DINKS Pay 5.6% Taxes – Is it right?

Hi All,

Yesterday we got our income taxes back from our accountant. Including both federal and state obligations, our effective tax rate was 5.6%. That’s pretty low.

Why was it so low? There are a number of reasons:

1) Tax Regulations Allow Income Earned Abroad to be Sheltered From Obligation. Since one of us DINKS – Miel – is in Afghanistan, the federal tax rules allow one to keep most of her income. There are several residency requirements, but Miel has been abroad for the better part of a year, so we meet these criteria for the earned income exclusion. Since Miel provides over 80% of our income from her salary, the bulk of our income is sheltered from taxes.

2) We Itemize. Since we have pretty large mortgage payment and healthy property tax payments, we are able to itemize our deductions to the tune of nearly $25,000.

3) Education Tax Credits. Both Miel and I are enrolled in graduate programs. The tuition and fees we incur from being Maryland students allowed us to take a credit of $1,077. Further lowering our income taxes.

4) Real Estate Deductions: Since Miel and I own rental real estate, were were able to offset the income produced by the property by taking depreciation and deducting our expenses. The final tally reduced our taxable income by $7,200.

All in all our, Federal taxable income was $47,600 and our DC taxable income was $22,000, leading to a very low effective tax rate of .6 and 5.0 respectively.

Is it right to pay so little?

The fact that our obligations are so low does lead to a larger question – is it morally right to pay so little in taxes?

I think the answer is yes. For two reasons.

First, the low rate is just for income taxes. We are still on the hook for property taxes, sales tax, social security tax, medicare tax, surcharges on telephone & internet service, energy taxes, etc., etc. So, we are paying plenty, just a bit less that some others.

Second, not all tax money is used appropriately or efficiently. Local and state governments often do a very good job of providing core public services like roads, police, fire and appropriate regulatory and oversight functions. Sometimes however, federal tax funds are used for controversial purposes. So, its important to balance the effect of “not paying our fair share” against what our “fair share” will be used for. For example, I don’t regret paying less money to bailout fatcat CEOs.

Just to be clear on this final point. We are NOT tax deniers. In fact the right of representative governments to tax is a core underpinning of western civilization. The objection is that the funds are often inefficiently or unethically allocated.

Thanks,

James