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California may be high tax for high income people, but for most middle and low income folks, it is actually pretty cheap. CA's top marginal income tax rate is

California may be high tax for high income people, but for most middle and low income folks, it is actually pretty cheap. CA's top marginal income tax rate is actually a temporary provision which may or may not be extended when it expires, depending on who the voters elect. > driving away the 1% of households that pay 50% of the taxes in California, worsening the situation for everyone. One big problem is that over the decades the economy has shifted more to services and less to sales of physical goods, so sales tax revenue has declined disproportionately. We should have a sales tax on services to offset reductions in income tax, which would be much better for creating steady revenue. >this is the only place we’ve lived where it would add an additional $2,000+/month expense to keep our family’s healthcare while unemployed. That's inaccurate. If your income is low, you can get subsidized coverage through Affordable Care Act (aka Obamacare), up to 100%. >government retirement plans like 401(k)s 401k is not a "government plan", it is an employer-sponsored plan. There is no "retirement age" associated with a 401k or an IRA, for that matter. You are making a pretty big mistake here by not maxing out your available opportunities to defer taxes. The tax you pay when you retire on such contributions is based on where you live at the time, not where you lived when you earned the money. >Lastly, we won’t allow ourselves to be audited without our knowledge by the IRS by using a cloud-based personal finance app that could be subpoenaed behind our backs if they continue pushing for new powers. Paranoid maybe? Audits are a necessary component of our voluntary reporting system, and you have nothing to fear if you pay what you legitimately owe. You will absolutely be notified if you are being audited, and get a chance to provide accurate information. Far more people cheat on their taxes than are unfairly dunned by the IRS.

dgildeh 4y ago
Thanks for the comment. I wasn't aware of that point on the high top marginal tax rate, I can only comment that it's been in place for a long time (since I moved here) and I don't get any sense personally that it will be expired when California is constantly looking for ways to increase taxes. Re. healthcare, from past people I've hired and let go and friends who've been unemployed, perhaps as they're all in tech with higher incomes, it seems pretty accurate. I remember one employee had to setup Cobra to continue keeping their healthcare plan, and it was actually more expensive than what the company was paying for some reason! Terrible system in general... Re. 401(k), I understand these are privately managed accounts, but the rules around them are dictated by the government, and can be changed as many countries are doing in general. And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans. I completely get the math of deferring taxes on your investments, and employer contributions, but I prefer to find other tax strategies that lock in tax savings today and also have more freedom around what we do with our money, these plans are pretty restrictive and I suspect will only get more restrictive in future as I mention in the blog. With regards to my paranoia, I did link to a full blog on Privacy explaining that position, but specifically this attempt which fortunately failed: https://abcnews.go.com/Politics/biden-admin-backs-tracking-bank-accounts-600-annual/story?id=80665505 https://abcnews.go.com/Politics/biden-admin-backs-tracking-b... I could be wrong, but this is one of many examples I've heard about since moving here, the general theme being they want more powers to get our data and audit us. Since moving here, our experience is the IRS is way more aggressive and invasive with tax filings and penalties than we ever experienced in the UK too. And don't even get me started on the exit tax, which for some reason kicks in after 8 years if you're on a green card, requires you to list every asset you have worldwide, and then pay capital gains on it, if you ever decide to leave the USA one day!
- stouset 4y ago
  > And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans. Sort of, but in practice not really if you're smart about it and plan a bit in advance. If you want to retire early and access 401(k) or traditional IRA funds, you can do so without incurring additional taxes or penalties. The strategy is called a "Roth conversion ladder". It takes advantage of the fact that you can always withdraw Roth principal (not investment returns) before any retirement age penalty-free (as long as those funds have been in the Roth for at least five years). The general outline is that you roll over some of your 401(k) or IRA funds into a Roth IRA every year. This causes those funds to be taxed as regular income tax, but your income is almost certainly going to be dramatically lower than during your earning years, putting you in a much lower tax bracket. This entire amount that was rolled over is now considered principal, and in five years you can use it penalty-free per the Roth rules. Every year you roll over what you expect to need in five years. Once you bridge that first five years (perhaps with preexisting Roth funds), you now have a recurring source of income through your Roth. Yes, this is some additional complication and requires some planning. But it's not particularly onerous. GP is right that you're likely making a pretty big mistake, paying 40%–50% tax rates (on the marginal top end of your income) in order to avoid some restrictions that are—in most cases—pretty easily bypassed. That's not to say there aren't some very legitimate reasons for keeping money in accounts that don't come with restrictions, but paying 40%—50% in taxes for that privilege makes those situations comparatively rare. I will absolutely agree that the fact that you need to know these sorts of "tricks" is one of many indefensible parts of our retirement system. And of course, there's always the risk of the rules changing out from under you. But cases where that actually happens in a way that causes significant impact are uncommon in practice.
  - dgildeh 4y ago
    Thanks for the info - funnily enough after I posted this I spoke to a tax strategist this morning who also laid out a bunch of things we could do to reduce our tax bill. The problem as you say, is this type of person isn't accessible to most people, and expensive!
    - 4y ago
hkt 4y ago
> One big problem is that over the decades the economy has shifted more to services and less to sales of physical goods, so sales tax revenue has declined disproportionately. This is also the reason why the rich won't leave places with unusually good services even if they're taxed hard for the privilege of living there. See London, NYC, etc. Taxes in those places could and should be higher. A little tangential perhaps, but we don't adequately measure the value amenities and services have for people, so we disadvantage ourselves in conversations about tax.
giantg2 4y ago
"One big problem is that over the decades the economy has shifted more to services and less to sales of physical goods, so sales tax revenue has declined disproportionately." What? Do they really not tax services? I thought that was part of sales tax everywhere.

dgildeh 4y ago

Thanks for the comment. I wasn't aware of that point on the high top marginal tax rate, I can only comment that it's been in place for a long time (since I moved here) and I don't get any sense personally that it will be expired when California is constantly looking for ways to increase taxes. Re. healthcare, from past people I've hired and let go and friends who've been unemployed, perhaps as they're all in tech with higher incomes, it seems pretty accurate. I remember one employee had to setup Cobra to continue keeping their healthcare plan, and it was actually more expensive than what the company was paying for some reason! Terrible system in general... Re. 401(k), I understand these are privately managed accounts, but the rules around them are dictated by the government, and can be changed as many countries are doing in general. And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans. I completely get the math of deferring taxes on your investments, and employer contributions, but I prefer to find other tax strategies that lock in tax savings today and also have more freedom around what we do with our money, these plans are pretty restrictive and I suspect will only get more restrictive in future as I mention in the blog. With regards to my paranoia, I did link to a full blog on Privacy explaining that position, but specifically this attempt which fortunately failed: https://abcnews.go.com/Politics/biden-admin-backs-tracking-bank-accounts-600-annual/story?id=80665505 https://abcnews.go.com/Politics/biden-admin-backs-tracking-b... I could be wrong, but this is one of many examples I've heard about since moving here, the general theme being they want more powers to get our data and audit us. Since moving here, our experience is the IRS is way more aggressive and invasive with tax filings and penalties than we ever experienced in the UK too. And don't even get me started on the exit tax, which for some reason kicks in after 8 years if you're on a green card, requires you to list every asset you have worldwide, and then pay capital gains on it, if you ever decide to leave the USA one day!

stouset 4y ago
> And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans. Sort of, but in practice not really if you're smart about it and plan a bit in advance. If you want to retire early and access 401(k) or traditional IRA funds, you can do so without incurring additional taxes or penalties. The strategy is called a "Roth conversion ladder". It takes advantage of the fact that you can always withdraw Roth principal (not investment returns) before any retirement age penalty-free (as long as those funds have been in the Roth for at least five years). The general outline is that you roll over some of your 401(k) or IRA funds into a Roth IRA every year. This causes those funds to be taxed as regular income tax, but your income is almost certainly going to be dramatically lower than during your earning years, putting you in a much lower tax bracket. This entire amount that was rolled over is now considered principal, and in five years you can use it penalty-free per the Roth rules. Every year you roll over what you expect to need in five years. Once you bridge that first five years (perhaps with preexisting Roth funds), you now have a recurring source of income through your Roth. Yes, this is some additional complication and requires some planning. But it's not particularly onerous. GP is right that you're likely making a pretty big mistake, paying 40%–50% tax rates (on the marginal top end of your income) in order to avoid some restrictions that are—in most cases—pretty easily bypassed. That's not to say there aren't some very legitimate reasons for keeping money in accounts that don't come with restrictions, but paying 40%—50% in taxes for that privilege makes those situations comparatively rare. I will absolutely agree that the fact that you need to know these sorts of "tricks" is one of many indefensible parts of our retirement system. And of course, there's always the risk of the rules changing out from under you. But cases where that actually happens in a way that causes significant impact are uncommon in practice.
- dgildeh 4y ago
  Thanks for the info - funnily enough after I posted this I spoke to a tax strategist this morning who also laid out a bunch of things we could do to reduce our tax bill. The problem as you say, is this type of person isn't accessible to most people, and expensive!
  - 4y ago

hkt 4y ago

> One big problem is that over the decades the economy has shifted more to services and less to sales of physical goods, so sales tax revenue has declined disproportionately. This is also the reason why the rich won't leave places with unusually good services even if they're taxed hard for the privilege of living there. See London, NYC, etc. Taxes in those places could and should be higher. A little tangential perhaps, but we don't adequately measure the value amenities and services have for people, so we disadvantage ourselves in conversations about tax.

giantg2 4y ago

"One big problem is that over the decades the economy has shifted more to services and less to sales of physical goods, so sales tax revenue has declined disproportionately." What? Do they really not tax services? I thought that was part of sales tax everywhere.