Penny Is A Broke Gal Who Pays No Taxes. By Earning More, She Ends Up With Less!

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Dear Rich,

It’s tax time again! We’ve actually had our taxes done for months, and I noticed that we are getting a smaller refund than we did last year. See, in the year 2015, our adjusted gross income was $27,911. So, last year, we received a federal refund of $7,321 and a state refund of $2,655.

Well, the 2016 tax year, our adjusted gross income was $38,944. So, our federal refund was only $6,497 and our state refund was $1,107. This means, we got back $2,372 less this year than last, which, as you know, is a big deal to us (see a bit how it affects us here).

And the reason for the reduction in tax refund is because of the Earned Income Credit. With the Earned Income Credit, the less you make, the more you get back (assuming that you’re making something to begin with). Take a look at this chart, brought to us by Equitable Growth:

See how the amount kind of tapers off after we start earning $40,000 or more? (I’m married with more than 3 children, so you can look at the very top lines of the chart.)

This is something for us to be aware of, as our tax refunds mean a great deal to us at this time. I can kind of understand how people can get trapped in the welfare system, and not wanting to earn more because they’ll lose their benefits and stuff like that. I get it.

So, this got me to thinking more about how our financial picture will look when we start making more money. Which, I assume we will, because my husband’s business has been on a consistent upward trajectory since he started it, as you can see here:

As you know, we are also on food support. I looked up the income limits to food support and they are $53,760 annually (for a family of six). So, we could possibly be done with food support within a year or two.

We also get Medical Assistance through the state, so right now we aren’t paying anything for health insurance. It gets totally covered through Medical Assistance. I looked up the income limits for that and, for our family size, it is $43,464 for adults and $89,870 for our children. So, our kids will be taken care of for quite awhile (because I don’t see us making a jump to over $90,000 in income anytime soon), but Mr. Penny and I could be on the hook for health insurance anytime now. We would jump to MinnesotaCare, which is also health coverage through the state, but with a premium. The income limit to this (for our family size) is $65,160. If we made that much, our premium would be $80 a month per person, so $160 total.

So, let me run a some numbers here and see what we’re looking at.

Last year, we made $43,000. Add in the tax refunds (as well as a property tax refund) and the total amount of money we had was around $55,000. Add to that what we would have spent on food ($8,400) and we have a total of $63,400.

Now, let’s say we start making $65,000 a year. We would no longer get the Earned Income Credit, so our tax refund would be profoundly less. We’d still get a property tax refund, so let’s estimate $1,000 for that. We would no longer be getting food support, and we would be paying $1,920 in health insurance premiums every year (for two adults, through MinnesotaCare). So, our total here would be $64,080.

Did you see what just happened here? Even though we’d make $20,000 more each year, we’d be getting around the same amount of money that we’re getting now. Crazy, isn’t it?

This doesn’t mean that we’re going to try to stop making money, because, ultimately (even though I’m gracious and appreciative and all of that), it does feel better not to have to take support. This is just something that my family needs to be aware of, financially. It’s the paradox of the welfare system, you know?

How are your taxes treating you this year?

Penny

8 Replies to “Penny Is A Broke Gal Who Pays No Taxes. By Earning More, She Ends Up With Less!”

  1. Penny – Thanks for sharing this post.

    It didn’t really dawn on me when I first started reading the blog, but you may be able to provide some guidance for me (well, for my brother). You see, although I grew up on Welfare, I am so far disconnected from that life that it almost feels like a dream.

    These days I make more in a month then my mom ever made in a full year while my 4 brothers and I were growing up. But I do remember the foodstamps, the subsidized housing, and food pickups at the community center.

    Recently my wife and I helped my youngest brother get a fresh start and likely saved his life. He had gone done the path my parents did and got pretty mixed up in drugs (like he went as deep as you can go).

    The good news is he realized it at 26 and asked for help. We put him in a rehabilitation program, which he just graduated from. It is amazing to see the change and the chance to re-build a relationship with my little brother. He has such a bright future in my opinion (no matter how biased I may be).

    My wife and I are here to be his support group and provide him the tools and resources he needs to get back on his feet. We are currently in the process of getting him geared up for employment. But at 26, he doesn’t have much of a work history, so I am trying to pull in some favors from friends that I know that own businesses.

    My wife’s dad has even offered to have him come work with him to finish up a guest house he is building. I could share a lot more, but I was just trying to build up a little context.

    My question is, if he wanted to apply for some government support while he is trying to get back on his feet, do you have a recommended starting point?

    Cheers,

    Dom

  2. Hey, good question! What an interesting situation you find yourself in. I liked hearing the background, from your beginnings to where you are now with your brother. I am not that familiar with all the government programs out there. There’s got to be something that would help with a situation like this. You could try something like the Benefits Finder (https://www.benefits.gov/benefits/benefit-finder#benefits&qc=cat_1). Google “government assistance” for the state you live in. Most states probably have some sort of work program (counseling, job training, placement services) to help people get back on their feet. Here’s another website that might help: https://www.acf.hhs.gov/ofa/help

    Good luck, Dom! Hope you find something and I think it’s great what you’re doing for him personally.
    Penny @ pennyandrich.com recently posted…Penny Is A Broke Gal Who Pays No Taxes. By Earning More, She Ends Up With Less!My Profile

  3. I’m curious Penny — neither of us actually think of you as “broke” but where would you say you fit in terms of social class? Do you think of yourself as Lower Middle Class or Middle Class or what?

    Personally I don’t put much stake in these definitions but I think how a person sees themselves can certainly impact their well being. I’ve always appreciated your ability to be content at any level of income. In a vacuum it’s easy to say that you are lower middle class and I’m upper middle class, but since we come from the same tiny town it’s hard for me to think of us as significantly different in a more fundamental way. I don’t know, just thinking out loud.

    Last question — taxes aside, what would you say is your “ideal” income? I’m thinking a level where you’d be most comfortable, not too much not too little. They say the magic level is $75K for happiness. What’s your number? (Mine at the household level is $300K so we could have access to accredited investing)
    Rich @ pennyandrich.com recently posted…Monthly Money Check: Rich’s Expenses Are Lumpy. $150,000 For Child Care Lumpy. So Why Track Coffee? — March 2017My Profile

    1. I never really thought of myself as low-income until we started applying for food support and that’s what they called us. I don’t really think of myself as anything, or adhere to any label.

      Our ideal income would probably be around $90,000, take home. If we didn’t have student loans and didn’t send our kids to private schools, you could take $40,000 off that number.
      Penny @ pennyandrich.com recently posted…Rich Explains Why High Income Earners Feel Woozy At Tax Time. He Pays 9 Times More in Taxes Than Penny.My Profile

  4. Our taxes got us this year. Earned more (which I’m very grateful for) and underestimated how much more that would increase the tax bill. So I’m sending in a significant check this year. And yes I’ve already changed our withholdings for this year so that doesn’t happen again.

    Congrats on your husband’s business income continuing to climb upwards.

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