This Man Pays 102% in Income Taxes

This is the story of a 58-year-old founder and managing member of Rossrock, a Manhattan-based private investment firm, Mr. James Ross.

But his story could very well be your story one day...

With a distinguished background full of elite academic institutions and famous law firms, Mr. Ross has achieved success in his lifetime. Realizing he is “very fortunate” to be a part of the 1 percent, Mr. Ross is also sure to note that he pays his fair-share and then some in taxes...a whole lot more, actually. 

Excluding real estate taxes, sales taxes and a few others, Mr. Ross owed and paid 102 percent of his taxable income in federal, state, and local taxes back in 2010.

Compare that to Mitt Romney – with a net worth between $190 million to $250 million making him one of the wealthiest Americans to ever run for president – who paid just 13.9 percent in taxes back in 2010.

The New York Times documented Mr. Ross's comments:

“I had trouble believing this was possible. I called my accountant, and I said, ‘Do you realize I’m paying every penny I have in taxable income? I’m dipping into savings to pay my income tax.’ He said, ‘It’s unfortunate, but at your income level’ ” — with high earned income and large itemized deductions that Mr. Ross can’t take advantage of — “ ‘that’s just the way it is.’ ”

In Mr. Ross's case, his “total tax as a percentage of his adjusted gross income was 20 percent” because he has many itemized deductions: i.e. charitable contributions, mortgage interest, local and state taxes that are deducted.

With those factors taken into consideration in calculations, the amount of money that is left after subtracting those deductions is almost always less than the adjusted gross income. Therefore, it is possible that some like Mr. Ross could end up paying over 100 percent of taxable income in tax.

Ideally, Mr. Ross would be able to propagate some capital gains in the future...

Still, it brings about an important point of controversy when it comes to the present day tax codes in America: 

Mr. Ross’s plight illustrates something that came through in nearly every response and cuts across nearly all income levels: the disparities of the tax code don’t just pit rich against poor or middle class. It taxes people within the same income brackets at grossly unequal rates. “I cannot help but reflect on the unfairness of the current tax regime,” Mr. Ross wrote. “Why should I pay 102 percent of my taxable income in taxes when others, with far greater wealth than mine, pay a fraction of that?” 

Here's why:

James Ross lives in New York City (expensive location with all but guaranteed high tax rates) and nearly all of his income was earned, making it “taxable at top rates.” Now, this isn't always the case but here's why it was the case for Mr. Ross in 2010...

Because of the poor conditions in the real estate market, James Ross had very few capital gains that year. Any carried interest he had accumulated didn't produce any income... 

He couldn't make any itemized deductions – his gross adjusted income was over $1 million, making him ineligible for any itemized deductions (except 50 percent of any charitable contributions) according to the state of New York.

Since Ross is a high earner, he is hit by heavy taxes. However this scenerio could happen to a self-employed middle-income earner making $75,000 a year. Here's the breakdown, from the New York Times:

Suppose a self-employed New Yorker earns $75,000

In the federal formula, part of the self-employment tax is subtracted to get the adjusted gross income: $69,702

Subtracting personal exemptions ($18,500) and itemized deductions for mortgage payments ($25,000), charitable contributions ($5,000) and state and property taxes ($10,158) leaves the taxable income: $11,044 

The state’s formula allows fewer deductions and taxes a larger share of income. This adds up to more than taxable income in total state and federal taxes: $12,473 

$12,473 / $11,044 = 113%

Frustrated by the whole situation, James Ross asked his accountant what he could do to avoid the 103 percent tax rate. Mr. Ross's accountant advised him to “fire everyone and move to Florida”.

And that may very well be the only solution for Mr. Ross in his attempt to escape paying extreme tax-rates in an unequal and broken system.

Meanwhile, a lot of wealthy and hard-working Americans are finding themselves in similar positions as their accountants are busy preparing their 2011 tax returns.

Those people are angry. Mr. Ross is angry. Unless unearned and earned income are taxed at the same rates (a suggestion by one esteemed accountant, Jeffrey Rosenthal), the argument of paying one's “fair share” will continue to cause class tension accross the board.