The income limits before tax deductions start phasing out are ~$260,000 for singles and ~$311,000 for married couples according to the IRS in 2021.
In other words, after making more than $260,000/$311,000, you won’t be able to deduct the full amount of your mortgage interest and property taxes. You will also be subjected to the Alternative Minimum Tax (AMT) as well.
In this post, I will demonstrate to you 1) why the government doesn’t believe in equality, 2) reasons why you shouldn’t get married if you plan to make a high income, and 3) how much you should strive to make every year as an individual or as a married couple.
It’s important everybody understands what type of financial limitations the government imposes so that you can optimize your lifestyle.
If the government believed in equality, the government would allow married couples to earn up to $260,000 X 2 = $520,000 before deductions start getting phased out. Unfortunately, the government believes that one spouse should either give up his/her $260,000+ job to earn just $51,000 ($311,000 is the income max for married couples – $260,000 is the income max per individual), or stop working altogether to be a home maker.
Think about the thousands of studious individuals out there who want to be lawyers, doctors, scientists, engineers, financiers, and entrepreneurs. The government is telling them that as a reward for their sacrifice and hard work, it is disqualifying $209,000 of their income from tax deductions (should be $520,000 versus $311,000 actual) because they are married and not single.
Not only is the government discouraging people to enter these much needed professions where there are already shortages of doctors and scientists, the government is also encouraging higher earning people to not get married.
Repercussions of delayed or fewer marriages include fewer children and an aging society which is creating a growing financial burden on younger generations.
Is it not discriminatory to want lower income folks to get married and have more children compared to higher income folks? There’s already the $1,000 child tax credit that goes to families that make less than ~$110,000 a year. Why not extend the $1,000 child tax credit to all couples?
I asked a very senior US Treasury official in the Reagan administration these questions about why the government creates asymmetric rules that affect our personal lives, and he said that “it was in the government’s best interest to keep the American public fat, happy, and under control.”
The government, an entity, created by politicians, which passes laws to govern the people, doesn’t want to give the nerds, i.e., the high academic achievers and income earners who graduate from top schools, too much power or freedom. Otherwise, the politicians, would cede
Related: Scraping By On $500,000 A Year: Why It’s So Hard For High Income Earners To Escape The Rate Race
The good thing about America is that it’s still a free country. Nobody is forcing you to do anything. Therefore, here are the strategies you can consider if you want to get the maximum tax deductions available to you while earning a high income:
Related: How To Pay Little Or No Taxes for The Rest Of Your Life
The only people who really care about discriminatory tax policies are individual or couples who make over $258,000 and $310,000 a year, respectively. But even if you don’t make such figures, you should still care because discrimination is wrong even if you aren’t being discriminated against.
There is always a chance you could make more as an enterprising individual one day. Or perhaps your own children want to bust their butts going to graduate school for years and years to become doctors. Why should they get discriminated against for investing so much time and money to help society?
I’ve chronicled my journey from making $3.65/hour at McDonald’s to a lot more than $250,000 working in finance, and back down below $100,000 after my first year of early retirement. The ideal income for maximum happiness as an individual is $200,000 – $250,000 because you get to make the most without being subjected to tax deduction phaseouts. You really don’t need much more than ~$250,000 per person to be happy. If you can find the love of your life who also makes around $250,000 a year, then all the better. Marriage is not necessary to be happy!
If you currently make more than $250,000 a year while not loving what you do, know that it’s OK to make less. $250,000 puts you well within the top 5% of all income earners. Take a chance at going after your dreams. You will feel incredibly happy no longer paying an exorbitant amount in taxes each year while no longer being assailed for being rich. The middle class is the real first class!
Track Your Wealth For Free: In order to optimize your finances, you’ve first got to track your finances. I recommend signing up for Personal Capital’s free financial tools so you can track your net worth, analyze your investment portfolios for excessive fees, and run your financials through their fantastic Retirement Planning Calculator. Those who are on top of their finances build much greater wealth longer term than those who don’t. I’ve used Personal Capital since 2012. It’s the best free financial app out there to manage your money.
Updated for 2021 and beyond.