I filed my taxes today. Yeah, they are late. I almost always file with an extension because I’m so busy in April – I’m not recommending it, I’m just saying it happens.
Anyhow, this year, it really hit me how much being middle class in American sucks. And as the words were coming out of my mouth during my rant to my husband, I thought, this would make a good post… It’s not often that you get an Op-Ed piece from me, but then you haven’t seen my tax return.
First of all, defining middle class is hard, so I’m not going to try. I’m not going to draw a line in the sand and tell you who actually qualifies as middle class or not. I’m just going to talk about tax policy and how it more or less affects those that don’t seem to fit in as “poor” or “rich”. You can figure out for yourself where you think you land.
And this isn’t going to be a discussion about tax rates (though effective rates are a different story). The progressive nature of our tax system actually doesn’t bother me. I don’t buy the argument that a flat tax serves everyone the same way because it’s a hell of a lot more difficult to give up 10% of your income for taxes when you’re at the bottom of the scale than it is at the top. But again, that’s not my point.
What does bother me is our priority system – what we choose to allow as deductions and how we limit those deductions. Here are some examples:
Home mortgage interest. This is almost always deductible – up to $1 million mortgage. Rental payments are not. The more that you pay your mortgage down, the worse off you are for tax reasons. It almost always pays to have a high mortgage, speaking strictly about taxes. Why do you think home sales and re-fis are driving the economy of late?
Home mortgage interest on second homes. If you keep it merely as a vacation home, it’s deductible. But if you have to rent it out in order to keep the house? Not fully deductible.
Dependent Care Credits. Your deductions are limited to the amount of the least paid spouse’s income or a cap of $6,000. Looked into childcare lately? For full time care, you should expect to pay $20,000/year or more. This doesn’t include payroll taxes which you are required to withhold for in-home childcare. And your deduction? $6,000. Further, the deductions are subject to income phase-outs.
Student Loan Interest. This is the deduction that I cringe about the most. This year, my husband and I paid twice as much in student loan interest this year as we paid for the mortgage. Why? Because like most middle class kids I knew, I didn’t grow up rich, my parents didn’t pay for my education, my scholarships didn’t cover the cost of my entire education and college and grad school are ridiculously expensive. And what do I get for it? Practically nothing. If you’re single the deduction begins to phase out if your AGI is over $50,000; it disappears if your AGI is over $65,000; you can double those limits if you’re married.
Child Tax Credits. To qualify, you must have an income of less than $110,000 when filing a joint return with your spouse; $75,000 if you are filing as a single head of household; or $55,000 if you are married but filing separate.
Educational Expenses for Elementary and High School Students. Oh, that’s right. There is none. If you’re like me and you pay for private school because you lack confidence in your local schools (ahem), there’s no deduction. However, if I kept my children out of school with a private nanny, that is deductible. And if I buy a more expensive home in a better school district, that is deductible. But not tuition. For what it’s worth, I wrote my Congressman (Chaka Fattah, who sits on the Appropriations Committee) about this years ago and never received a response… I actually think it’s one of the more despicable omissions in the tax code.
IRA Contributions. Your contributions to an employer-managed plan are only fully deductible if your AGI is less than $34,000 for a single person and $54,000 for married persons. It phases out completely if your AGI is more than $44,000 and $64,000, respectively.
Medical Expenses. Medical expenses are subject to a floor: 7.5% of AGI. That means that you can only deduct medical expenses which are greater than 7.5% of your AGI. Here’s an example: You have $4,000 in medical expenses and your AGI is $50,000. Your deduction is… $250. That’s right. 7.5% of $50,000 is $3,750. So, you can only deduct the expenses over $3,750 – in this case, $250.
Miscellaneous Expenses. Also subject to a floor: 2% of AGI. Don’t get me started.
And AMT? A direct hit for the middle class – who were never intended to be subject to AMT.
So what does all of this mean? A Congressional Budget Office study from found that the wealthiest 20% of taxpayers (average incomes of $182,700), saw their share of federal taxes drop. The top 1% (average incomes of $1.1 million) also saw their share fall. However, taxpayers with incomes in the range of $51,500 to $75,600 saw increases in their share of federal tax payments. The biggest leap was for households earning around $75,600.
In terms of effective federal tax rates, the numbers are even more telling. Rates for the top 1% of taxpayers have fallen by 20%. The poorest taxpayers saw their taxes drop 16%. The smallest drop? The middle 20% of taxpayers with average incomes of $51,500 – their drop was less than half of the wealthy.
And yes, the web is full of statistics that prove any point. So, I’m not relying just on stats and policy reports. I’m relying on my own experiences and those of my clients, many of whom are professionals and small business owners – solidly middle class.
And this isn’t about politics – many of these tax issues have been around for several administrations – so it’s not a liberal versus conservative argument.
It’s really about how hard it is, increasingly, to be middle class in America. We work hard and we don’t mind paying our share. We just don’t understand why our share of the burden continues to grow while our services shrink. I don’t receive free medical benefits, I can’t rely on our public schools to educate my children, public transit is phasing out and getting more expensive, energy prices are rising… I guess I’m just not sure what I’m paying for anymore.
Editor’s note: This was one of my highest commented posts for 2007. Unfortunately, when I made the transition to a different server in 2008, some of the posts lost comments; sadly, this was one of them. Don’t let it stop you from commenting. The omissions were totally unintentional!
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- Apparently Being Middle Class in the UK Sucks as well…