President Joe Biden and Vice President Kamala Harris recently released their annual tax returns, showcasing important lessons for average Americans. President Biden and First Lady Jill Biden reported a joint adjusted gross income of $619,976 for the year 2023, reflecting a 7% increase from the previous year. They paid $146,629 in federal income taxes, with an effective tax rate of 23.7%. On the other hand, Vice President Kamala Harris and her husband, Douglas Emhoff, reported an adjusted gross income of $450,299, slightly lower than their earnings in 2022. They paid $88,570 in federal taxes, with an effective tax rate of 19.7%.
Sources of Income
Both couples primarily earned their income from salaries in 2023, with federal and state taxes deducted by their employers. They also had interest income, which can sometimes lead to surprises during tax season, especially without increased paycheck withholdings or quarterly estimated tax payments. It is essential for investors to monitor taxable activities like dividends or fund distributions in brokerage accounts to avoid such surprises, according to tax experts.
Estimated Tax Penalties
Even though both couples made extra tax payments, they incurred small estimated tax penalties due to underpayments from each quarterly deadline and accruing interest. The Bidens faced a penalty of $285, while Harris and her husband owed $451. Despite this, both couples managed to reduce self-employment taxes over the years by receiving part of their wages through their S-corporations. By paying “reasonable compensation” to shareholders, S-corporation owners can take distributions without being subject to Social Security and Medicare taxes. This strategy has provided significant savings for the Bidens in the past, particularly in relation to their book deals and speaking engagements.
However, it is crucial for working-age taxpayers with self-employment income to analyze how lower wages could impact their future Social Security income. According to CFP Catherine Valega, the calculation for Social Security benefits is based on up to 35 years of wages, influencing the monthly payments. Therefore, taxpayers must carefully evaluate the implications of structuring their income to optimize tax savings while ensuring future financial security.
Typically, taxpayers receive a refund when they overpay taxes throughout the year, while they owe taxes if they underpay. Both tax returns submitted by the couples indicated that they were relatively close in total taxes paid versus owed. Valega emphasized that when filing returns, being “plus or minus $500 [for a refund or balance] is magical,” suggesting that such a narrow margin reflects effective financial planning and tax management.
Examining the tax returns of President Biden and Vice President Harris provides valuable insights for the general public on managing income, taxes, and financial planning. By learning from their strategies, individuals can enhance their own tax efficiency and long-term financial well-being.
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