Friday, January 2, 2015

Love, Marriage, and Taxes

I started thinking about the future during this year's winter break. What will I do after I get out of grad school? How much will I make? What type of life will I be able to sustain? I got to thinking about what type of salary I'd be able to command and what that'd look like each month. Then I realized that I hadn't accurately accounted for taxes, or the effect of marriage. I looked up federal tax tables (here) and realized it'd be a royal pain in the ass to try to calculate taxes for every individual salary I wanted to test, let alone accounting for marital status and whatnot. So, instead of doing each calculation individually, I decided to fire up Python and play with lots of numbers. If you want to see the calculations yourself, my python code is here (link). Here's the results!

I calculated the amount of taxes for salaries in various tax brackets. If you want to know more details about how things were calculated, follow the asterisk (*) to the bottom of the page. You can probably tell where each bracket begins/ends by the kinks in the lines. The blue lines represent single people, while the red lines represent married people. Solid lines are strictly calculating federal income tax, and would represent the total tax for people in these states: .  Dashed lines are federal and state income tax for people anywhere in New York State (except Yonkers and and the five boroughs), and dotted lines are specifically for people living in NYC. And in case you can't read the axes here, the amount of money represented is the number on the axis times $1,000. Thus, if you're single and making $80,000 per year, your federal income tax bill for 2014 should be about $20,000, and so on.

The first thing to notice here is that no matter where you live, being married carries with it a pretty sizable benefit (at least as far as paying taxes is concerned). And I didn't even include the (tax) benefit of having a buttload of kids! So if you're making $80,000 per year and dating let's say an unemployed philosopher, put a ring on it and save yourselves about $6,000 per year (roughly $500 per month). Hell, throw that extra money into an IRA!

The next obvious thing to notice is that to exist in the state or city of New York means to live with extra hands in your pockets (especially in the latter locale). Now why'd I pick New York to bully? Laziness and familiarity. I'm from there, so I'm somewhat interested in its economics, and I may end up back there in the end. Who knows? But hey, I'm in Washington state now, and we've got no city or state income tax so haha**! Anyway yeah, tax-wise, being married in New York city or state is about as bad as—if not worse than—being single anywhere without income tax. For example, let's take a salary of about $80,000. In Washington state, that'd yield a tax bill of about $19,500 if you're single, ~$14,000 if you're married (and your total household income was $80K). In New York state, that's a tax bill of $23,750 and $17,500 respectively. In NYC, $26,500 and $20,250 respectively. You pay about $3-4,000 extra just for the privilege of living in NY state, and another $2.5-3,000 on top of that to experience city life. That's a little cray cray.

The last not-so-obvious thing here though is that these taxes are detrimental to those that make the least. Above I've plotted the total percentage your taxes taken out of your gross income for the same income levels and circumstances above. Now let me explain my point: fed/state/city taxes are structured to adjust with your income, however living day-to-day is not. Whether you make $14,000 per year (roughly minimum wage) or $1.4 million per year, a 4-lb bag of frozen chicken breasts is still about $12 down at Safeway, and the bus/train/whatever still costs about $2.50 to use each time. Granted, if you're making $1.4 million per year you're probably not getting the $12 bag of chicken at Safeway. But, let's scale up the impact it'd have on that salary. $12 chicken to someone that makes $14,000 per year is equal to about $1,200 for someone making $1.4 million. That's some expensive chicken, even if you are a millionaire..

So if you're fresh out of undergrad or grad school, you're single (as far as the IRS is concerned), and you live in NYC, I'm sorry. Cause that $50,000 starting salary is getting $13,700+ sucked out for taxes, and then you've still gotta pay rent (~$10,000 per year), buy food (please, eat out as little as possible, cause that might be another $10,000), get that metrocard, pay back those student loans, pay off that/those credit card(s), and still try to enjoy life. Better get yourself an inexpensive hobby, or hell maybe one that pays. There's spots on subway platforms for every talent.
I actually became more interested in what expenses would look like for someone making about that, so I figured it out. Above, we have the financial life of Mr. Johnny Averageface. He makes the median American salary ($50k; green), has average fun ($300/mo; blue), buys average food and eats out averagely ($150/wk; gray), pays averagely on his average student loans ($345/mo on $30k of debt; orange), on his average credit card debt ($312/mo on $15k of debt; purple), on his average rent ($1,300/mo; yellow), and is taxed appropriately (red). Wow, rent is a bitch. But hey, taxes are giving rent a run for it's money (well, Mr. Averageface's money) in NYC.

So what's the takeaway(s) here? Get married, find a cheaper apartment, and don't live in NYC. Also, not mentioned much above but for the hell of it here, put your money in a goddamn IRA already! Whatever you put in reduces your tax bill, gains interest (as long as the US economy doesn't collapse), and gives you something to eat early-bird specials and live in south Florida with when you're in your twilight years.

Happy New Year!

Note, while the numbers quoted in text are approximated and rounded (because no one likes to see 12,736.04 instead of 12,700), the numbers in the figures are exact.

* These are using the 2014 tax brackets for US federal, New York State, and New York City income tax. There really isn't anything extra added. Just the standard deduction for each combination and one exemption. The taxes here include FICA and Medicare, and it only goes up to $200,000 in salary because Medicare is calculated in a weird way that I didn't feel like figuring out after $200,000 ($250,000 for married couples).

** With that said, our public services pale in comparison to New York's. It'd be like comparing a kitten to a 2-days hungry tiger in their ability and willingness to kill you.

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