax rises to the same level as my payroll tax, I'll probably be a little hesitant to invest any of my money.

You only get taxed on your profit which is new income. The billionaires hide their money from taxes using similar strategy with capital gains and it isn't fair at all.

[jdlea]

Originally Posted by saden1

You only get taxed on your profit which is new income. The billionaires hide their money from taxes using similar strategy with capital gains and it isn't fair at all.

I know that, I still have a problem with it when it's on a smaller scale, though. I'm not saying that I necessarily have a solution to the problem, but I don't know that raising the tax is fair to the people who aren't able to put much in and don't end up earning much, either.

[saden1]

Originally Posted by jdlea

I know that, I still have a problem with it when it's on a smaller scale, though. I'm not saying that I necessarily have a solution to the problem, but I don't know that raising the tax is fair to the people who aren't able to put much in and don't end up earning much, either.

Whatever problem you have with it is unfounded. You have 1k in new income, how you got it is irrelevant. If it helps think of the process investing in stock as having invested in a business and making a profit (exactly what you're doing actually). You will pay and you should pay taxes on those proceeds.

[jdlea]

Originally Posted by saden1

Whatever problem you have with it is unfounded. You have 1k in new income, how you got it is irrelevant. If it helps think of the process investing in stock as having invested in a business and making a profit (exactly what you're doing actually). You will pay and you should pay taxes on those proceeds.

How should 401k's be handled then? This is before tax income that's earned compound interest for a number of years. I know it's taxed when it is paid out during retirement, but at what rate should it be taxed? Also, how would the "income" portion of it be determined?

I'm pretty ignorant to tax laws and such, so I'm asking for informational purposes, not to be combative.

I suppose I just never really thought about every bit of money I earn as income before; admittedly, I probably should have. It's just a way of thinking that needs to switch, but this is an interesting discussion, to me.

[saden1]

Originally Posted by jdlea

How should 401k's be handled then? This is before tax income that's earned compound interest for a number of years. I know it's taxed when it is paid out during retirement, but at what rate should it be taxed? Also, how would the "income" portion of it be determined?

I'm pretty ignorant to tax laws and such, so I'm asking for informational purposes, not to be combative.

I suppose I just never really thought about every bit of money I earn as income before; admittedly, I probably should have. It's just a way of thinking that needs to switch, but this is an interesting discussion, to me.

401k contributions aren't taxed at all until they are withdrawn and there a lot of rules around it. For one thing you can borrow against it and not pay taxes or penalty on it so long as you pay it back within 5 years (except when buying a home). You are required to withdraw a minimum amount of it when you turn 70.5 (this requirement was suspended by congress for 2009 because of the economic downturn).

You are technacally suppose to be taxed on it at the tax bracket you were in at your last income generating position before retirement (It doesn't mean you can go get a job at McDonald's though to lower your tax bracket). There are some strategies you can employ to lower your taxes. For example, if you don't anticipate your tax bracket to be lower as you get older and near retirement it might be wise to convert your 401k to Roth IRA before you retire since isn't subjected to minimum distribution rules which could cost you in the long run.


Bottom line is the rules around 401k are quite generous and if you combine it with other financial instruments (i.e. whole life insurance) you can definitely lower your tax bill when you retire.

[firstdown]

Originally Posted by saden1

401k contributions aren't taxed at all until they are withdrawn and there a lot of rules around it. For one thing you can borrow against it and not pay taxes or penalty on it so long as you pay it back within 5 years (except when buying a home). You are required to withdraw a minimum amount of it when you turn 70.5 (this requirement was suspended by congress for 2009 because of the economic downturn).

You are technacally suppose to be taxed on it at the tax bracket you were in at your last income generating position before retirement (It doesn't mean you can go get a job at McDonald's though to lower your tax bracket). There are some strategies you can employ to lower your taxes. For example, if you don't anticipate your tax bracket to be lower as you get older and near retirement it might be wise to convert your 401k to Roth IRA before you retire since isn't subjected to minimum distribution rules which could cost you in the long run.


Bottom line is the rules around 401k are quite generous and if you combine it with other financial instruments (i.e. whole life insurance) you can definitely lower your tax bill when you retire.

Thats such a stupid rule. They allow people to dig into their retirement so they can buy a home they cannot afford.

[saden1]

Originally Posted by firstdown

Thats such a stupid rule. They allow people to dig into their retirement so they can buy a home they cannot afford.

You're too grown to say stupid stuff like this. You know they can't afford it how? Because they are tapping into their 401k? I tapped into my 401k to buy a home I can afford. Why? because it's kinda smart to maximize your 401k investment, borrow money against yourself for 10 years and pay yourself back with interest.

[jdlea]

Originally Posted by saden1

401k contributions aren't taxed at all until they are withdrawn and there a lot of rules around it. For one thing you can borrow against it and not pay taxes or penalty on it so long as you pay it back within 5 years (except when buying a home). You are required to withdraw a minimum amount of it when you turn 70.5 (this requirement was suspended by congress for 2009 because of the economic downturn).

You are technacally suppose to be taxed on it at the tax bracket you were in at your last income generating position before retirement (It doesn't mean you can go get a job at McDonald's though to lower your tax bracket). There are some strategies you can employ to lower your taxes. For example, if you don't anticipate your tax bracket to be lower as you get older and near retirement it might be wise to convert your 401k to Roth IRA before you retire since isn't subjected to minimum distribution rules which could cost you in the long run.


Bottom line is the rules around 401k are quite generous and if you combine it with other financial instruments (i.e. whole life insurance) you can definitely lower your tax bill when you retire.

Interesting. Thanks for that info!

[firstdown]

Originally Posted by saden1

You only get taxed on your profit which is new income. The billionaires hide their money from taxes using similar strategy with capital gains and it isn't fair at all.

Why do you have to use billionair to make your point? Any investor who risk their money in the market benefiits with lower taxes for taking the risk. It also pumps money into corporations so they can expand and hire new people and help grow the ecomony. So its not just the rich that makes out. How about the plumer who has work his entire life and now wants to sell his small book of business for $300,000 so he has a retirement. If it was not for the lower tax he would get hit with a very high tax (remember that considered rich) for that year taking 1/3 $99,000 in taxes. Same with me. A large part of my retirement will be the value of my book of business and I cannot afford to give the fed gov. 1/3 of $600,000. That would be $200,000 from my retirement to the federal gov for selling a business I worked 20 to 30 yrs to build.

[saden1]

Originally Posted by firstdown

Why do you have to use billionair to make your point? Any investor who risk their money in the market benefiits with lower taxes for taking the risk. It also pumps money into corporations so they can expand and hire new people and help grow the ecomony. So its not just the rich that makes out. How about the plumer who has work his entire life and now wants to sell his small book (clientell) of business for $300,000 so he has a retirement. If it was not for the lower tax he would get hit with a very high tax (remember that considered rich) for that year taking 1/3 $99,000 in taxes. Same with me. A large part of my retirement will be the value of my book of business and I cannot afford to give the fed gov. 1/3 of $600,000. That would be $200,000 from my retirement to the federal gov for selling a business I worked 20 to 30 yrs to build.

It can be a millionaire...these people only need a few hundred grand to live a lavish lifestyle and their is hardly any long term risk unless you're investing with Maddof. At the end of the day the risk you take means nothing. If you lose money, you get a tax dudction, if you make money you get taxed. Pretty simple stuff.


As for the business owner wanting to sell his business, why shouldn't he get taxed at the highest bracket if he is going to make out 300k? Why does it matter the years who has put into it? Was he not paying himself all those years? I would advise you to start paying yourself (at least 15% of revenue) and putting a chunk of that money you pay yourself away. If you can't, your business isn't doing as well as it should and you might be in trouble when retirement rolls around. Don't blame your piss poor planning on the government, plan better.