Is it true that if I work 6 months per year, it is better than to work for 1 calendar year and take a break for 1 year?

Question

For USA taxes, if I have two choices of either working from January 2015 to January 2016 and not work for a year, versus working from June 2015 to June 2016, and not work for a year, isn't the second choices a lot better for taxes, because the wages are more evenly divided between 2 years?

That is because (1) if the wages is all within a calendar year, then the tax bracket is higher -- for every dollar I earn, 45 cents can go to taxes, versus if the wages is divided into 2 years, then for every dollar I earn, it might be 30 cents that will go to taxes. The other reason is that (2) if there is any type of deduction, such as mortgage deduction, then if the wages is divided into 2 years, then the mortgage deduction can apply towards year 1 and year 2, versus if the wages are mostly in 1 calendar year, then the mortgage deduction can apply toward year 1, but is virtually useless in year 2.

It is a little bit strange that just choosing which months you work can make quite a bit of difference, instead of if our income is taxed at a 30% simple rate, then there is very little rules, as opposed to, the more rules there are, the more ways there are to get around it.

Answer 1

In many cases spanning across years will indeed be beneficial.

Deductions: You get to take twice as much in deductions (twice the standard deduction, or itemizing - if you can) when you span over two years than in one.

IRA: You can only contribute in years when you have earned income. You have all the income in year 1 and none in year 2 - you can only contribute in year 1. You have half of the income in year 1 and half of the income in year 2 - you can contribute in both years (up to the limit/earned income, whichever is less).

Social Security: You get 4 credits for each year you earned ~16K in. You earned 32K in year 1, and nothing in year 2 - you get 4 credits. You split it in half for each year - you get 8 credits.

The list can go on.

If you can do the planning ahead of time and can chose the time periods of your work freely (which is not something most people can do), you can definitely plan ahead with taxes in mind. This is called Tax Planning.

Answer 2

Yes, if you can split your income up over multiple years it will be to your advantage over earning it all in one year.

The reasons are as you mentioned, you get to apply multiple deductions/credits/exemptions to the same income. Rather than just 1 standard deduction, you get to deduct 2 standard deductions, you can double the max saved in an IRA, you benefit more from any non-refundable credits etc.

This is partly due to the fact that when you are filing your taxes in Year 1, you can't include anything from Year 2 since it hasn't happened yet. It doesn't make sense for the Government to take into account actions that may or may not happen when calculating your tax bill. There are factors where other year profit/loss can affect your tax liability, however as far as I know these are limited to businesses. Look into Loss Carry Forwarded/Back if you want to know more.

Regarding the '30% simple rate', I think you are confusing something that is simple to say with something that is simple to implement.

Are we going to go change the rules on people who expected their mortgage deduction to continue? There are few ways I can think of that are more sure to cause home prices to plummet than to eliminate the Mortgage Interest Deduction. What about removing Student Loan Interest? Under a 30% 'simple' rate, what tools would the government use to encourage trade in specific areas? Will state income tax deduction also be removed? This is going to punish those in a state with a high income tax more than those in states without income tax.

Those are all just 'common' deductions that affect a lot of people, you could easily say 'no' to all of them and just piss off a bunch of people, but what about selling stock though? I paid $100 for the stock and I sold it for $120, do I need to pay $36 tax on that because it is a 'simple' 30% tax rate or are we allowing the cost of goods sold deduction (it's called something else I believe when talking about stocks but it's the same idea?) What about if I travel for work to tutor individuals, can I deduct my mileage expenses?

Do I need to pay 30% income tax on my earnings and principal from a Roth IRA? A lot of people have contributed to a Roth with the understanding that withdrawals will be tax free, changing those rules are punishing people for using vehicles intentionally created by the government.

Are we going to go around and dismantle all non-profits that subsist entirely on tax-deductible donations?

Do I need to pay taxes on the employer's cost of my health insurance? What about 401k's and IRA's? Being true to a 'simple' 30% tax will eliminate all 'benefits' from every job as you would need to pay taxes on the value of the benefits. I should mention that this isn't exactly too crazy, there was a relatively recent IRS publication about businesses needing to withhold taxes from their employees for the cost of company supplied food but I don't know if it was ultimately accepted.

At the end of the day, the concept of simplifying the tax law isn't without merit, but realize that the complexities of tax law are there due to the complexities of life. The vast majority of tax laws were written for a reason other than to benefit special interests, and for that reason they cannot easily be ignored.