Tess Vigeland: Let’s start with a look back at the week that was — and for that I’m joined by our own Nancy Marshall-Genzer from the Marketplace Washington bureau. Hey Nancy.
Nancy Marshall-Genzer: Hey Tess.
Vigeland: So I hope you didn’t get stuck in any of the motorcades on Tuesday night around the Capitol.
Marshall-Genzer: I did not. I was home playing with my two-and-a-half-year-old boys.
Vigeland: Perfect thing to do on State of the Union night.
Marshall-Genzer: Absolutely. Then I stayed up late to watch it after I put them in bed.
Vigeland: I think the most interesting thing though is the State of the Union was almost eclipsed by the news on Tuesdya of Mitt Romney’s tax return.
Marshall-Genzer: You know, it was really big news and there was a build-up to that news, because Romney, of course, didn’t wanna release them, but he finally did.
Vigeland: Right.
Marshall-Genzer: Turns out Romney and his wife Anne paid a rate of 13.9 percent in 2010.
Vigeland: This is what’s called the “effective rate,” which means it’s the total amount of federal tax that they paid proportionate to their income. Now, the big story has been this sounds relaly relaly really low and I bet a lot of people heard that news and wondered, “Hey, how can I get a rate like that?” So Nancy, how can I get a rate like that?
Marshall-Genzer: Remember, Romney doesn’t actually have a job, right? So he’s pretty much treated as a retiree, living off hsi investments, like his grandmother. Now, remmeber, the Romneys did pay a lot of money in taxes in 2010, about $3 million. But it was at this low rate for investment income. So Tess, as far as how you get to this lower rate, maybe you’re thinking to yourself, “Hey, I’ll just win a million dollars in the lotteyr, right?”
Vigeland: I’m thinkin’ that’s exactly what I’m thinkin’ to myself.
Marshall-Genzer: Go out and buy a ticket!
Vigeland: Right.
Marshall-Genzer: I’ve got bad news for you Tess. Lottery winnings are treated liek earnings! So, if you won a million bucks, that would land you in the 35 percent tax bracket. I got that bad news from Stuart Ritter. He’s a financial planner at T. Rowe Price.
Stuart Ritter: And when you get your lottery check, they don’t even give it to you and have you report the taxes; they take the taxes right out of the top. So, not all of it would go to the 35 percent, but of the million, you’d probably clear $750,000.
Vigeland: But Nancy, I’ve always heard that lottery was taxed like a windfall, so they actually take out like half. But here we’re saying 35 percent?
Marshall-Genzer: Well, depends how much you win, right? But as Stuart just said, if you won that million bucks, that would shoot you out into the 35 percent tax bracket. And you’re probably still wondering why I haven’t answered your question of how you can get into that 15 percent tax bracket.
Vigeland: Without winning the lottery.
Marshall-Genzer: Yes. The best thing to do is invest whatever money you uhave, OK? So if you did win that $750,000 from the lottery, you would invest that. Becuase income from investments is taxed at a flat 15 percent rate. Income from wages is taxed usually at a higher rate unless you don’t make much money.
Vigeland: You know, I think what this generated this week Nancy is peopel thinking about what their tax rate is. And I wonder if sometimes if people overestimate what that is, that perhaps they think they’re paying a higher rate than they actually do.
Marshall-Genzer: You know, actually, people do that all the time. And, Tess, this has to do with that effective tax rate that you mentioned when we first started talking. What’s your favorite kind of cake?
Vigeland: Chocolate.
Marshall-Genzer: All right. Think of your tax bill as a chocolate layer cake with fudge frosting.
Vigeland: I like my taxes then!
Marshall-Genzer: Now you like yoru taxes!
Vigeland: I want more taxes!
Marshall-Genzer: You pay 10 percent on the bottom layer of your income, right? The next layer is the 15 percent layer and so on, until you get to the last $15,000 of your income. You pay a 28 percent rate on that. So your effective tax rate is the blend of what you paid on all those layers. So Tess, you hear people say at a party, “Oh, I’m in the 28 percent tax rate,” what they don’t realize is they only pay 28 percent on that top layer of their income. So their effective tax rate is much lower than that. Still, it is usually higher than the tax rate on income from investments. So save your pennies, buy that lottery ticket.
Vigeland: All right, Marketplace’s Nancy Marshall-Genzer making me hungry and more educated. Thanks so much.
Marshall-Genzer: Enjoy the cake.
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