Tax Season: Why I loathe paying taxes since moving to CA from the UK
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Some things I've noticed -
I surrendered a good chunk of my paycheck to health insurance in the states that's already folded into income tax in UK
Car insurance in UK is much cheaper because it only needs to cover damage to the car instead of hospital bills
Council tax (property tax) is significantly cheaper here. For instance, a £1,000,000 home in manchester might pay £2200-£2700 per year in council tax, while a $1,000,000 home in my old neighborhood in Denver is paying $6000 per year
Gasoline is more expensive here, but driving distances are not as high so I think that washes out even
Fruit, vegetables and meat is definitely cheaper here then anywhere in CO
Internet, cable, and phone plans are significantly cheaper hereUK car insurance includes medical cover! It's just not usually called on quite so much and it's cheaper if it is. At one point there was a lot of fraudulent whiplash claims. Maybe the US has a medical expenses insurance fraud problem?
> Council tax (property tax) is significantly cheaper here.
Council tax is a really bizarre system that is only loosely linked to property, and the UK would benefit from introducing proper US style property taxation.
> Fruit, vegetables and meat is definitely cheaper here then anywhere in CO
One of those things that we UKans don't appreciate - food is both cheap and pretty good compared to lots of Europe and especially the much praised Scandinavia. Whereas the US is the land of cheap and plentiful processed food.
> Internet, cable, and phone plans are significantly cheaper here
The UK has a working if slightly artificial market here, where the US basically doesn't have competition.
It has a medical expenses problem! ER visits are thousands of dollars even if nothing is wrong! There is a reason coverage is expensive — if it’s ever used, the costs are catastrophic
> 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.
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-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!
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.
There's even crazier options like the Mega Backdoor which require working at a company with an excellent benefits package. When combined with a normal Roth backdoor and an HSA, they allow a high earner to set aside $22,500 in a traditional 401(k) and $50,000 in Roth accounts, for $72,500 in tax-advantaged savings every year. With the information from my previous comment, this means that every year you do this equates to $50,000/yr you can spend in early retirement completely tax- and penalty-free
It's absolutely insane to me and also completely indefensible that simple access to this level of tax-avoidance is available to people based on their employer. Someone who earns the same level of income but at a different employer without a 401(k) only has the opportunity to set aside $6,500 (solely in a Roth IRA). And even doing that requires knowing about the backdoor "trick".
Cobra is federal and was always a hack. We Americans need a complete healthcare rewrite, but there isn’t enough political will to get it done and we couldn’t even agree on what/how to change.
Cobra shifts all of the cost to the newly-unemployed employee, whereas previously the employer and employee shared the insurance premium cost and the employer side was tax deductible. It’s only more expensive than while employed because the person can’t deduct it from taxes, while the company could.
The parent of your comment mentioned Obamacare plans. Those plans (and Medicaid) require that you change your insurance policy, so depending on availability you may be able to keep your primary healthcare provider. The out-of-pocket costs vary depending on what you qualify for, but the change in employment allows you to move to a higher deductible plan (cheaper if you conserve your healthcare visits).
All US safety net programs assume the end user is a liar and/or thief so it is your responsibility to prove your need. The UK (and Germany and Japan) got to redesign their social contract in the rubble of WW2; the US didn’t. And WW2 was the reason we ended up with so much employer-sponsored healthcare —- which means being unemployed comes with losing healthcare. We would have far better job creation if employees were more willing to leave companies quickly rather than searching for the next job first or calculating how much Cobra runway they can afford.
I am a bleeding heart liberal which doesn't come through in the below, but think this is one example of 'nothing as permanent as a temporary government measure'
Before 2012 the top CA tax bracket was the 9.3% one. CA was still one of the most progressive states (tax burden for mid-income folks and retirees is not bad, though cost of living is high), which means the state revenue is sensitive to the income of high-income Californians. Some of those incomes weren't doing so well in 2009-2011 with the GFC impact on tech, finance, maybe entertainment, execs living in the state, everyone's stock portfolios, etc.
Oh no, the schools are going to lose funding and the children won't be able to learn! Proposition 30 was proposed and raised sales tax for 4 years, and income tax for 7, via the creation of the 10.3-12.3 brackets; a 1M 1% surtax already existed. This was retroactive, raising taxes for the whole calendar year where it was on the November ballot.
https://en.wikipedia.org/wiki/2012_California_Proposition_30
Jerry Brown campaigned for it and stressed this was a temporary measure to get through these times, and it passed.
Four years later, in 2016... Did you know that if you don't act NOW then in a couple years there is going to be a big TAX CUT exclusively for rich Californians? Don't let this grave injustice happen, we need to fund schools so the children can learn! (and this time some other stuff like Medi-Cal and pay down the debt a bit).
https://en.wikipedia.org/wiki/2016_California_Proposition_55
I believe this makes them effective through 2030.
Next year, CA will lift the cap on the 1.1% CA employee payroll tax. I haven't followed this too close but think that means that californians making over $1M will be paying a 14.4% state marginal tax rate. Not that there's much sympathy for that group.
In 2025, the individual Tax Cuts and Jobs Act brackets will expire, with the top bracket going back up to 39.6%. Though I think Californians will be able to deduct their state taxes on the federal side once again (would not be surprised for that cap to return though).
I'm not necessarily opposed to these tax rates. I just wish having marginal rates over 50% would get us some form of universal healthcare.
Not only has the homeless problem gotten worse since they introduced it, its also driven a few companies out of the city like Stripe, and in my opinion its the policies, not the funding which is the issue.
These are all examples of the government raising taxes, expanding, and not being accountable for any results that the increased spend was meant to bring
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.
What? Do they really not tax services? I thought that was part of sales tax everywhere.
I did think to add some caveats about the NHS, my sister works there so I'm aware of all the issues there. However, I would rather choose that system, over the one here, which is extremely expensive, and doesn't even look after you if you lose your insurance for whatever reason.
I think overall, I would say the UK has a lot of challenges, and if I was still living there, I would actually feel ok to pay more taxes to support those services, because I'd be using them.
As opposed to here, where I pay almost the same rate of taxes, and feel like I get nothing in return!
The underfunding is the cause of the inefficiencies that you have probably seen. It literally does not have enough staff, buildings, beds, mri machines etc to operate and is constantly fire-fighting.
Yes, it's a big employer, and? It provides health care to 70 million people, of course it is. Why do you think competition would improve things? the US spends more than 2x as much per capita.
I notice there are now more potholes, more "please don't abuse our staff" signs, more strikes, more working-to-rule, more dirt, more delays, more homeless.
I think the article is correct if you consider it an average of the last 10 years or so.
World-class public transport, never needed a car in London
The idea that UK public transport is world class is absurd.
The author is doing extreme cherry picking by referring to the entirely unrepresentative London transport infrastructure and service.
Try living in a rural area or many urban areas, especially in the north, and talk about "world class" public transport to people there.
Compare here, we have a Caltrain that only runs once an hour during the day, is slow, and to get to city requires switching to the Bart, which is also slow, and so filthy too, its much easier just to drive into the city, avoiding the potholes, and hoping your car doesn't get broken into when you park late downtown...
UK has it way better without any cherry picking :)
Also worth pointing out that BART was originally planned to be a large loop around the entire South Bay, but the affluent suburbs in the lower peninsula rejected the plan to expand it to their neighborhoods.
Yay American NIMBYs! /s
We've been spending some time in Turkey since the pandemic and despite all the corruption, we experienced clean streets (swept daily, hardly rocket science), rebuilt roads, rebuilt sidewalks, new bike lanes, maintained gardens/parks, improved broadband, virtually no homelessness. They even tried cleaning the temporary sea snot problem, which seemed a bit like trying to boil the ocean. But A for effort, I thought.
I love CA but also quite heart broken that in over a decade, I've watched San Francisco get more and more expensive, with taxes also going up, and homelessness get more and more prevalent, only to find out that in 2019 they were not letting homeless people with drug issues or dogs in shelters, and complaining about how homeless people "don't wanna go to the shelters." Well, have the operators not seen a single homeless person? I bet having a dog and drug issues is the greatest predictor of homelessness. So the homeless shelter is basically a shelter that doesn't allow any homeless in.
:)
This does not consider costs. Example: US spends more per person on Medicare and Medicaid than the UK spends per person on NHS. Medicare and Medicaid are not exactly known for lavish spending.
Many expensive services are labor intensive and labor costs more. Other costs are driven by political factors — which are not caused by corporate interest but are instead wildly popular with voters (example: NIMBY-ism, Prop 13).
Even the dreaded tax filing business exists because there is a substantial political base that hates taxes — and having an awful and infuriating UI/UX to the tax system makes people hate taxes more. The fact that you have to fill out all those forms is a feature, not a bug.
It's disappointing that the take-away is "join me in having a better way to avoid paying your taxes."
However one serious ommision is the fact that NO ONE who makes $650,000/yr pays $295,000 in income taxes in the US.
That byzantine tax structure is basically in place to insure this.
Personally, I'm a lefty, and I will be the first in line to say that the government of California is massively corrupt. Government is a monopoly, and as such it needs major public review and restrictions in place to prevent corruption. We don't have those review processes, and we don't have those restrictions.
A message to the author: If you think you're getting a bad deal for your taxes in California, try out a red state for size, where you get basically nothing for your tax dollars.
Also, my point was I feel that I get nothing for my taxes in California already!
I will give California public libraries which I rediscovered recently after Covid, that's probably the only service I appreciate with my tax dollars currently!
What are you suggesting they actually pay?
This is an understandable decision because running an ambulance service is expensive and cities/counties would rather have someone else pay for at least a part of it. Here is a nice explanation from the City of Long Beach: https://www.longbeach.gov/finance/services-and-permits/ambul...
Who is in the upper class? Just the thousand or so billionaires?
You might as well make yourself clearer & instead of saying the wealthy don't pay 40% taxes, just straight up say "dgildeh, you're a liar, you don't pay that much in taxes, post your tax records to prove yourself"
Personally, I’d say if you are a wage slave like me regardless of how much you earn, we can’t afford to have any children.
I can’t say you have not been warned. The signs have been there all along. Remember how much trouble HRC go in for just the title of the book, it takes a village. It is not your responsibility alone to make sure you have happy, healthy children who will become productive members of society later.
If you have zero income as soon as you stop working and waste your money on private school for your kids, I say it is in the same category as buying a yacht and a jet ski. Just incredibly dumb things you can’t afford. Can you imagine how much pain you will cause if you need to withdraw your kids from school if you have a stroke? Ffs stop sending kids to private schools!
We and our parents are getting older every day. How will we pay for our and our parents’ health care cost? I don’t have the courage to say just pull the plug if something happens to me and my end of life care costs more than USD 200k.
Don’t worry about the bigger picture of who will take care of society when we are older. Screw this society. In any case, can you really trust your kids to take care of you when you are old if you don’t have any savings of your own?
- that is all income and it really is taxed at the rates described, it is crushing the amount of tax I/we pay as wage earners
- CA (where those salaries exist) is really expensive, like $4500/mo for daycare, so despite having a high income it feels no higher than somebody making half as much elsewhere - the truely wealthy derive their cash flow from investments which are taxed at half as much, or own businesses and deduct expenses to effecting 0%
So the effect is if you have high income you are inescapably taxed very high (and are ineligible for almost all govt inventories) resulting in an effectively much lower cash flow, meanwhile the wealthy have a lower effective tax burden for the same or higher standard of living.
Ideally, I’d like to see an end to all silly credits, deductions, and exemptions and things like that.
It is absurd to me that you would want to not pay taxes on your daycare expenses. I think the proper solution is for the state to offer free of cost (actually free of cost, no hidden charges) daycare for all children. This is just the tip of the iceberg though. We are just overly against supporting all parents. All children, regardless of income or assets, should have access to WIC and ideally we should increase WIC age to eighteen. We should remove income, assets, means testing from all entitlement programs.
> the truely wealthy derive their cash flow from investments which are taxed at half as much, or own businesses and deduct expenses to effecting 0%
How can we fix this?
Federal Withholding 37.00%
California State Tax 10.23%
Medicare 2.25%
OASDI 0.50%
California VDI 0.07%
Also, we can and should fix the tax system so any state income tax you pay reduces your federal income tax bill. So for example, in your case, the ten percent or so that you pay to California (or the flat four percent in case of Colorado) gets effectively paid back to you by the federal government (even if you choose standard deduction). This would immediately give you a little breathing room. This would also encourage states from artificially keeping their income tax low.
Ideally I’d like to see an end to all credits, deductions, and exemptions but I don’t see it happening so this is pretty much the best I can think of…
That and either California needs to repeal the idiotic prop 13 from 1978 that from what I understand keeps property taxes artificially low or we need to enact a federal property tax of about 7% (and effectively exempt the equivalent of a national median two bedroom unit per owner/co-owner). That’s a conversation for another day. For now let’s focus on federal income tax.
I don’t know how to solve this wealth tax problem.
Since you shared your withholding, let me share a metric that everyone in the US can agree on:
Divide line 24 by line 1a (not line 9!!!) and multiply it by 100. Forget about all the other things you pay. We paid under 16 percent in 2022 and under 22 percent in 2021. Do not include Medicare. Do not include state taxes. Just do plain simple math with the FIT. (You don’t need to share the final number here. It is just for you.)
https://www.simplybusiness.co.uk/knowledge/articles/2020/08/... : under some circumstances HMRC can access your banking information without telling you.
To be fair.
You picked California. Chicago , NYC, DC and I'm sure one or two other American cities have functioning public transportation.
The other two issues will never ever be fixed. Tbh if your quality of life was so much better in the UK why'd give that up ?
I was able to live in DC for 4 years without a car but with a bike and my walking shoes and found it a mostly happy experience. The trains could have been more frequent and some areas of the city had sparse coverage, but it was not so bad. Europe and NYC is a leap better of course.
Sounds like I missed a crime wave though. That’s a shame, I remember the metro system being safe and clean during the 2010’s.
I agree Europe is a step above, but to be fair European cities tend to be much more compact. Public transportation can't work well when things are spread out
works for other states too but the tax rates won’t be high enough for you to bother looking
If your plan is just earning a salary and saving then you’ll get taxed the highest, the government is literally telling you to do anything else. Risk is rewarded, transactional velocity within the economy is healthier for the economy than tax revenues and the government promotes this via the tax code.
A B2B play like, say, Zendesk, I can understand, but isn’t anywhere ok for a B2C app?
I think everyone will have a difference opinion on what is worth spend on.
There's a part about $100k student debt. Doesn't CA have some sort of reduced/free public college?
Single Income Married families have some benefits, or if one party makes a lot less than the other. However there are other disadvantages in some cases; after my first wife got married to me, her financial aid went into the toilet. Even though I was making less than 50k a year myself (and paying enough in student loans/etc that we were barely making ends meet,) that income counted against her. [0]
[0] - Filing separately (as we did once we were separated before our divorce) had it's own disadvanatges; namely that I could no longer declare my student loan interest on my taxes.
Most of my friends/colleagues are not aware that for at least single tax filers, the difference between UK/California is less than 5%, I think its assumed Europe is significantly higher, and that's not the case anymore as the US bureaucracy has grown!
Use the 15 seconds of your life you spent complaining about a non-existent problem to find out if your priors are correct.
California doesn’t make it easy to learn about the overview of government expenses, but the USA does.
And now we are at the point when one strong and courageous nation defending free world from neoHitler with sweat, tears and blood, while countries without adequate armies are trying to find weapons needed.
The author sees the relationship between the government providing all those services and a healthy functioning society. Americans do not… again, they see provision of community/common good social services as socialism.
Americans don’t see a direct line relationship between “socialism” and tent cities of homeless (though it’s true there is also a drug problem there).
In short, all the stuff that many other social democracies see as core to functioning society, the Americans…. speaking generally…. don’t want.
California foolishly tries to throw money at the problems without first addressing the reason the sieve is so leaky.
All of those countries rebuilt their social contracts after WW2 ended. The US built the New Deal (which has mostly been dismantled and/or sabotaged since), but we haven’t really changed the social contract or updated most of our welfare / safety net systems for the modern age.
People who want those things simply don’t see how they fit into the current US social contract.
you gotta take the bitter with the sweet