About JMW | Services | Contact Us                                            Volume 26 | Number 4 | April 2014

Congratulations, You Made It!

Am I talking about the looonng and frisky winter? Nope; I’m guessing a few of us may get just a little more snow yet. Are we out of the arduous (and boring) Affordable Care Sign-Up Drama? Certainly not; mid-term elections are coming up and Republicans plan to beat the death out of that already pulp-i-fied equine carcass. Finish the Boston Marathon? Well, I’m guessing that a few of my clients actually did finish that race and I heartily congratulate them for it. But that’s not what I’m congratulating all the rest of us for.

I’m congratulating us for making it past midnight last night, the end of “Tax Freedom Day” 2014! For those of you unfamiliar with this notable milestone, Tax Freedom Day marks the day by which we Americans will have collectively earned enough income to pay off the total federal, state, and local tax bill. Tuesday’s work is finally for the benefit of our own families!

This sounds like good news but there’s a dark lining to this silver cloud: this year the day arrived three days later than last year. And some people have it tougher than others: my clients in New York, New Jersey and Connecticut have the latest tax freedom days in the nation. While the average load for state and local taxes of all U.S. residents was 9.8 percent of income, people in New York, New Jersey and Connecticut paid 12.6%, 12.3%, and 11.9% respectively.(1)

Those are just state and local income tax percentages. When you account for federal income taxes too, a person can end up paying an additional 10 - 39.6% of their income in taxes, depending on their level of adjusted gross income.

And it’s not just the rich who get hit. According to the U.S. Census, the median income from 2009 to 2011 in New York was $68,161, New Jersey $85,005 and in Connecticut $84,558.(2) That puts the mid-point of wage-earners squarely in the 25% federal income tax bracket. If you earn more than that, your tax bite grows progressively with it. Just as a reminder, peek through your fingers at the current federal tax rates:

2014 Federal Income Tax Brackets (3)

Our median New Yorker earning $68,161 will pay $13,070.25 in Federal Income Taxes plus an additional $8,588.29 in state and local income taxes for a total of $21,658.54 in earned income turned back to their various governments to cover expenses. The weather may be getting warmer, but this rite of spring leaves most of us feeling cold and miserable.

To wade a little deeper into the cold, let’s pretend this New Yorker had the misfortune of being injured at the hand of another. After a protracted legal battle and paying off the attorney who won the battle for him, minus liens and litigation expenses, he netted enough money to invest and earn himself an additional $12,000 in income per year. That income too is reduced by federal, state and local income taxes causing him to pay an additional $4,512 in income taxes.

After suffering the injury itself, compounded by the aggravation, risk, and stress of prosecuting his personal injury case, all he gets to keep is an additional $7,488 per year after taxes. Talk about adding insult to injury. And if he had the “good luck” to win more in the lawsuit, the next federal tax bracket of 28% awaits him at the $ 85,650 income level and then 33% and finally 35%.

We Americans in the northeast (and especially residents of New York, New Jersey and Connecticut) have the dubious honor of “enjoying” the highest income tax rates in the land. Knowing this, how receptive do you think an injured claimant in these three jurisdictions might be to an offer of guaranteed, non-taxable income for life? How receptive would you be?

Let’s consider our injured median New York wage earner previously described. In the context of that very same gross settlement sum, you could offer him a full $12,000 per year instead of the $7,488 he could take home if he invested it himself. Do you think you have given him something to think about? If he has any dependents or even a garden-variety level of “income insecurity”, how does he not want more information on that deal? Why would any citizen choose to hand over more of their hard earned income (or hard fought recovery) to the IRS and their state Comptroller, if they don’t have to?

Most don’t. Most people in our neck of the woods are acutely familiar with the impact taxes have on their families. The only reason most claimants don’t structure their settlements is that no one ever told them they qualified for one.

Want to offer someone a “Tax Freedom Day” of January 1, each and every year??
Call Frank C. Kilcoyne, CSSC at 800-544-5533 I am here to help.

Sources:
1)According to a report by the Tax Foundation, as reported by Bloomberg News, Darrell Preston, “U.S. Residents Paid 9.8% of Their Income in State, Local Taxes”, April 03, 2014

2)http://www.census.gov/hhes/www/income/data/statemedian/

3)http://www.tax-rates.org/federalincometax