Episode 30: I want Tax Freedom Day (Income Taxes Part 2)!!!

GRANT: This is awesome. Yahoo!!!

 

MAK: What’s going on? Why are you so happy?

 

GRANT: Didn’t you hear? We’re free!!! No more school.

 

MAK: What? Do you mean they canceled the rest of school because of the Coronavirus?

 

GRANT: Yep. I think they’re trying to keep us safe.

 

MAK: But, we still have e-learning to do, right?

 

GRANT: Sure do. 4 days a week from 9am to 3pm. Can’t wait to do jumping jacks for PE via Zoom.

 

MAK: That is going to be weird. At least they won’t smell you.

 

GRANT: Funny. Who cares? It’s Education Freedom Day, baby!!! 

 

MAK: Didn’t that sound just like that thing dad was talking about in the last podcast… Wasn’t it called “Tax Freedom Day”?

 

GRANT: Yeah. Now that I think about it, it does.

 

MAK: Totally excited about getting off school, this is going to be fun. By the way, what do you think dad’s thing is all about?

 

GRANT: No idea. Do you think it’s one day when you don’t have to pay any taxes?

 

MAK: I don’t know, but I’m sure that would totally make him happy. He’d do that thing where he dances around singing in his robe.

 

GRANT: Yeah, remember last year with the big tax refund. The dude needs to tie his robe tighter!

 

MAK: You said it! My eyes hurt for a week.

 

GRANT: Dad did say there are a ton of taxes, and having an ENTIRE DAY to get out of them would sound awesome to him.

 

MAK: Yeah, you’re absolutely right. That would probably be the best gift you could give him… EVER!! 

 

GRANT: It would be better than Christmas. What do you say, should we ask him?

 

MAK: Sounds good.

 

MAK/GRANT: Dad!!! We want to hear about Tax Freedom Day!

 

DAD: What’s all the noise up there? You guys ok? Did I hear something about “Tax Freedom Day”?

 

MAK: Yep, but first we were talking about “Education Freedom Day”.

 

DAD: That’s an interesting name. I think we had those when we were kids. Isn’t that the last day of school before summer vacation?

 

GRANT: Come on dad, you probably heard the big news.

 

DAD: Ok, what is the big news? Are you getting a job? No, I got it… you’re going to move out and start paying your own way?

 

GRANT: Dad, we’re 11. We can’t move out.

 

DAD: Ok, I was just kidding. 

 

MAK: Come on Dad, we’re going to live with you forever… They just announced that school was over for the rest of the year.

 

DAD: Seriously?

 

GRANT: Canceled.

 

MAK: Dropped

 

GRANT: Scrapped

 

MAK: Scrubbed

 

GRANT: Scratched

 

DAD: It’s about keeping you safe due to Corona? Wow, you guys are really fired up about getting an extra 2 months off.

 

GRANT: Heck yeah, dad. 2 months old baby!!! That’s almost doubling summer vacation. That means a lot more video games!

 

MAK: That’s right. And more time with you and mom. 2 months!!! PARTAAAY!

 

MAK/GRANT: 2 months, 2 months, 2 months!!

 

DAD: Ok, I get it. But, we’re still in lock down. One of these days this will all be over. And, things will be back to normal.

 

GRANT: That would be great!!!! But, after our extra 2 months off. Ha-ha.

 

MAK: So dad, maybe you could tell us a bit more about this Tax Freedom Day. I’m really getting into “Freedom Days” now.

 

GRANT: I have a theory. If Tax Day is normally April 15th, is the next day Tax Freedom Day because you’re free from taxes?

 

DAD: That’s really a great theory. And, it’s funny that you mention April 16th. Because in 2019, April 16th was tax freedom day.

 

GRANT: So I was right? Hoop Hoop!! Who’s your daddy!!! Who’s the king!!

 

DAD: Great guess for sure, but Tax Freedom day changes each year. It shows how long we have to work each year to pay for all the taxes.

 

MAK: Wait, are you saying everyone in the US would literally have to work and hand over 3 ½ months of their income to pay all the taxes for 2019?

 

GRANT: So you pretty much work for free just to pay taxes for 3 and ½ months?

 

DAD: Yep. If you count, that’s 105 days out of the 365 days in a year. Not quite a third which means two days you get to keep and one day is tax.

 

MAK: OUCH!

 

GRANT: Yeah dad, that really hurts my ears just to hear that. Kinda like a chalkboard.

DAD: I agree. Around $3.5 Trillion goes to our Federal government in Washington and another $2 or so Trillion to state and local governments. That’s around $5.5 Trillion, and yes that hurts!!

GRANT: That’s a lot. But, it’s hard to imagine how much a Trillion means, let alone $5.5 Trillion.

 

MAK: Ok, here’s a question. Is that more than everyone in the US pays for clothes in a year?

 

GRANT: Or, is it possibly more than what is paid in the US on food each year?

 

MAK: Or is it more than we pay for everyone’s home?

 

DAD: Well, it’s actually more than ALL of that COMBINED. It’s the cost for all the food, clothing and housing spent in the US for the entire year.

 

GRANT: That’s unbelievable dad!

 

DAD: I agree!!

 

MAK: Well, I was thinking Tax Freedom Day was going to be happy. But, I think I need a minute to collect myself.

 

GRANT: Yeah, me too, that’s a little hard to digest.

 

DAD: That’s funny, G, thinking about the way you wolf down food, I would think you could digest anything!!

 

GRANT: Funny dad.

 

MAK: Ok, there are a lot of taxes. Since income tax is the biggest part, I think it makes sense to understand how it works?

 

GRANT: Dad, when you do your income tax, you say you do a calculation. Do you guess or estimate your income, add it all up together and pay that amount?

 

DAD: Hold that thought, because we’ll get into that. But first, I think it might be best to tell you about the structure of our income tax system. It’s called a progressive tax system.

 

MAK: Did you say it’s a depressive tax system? That makes sense. I was a little depressed when I heard about all the taxes we paid to calculate “Tax Freedom Day”.

 

GRANT: Mak, I think he said “PROgressive”. Like progress. Is that right dad?

 

DAD: You got it G-man. But, it does feel a little depressive at times. With a progressive tax, you pay a higher rate, the more money you make. You need to think about it like steps.

 

GRANT: Ok, I’m totally not getting that idea? We get taxed like the steps in our house?

 

MAK: I’m with G on this one, that sounds a bit out there.

 

DAD: Ok, the first time you hear it, I agree it’s weird. But, there is a different tax rate for each level of income. Let’s make it easy…

 

MAK: Please do. Tax rate… Steps… Progressive… All together it sounds like you’re speaking another language.

 

GRANT: I agree with Mak. 

 

DAD: G, in your video games, you have levels, right? As you progress to each level, you earn more points. You can then buy cooler and more expensive stuff, right?

 

GRANT: Yes, true. Ok, I didn’t see that coming. Video games are like taxes?? Are you insane? You actually dropped “Progress” in there…

 

MAK: And, dad said each level is like a new step, which earns you more. Is that right? I think I’m starting to get it dad, even if Grant isn’t.

 

DAD: You’re absolutely getting it Mak. So, let’s say there are two people. One earns a salary of $10,000 and the other earns a salary of $20,000. That’s their income. Are you with me so far?

 

GRANT: Yep, one is on a lower “level” and the other is on a higher “level”.

 

DAD: Perfect. So, the government tells us how much to pay at each level. If you aren’t married. You’re called “Single”. Starting with the first dollar you earn up to about $10,000 you pay 10% income tax.

 

MAK: So, you would pay $1,000 if you made $10,000 right? Because 10% means you pay $10 for every hundred.

 

DAD: You got it. But once you make between $10,000 to almost $40,000 you pay 12%.

 

GRANT: Is that the next step or level? 

DAD: Yep. Keep going G.

 

GRANT: So if you made $20,000 the first $10,000 is taxed at 10% which is $1,000 and the next

 

MAK: $10,000 you earn would mean you pay $1,200. So the government earns more on the next level.

DAD: Exactly. The government is the one playing the video game. They want people to be successful. The more income someone makes, the more tax the government earns. Make sense?

 

GRANT: So, if I was the government, playing the game, my goal would be to help as many people make as much money, so I would earn more money through taxes.

 

MAK: I think Grant’s totally got it. Is that right dad?

 

DAD: Yep. So, what is the total tax if you make $20,000?

GRANT: $2,200, which is the tax on the first level of $1,000 plus $1,200 on the next level.

MAK: And, in this case, based on the example, the average is 11% because twenty-two hundred divided by twenty thousand is 11%.

DAD: That’s a lot of numbers. 10%, 11% and 12%. You pay 10% on the first $10,000 you make, you pay 12% on the next amount, and the average is between the two. Mak & G you make dad proud!

GRANT: So, a progressive tax increases the tax for the income at each new level. Once you pass a level, you’re done.

DAD: Exactly, once you complete a level, just like in video games, you can’t go back. Unless you start over, which means a new year.

MAK: That makes sense. So, when I think of the highest level, what’s the most the government can make?

DAD: Well, it’s 37% but that’s for those people who make over $500,000. That’s a great number to know. But, do you know the highest rate we’ve EVER had?

GRANT: Was it 45%, or maybe 50%?

MAK: I’m going with 60%, no 65%.

 

DAD: Well in 1944 the highest tax rate was 94%.

 

GRANT: No way, that can’t be true!!

 

MAK: You have to be making it up. 

 

DAD: Nope, but it brings up the next question. What goes into your income, and what’s the big calculation you have to do that takes 3 ½ months?

GRANT: Don’t you just take your salary off your paycheck?

 

MAK: Dad, that seems really easy.

 

DAD: Well, that would be super easy, and for many, that’s it. But, for others, you have other ways you make money, right?

 

GRANT: Are you talking about stocks and bonds as well as other investments?

 

MAK: Like interest and dividend income?

 

DAD: You both rock! That’s exactly part of it. And, what do we know about making money in stocks?

 

MAK/GRANT: Buy low and sell high!!

 

DAD: Awesome, you have been listening. Example: what if you buy a stock for $23 and sell it for $35?

 

MAK: Then you make $12, which is the difference between what you bought and sold it for. Is that income too?

DAD: It’s a special type for sure. That’s called a capital gain, and there is a different tax rate for that. 

GRANT: Isn’t capital, the money a company puts together when they start? You can sell stock or you can borrow money?

DAD: Absolutely. Capital is really important for companies, just like the capital city for a state is a really important place. The tax rate is lower, because the government wants you to invest.

GRANT: Why do they want you to invest?

 

MAK: Is it about creating more jobs?

 

GRANT: Which then turns into creating more taxes!!

DAD: You are both right. The more growth, the more jobs, the more taxes, and the cycle continues. So, it’s good to see capital gains.

GRANT: Sounds like you have to keep track of things for a long time. If you bought a stock years ago and sold it today. Lots of paperwork. Sounds like a capital PAIN to me!!

MAK: Nice one G!

DAD: That was funny. You’re right, it can be tricky. But, remember when we spoke about the broker that can buy your stock?

 

GRANT: Yeah, I thought you said he was a “Joker”.

DAD: Well, the broker, or the company that holds your investments would help keep track of those things for you. So, I wouldn’t worry too much.

MAK: Ok, but the calculation is tricky, right?

 

DAD: Yep, you would use a computer program to calculate your taxes for you. You use computer programs every day, now more with e-learning. But, the software program asks you lots of questions to figure it out. 

 

GRANT: Is that why you have all those papers you look at? 

 

DAD: Yep.

 

MAK: So you use those papers to put information into the computer system?

 

DAD: Yep, you got it. You have to wait to get all that information, that’s one reason you get until April 15. But, here’s a simple rule, normally if you get money, it’s usually taxed.

 

GRANT: So what information do you get, that you need?

 

DAD: Maybe you can tell me. Any ideas??

 

MAK: Your salary

 

GRANT: Capital Gains

 

MAK: Interest on your bonds

 

GRANT: Dividends on your stocks

 

DAD: Excellent. And there are many, many others. I could go on for days.

 

MAK/GRANT: PLEASE DON’T.

 

DAD: Ok, I’ll stop there. How about the rest of the day is “DAD Freedom Day”!

 

MAK/GRANT: AGREE!! THANKS DAD!!

 

MAK/GRANT/DAD: BYE!!

 

Ben’s 2 Cents

Tax Freedom Day is an interesting way to look at taxes. In the US, we have to work approximately 3 and ½ months to pay for all those taxes. However, it changes each year, due to several factors. Taxes pay for so many things, and we’ll get into that. However, understanding some of the basics will help as we continue to manage our money better, which means choosing the right investments that might be more tax advantageous.

 

The Progressive Tax System is constructed to increase the rate of taxes paid as your income increases. It’s like reaching a new level in a video game. For every new level of income, the percentage of tax for that level increases. We refer to this as a marginal tax rate. The higher you go, the more points the government gets if you think about it like the video game, because there are fewer people who make it to the higher levels.

 

So, what is calculated in income? If you’re an employee with a salary, you definitely have to include that. We wait for our W-2 to come in, which has the information from your company for your total compensation, which includes your salary, bonuses, commissions and other compensation. It includes all your payroll taxes, health insurance, taxes withheld during the year and more. But, in many cases we haven’t paid taxes for other income which includes dividends, interest income or capital gains. As we do our tax calculation, we will have to add these for our tax return. That’s a big reason the deadline to file our personal taxes is April 15th.

 

Thanks for being here. Stay safe and healthy, and we’ll see you on our next podcast. And, don’t forget to share, like and give us comments. We love those!!! BYE!!!