Posted by
Poor Richard Reborn on Tuesday, December 18, 2007 6:24:26 PM
The Tale of a Taxpayer…Part II
During his internship, John received monthly paychecks of $2,250.00 from his employer. Because John was earning between $20,000.00 and $29,999.99 a year at his job the employer paid 30% of John’s 33% tax each month - $675.00 - and withheld 3% from John’s paycheck - $67.50.
When John earned his CPA the firm promoted him and raised his salary to $36,000.00 per year - $3,000.00 each month. Since this moved John, CPA into the next bracket - $30,000 to $39,999.99 – John CPA paid 4% and the firm paid 29%. And so it went for the next 40 years or so. John CPA ultimately became Partner John, earning well over the top bracket and paid all of the 33% tax out of his own earnings.
Over John’s 50 year employment career – age 12 to age 62 – he had earned a total of $6,300,000.00 upon which taxes had been paid by either him or his employer. Since John had been Ben Franklin frugal throughout his life, he had also amassed a nice estate of equity in his home ($1,000,000.00) savings ($2,000,000.00) and investments ($4,000,000.00).
Unfortunately, for the sake of this story, we have to allow John to die at this time to illustrate how his estate would be taxed. John created an estate of $7,000,000.00 during his lifetime, which passed to his wife, Mary, free of taxes. Assuming Mary used only the tax-free income from the estate for her personal income and maintenance, and the value of the estate didn’t grow, and she didn’t gift any of the estate away, when Mary dies the estate will be taxed on the difference between what John earned and paid taxes on during his lifetime and the total value of the estate at Mary’s death.
John earned and paid taxes on $6,300,000.00 during his life and left an estate of $7,000,000.00 at his wife Mary’s death. (Excuse the chauvinism. Mary could just as easily been the breadwinner but I had to make a decision.) The difference of $700,000.00 would, therefore, be taxed at the same 33% rate and the estate would pay a tax of $231,000.00 allowing the heirs to receive $6,769,000.00 in accordance with John and Mary’s wishes.
If we were to suppose that John and Mary had only one child, Emily, and she inherited the entire estate, then Emily could possibly have to pay the 33% tax on the $6,769,000.00 at her death insofar as it was more than her earnings during her lifetime.
Here’s another perspective on John’s, Mary’s and Emily’s lives. They each had full coverage health insurance throughout their lives. That may not seem extraordinary for a family of means but, had John been a common laborer all his life, it would still have been true. 33% is a lot of money when adding up the earnings of every American.
This is not the current system. The current system is a hodge-podge of rules and regulations that it takes an army of IRS Agents, tax attorneys, CPA’s and just plain Americans to manage. It is burdensome and NEEDS to be changed. It does not serve US or the USA.
Read on. Be prepared to ACT.