The first week of December is time to get out the Christmas decorations, hang the mistletoe and rip the doors off the advent calendar.
But here in the US it is also when you start collecting all your tax documents and paperwork to get ready for tax season. The deadline for filling is still April 15th but the tax year runs Jan-Dec.
Taxes, like death, are inevitable and unloved.
America prides herself on releasing your entrepreneurial spirit, reducing barriers to business, and bolstering the dream of wealth, home ownership and opportunities for your kids.
Taxes – how much they are and who pays them – therefore, is an emotive issue.
Federal Taxes – those levied by Washington DC – apply to anyone in the USA. Every individual from the great white wilderness of Alaska to the sugar-white sands of my Florida home pays them.
This is the largest source of income the US government receives. It is what funds defence, highways, education and disaster relief.
Federal income tax rates for individuals are progressive, meaning that as taxable income increases, so does the tax rate, and rates range from 10% to 37% and kick in at specific income thresholds.
Unlike the UK which allows you to earn a basic income before the tax kicks in, US Federal tax men take 10% of everything on the first $10,000 you earn. But, in keeping with the ethos of not punishing success, the tax brackets and rates become a little gentler as you start making some real money.
Individual taxpayers pay 12% on income up to $40,000 and just 22% on the next 50 grand. If you are earning up to $170,000 the highest rate which you’ll pay is a reasonable 24%, and if you are married and file jointly with your spouse that limit doubles to £340,000. You would have to be earning a combined $650,000 before you and your significant other finally reach that top bracket.
But that is only half of the story.
As well as Washington’s Inland Revenue Service taking a lump of your hard earned, there are a litany of others waiting to dip your pocket.
This is, after all, the United States of America, and if the ‘United’ part has had its share, rest assured the ‘States’ part want theirs too.
Thankfully, of the 50 States, nine choose not to levy state income tax on wages.
Nevada, Washington, South Dakota, Tennessee, Texas, New Hampshire, Wyoming, Alaska and the wonderful Sunshine State of Florida, forgo the opportunity to charge their residents additional income taxes.
Those who do take a cut of their residents income, range from some who levy a flat tax from as little as 3% to some states which collect an additional 13.3% on their highest earners.
California, of course, is that state. With the top rate of Federal Tax at 37%, the addition of the 13.3% state income tax takes the highest marginal rate to 50.3% – above that psychological line when you pay more in tax than you earn.
Ronald Reagan – the former California governor and US President – will be spinning in his grave.
Many Californians are voting with their feet.
Silicon Valley’s ultra-remunerated tech gurus are fleeing the high tax regime of the Golden State and setting up shop in tax-friendlier Texas towns like Austin and San Antonio.
But that isn’t the end of America’s tax woes, in addition to Federal and State taxes, some municipalities are collecting a cut of the money too.
Of course, the city which has its hand deepest in your purse is Gotham.
New York City takes between 3% and 4% of residents in the five boroughs, but if the Democrats get their way they propose a new set of taxes on those earning more than $1,000,000.
Former Mayor Bill de Basio proposed new taxes of 8%, 9% and 11% for those on mega-salaries. That would take New York City’s wealthiest back to the top of the tax charts,
As a consequence, the Hedge Fund managers, insurance and banking executives who previously lived in Manhattan’s ritzy penthouses are moving to my part of the world and setting up trading desks and international exchange accounts from laptops overlooking the Gulf of Mexico in zero-tax Florida.
The numbers of economic migrants crossing the Mason Dixon line under cover of night to escape the tax-induced poverty of New York is still unknown. Tens of thousands descended on Florida’s beach towns and retirement communities to avoid the COVID lockdowns, and Gen Z and college leavers have brought a youthful flush as they set up freelance or gig-economy set ups in a market where they might just, only just, ever be able to afford a home.
With a recession here, inflation entrenched and stock markets sliding – filing your self-assessment for 2022 may be the end of the dream for many American’s living in high tax cities and states.
