It’s March Madness time, and many of us will be pouring over NCAA brackets to figure out who will make it to the finals. The odds of making a perfect bracket are absurd – 2.4 trillion to one according to one Duke professor 1. The odds of winning Powerball are about 292 million to one2, or 8,219 times greater!
Basketball brackets make us think about tax brackets, so we’ve come up with a game that might be a little easier to play than picking the perfect basketball bracket.
Let’s play Tax-Bracketology, where you pick who’s in the highest and lowest tax bracket. It should be easy, right? Ready to play?
Here are the final four:
Bernie, age 74, is collecting Social Security, pension, and a very small amount of investment income. Married, one child and three stepchildren, all grown. He and his wife both collect Social Security (about $46,000 a year). Bernie gets a pension of $5,000 annually for his service as a former mayor, plus some rental income of about $10,000 a year. He gets $174,000 a year from his current job in public office. Bernie lives in Vermont.
Don, age 69, a real estate developer and media person. Don is well-off and has significant earnings from his investments. Married, five children: four from previous marriages, one dependent from current marriage. Don gets a $14,422 yearly salary. He receives an annual pension of $110,000 from the Screen Actors Guild, but he has other income. Don’s total income is close to $380 million a year, from various business enterprises. Don occasionally votes in New York, so we’ll count him as a New York citizen.
Ted, age 45, is an attorney and public servant. He and his wife have two dependent children. Ted makes $174,000 from his current job (same as Bernie) and has significant other income. He has also made money as an adjunct professor (which he’s currently not doing). Ted lives in Texas.
Hillary, age 68, a nonprofit executive. Both she and her husband are authors. In 2014, she made over $5.5 million in book income and over $10.4 million in speaking fees (about $16 million total). Hillary is a New York resident.
How to play: We’re going to match the final four down with a simple question: Who’s in the highest total marginal income tax bracket? Let’s even the playing field by offering all four $10,000 to speak at a convention (you pick the topic). How much do their taxes go up? “Winner” is in the highest bracket.
Bernie: $3,030 federal plus $770 of VT taxes, total $3,800, or 38.0%
Don: $5,446 federal plus $819 of NY taxes, total $6,265, or 62.7%
Ted: $4,375 federal plus $0 of TX taxes, or 43.75%
Hillary: $4,257 federal plus $870 of NY taxes, total $5,127, or 51.2%
In this tax-bracketology race, Hillary and Don are tied for the top brackets. Bernie is in the lowest bracket, with Ted close behind.
Let’s add in another person to our brackets: Cynthia is 42 and a single mom. She’s self-employed as a successful real estate salesperson. Her daughter, Richelle is 19 and a sophomore at a state university where the tuition and fees are $22,000 a year. Cynthia doesn’t itemize deductions, and lives in Michigan. She made $85,900 in real estate commissions, but has just found out she’ll get a great sale that will provide her with an additional $10,000 of commission income. How much will her taxes go up marginally?
Cynthia: $6,204 more in federal taxes, plus $425 of Michigan taxes, totaling $6,629, or 66.3%
Based on the game rules, Cynthia wins, but she really doesn’t win at all.
How can someone making around $90,000 be in a higher bracket than someone making $360 million? Answer: Tax-Bracketology. Tax brackets may seem relatively straightforward, but tax calculations aren’t.
Cynthia, as a self-employed person, pays income taxes and self-employment tax. At $85,900, she was eligible for an education credit for her daughter. But add $10,000 of income and the $2,500 education credit goes away, while she pays about 40% taxes on her new income.
It should be relatively simple to figure out your tax bracket. But the complexity of the 75,000 or so pages of the tax code make this bracketology pretty tough to iron out. The IRS Taxpayer Advocate Service estimates it takes 7.6 billion hours for Americans to fill out their tax returns; the equivalent of 3.8 million full-time workers. Welcome to April Madness.
This article is not intended to accurately reflect the financial conditions of any presidential candidates. LJPR does not endorse any candidate and does not express a preference for any particular candidate. No such inference should be made. Numbers in this article are entirely hypothetical and do not reflect the financial situation of Bernie Sanders, Donald Trump, Ted Cruz, or Hillary Clinton.
1 USA Today, March 17, 2015, Duke math professor says odds of a perfect bracket are one in 2.4 trillion, by Nick Schwartz
2 New York Times, January 12, 2016, You Will Not Win the Powerball Jackpot, by Daniel Victor