Taxing issues
Here taxes are done the old fashioned way, they are not assigned to an accountant or to H&R Block and they are done manually. It's a stubborn habit and it's damn tedious. A possible benefit would seem to be that it allows one to understand the tax code and experience its intricacy, but that may be a pipedream at this point. Three IRS returns were completed this past week and another overseen from afar. Some observations follow:
---The Alternative Minimum Tax remains as perverse as ever, no longer having anything to do with the very wealthy that it was originally meant to tax appropriately but instead hitting a strata of the middle and upper middle class that basically "earns" their keep in this country. I'll not go further and get on my high horse about that again. Instead here's something specific. For people who live in high tax states, New York for one, the AMT basically wipes out any Schedule A benefit for state and local taxes paid. So the effect is that if an AMT impacted family lives in a state with a high income tax and high property taxes they're both paying into public coffers big time on their home turf and then paying a higher percentage of their income, much higher, than the original 1040 calculation suggests into the national treasury. Alternatively folks who live in low tax states don't pay much at home and also pay less to the feds. Someone explain the logic and fairness here.
---There has always been a Form 8615 that requires that children with some investment income, threshold at least $1800, be required to pay taxes at their parent's rates. For many years the age level that this applied to was 14 or under, a few years ago it was raised to 18 and under, and for tax year 2008 it was raised to 23 and under for young adults who are still supported by their parents, as in going to college. As with almost any tax issue, inflation adjustment of any dollar amount is not a concept that is accepted in Congress so the impact becomes more regressive year by year as in the AMT. Is saving and having a nest egg for a young person's future to be discouraged by the tax code. That said, up until the age of 18 one could grit their teeth and say the concept has some possible merit event though the non-inflation adjusted number was annoying. The new age requirement is, to repeat a word, perverse. So a young person is going to college, their parents are paying an arm and a leg and maybe some more important body parts to keep them there, and if the kid gets a summer job to help, or takes some part-time work during the school year for living expenses, that money is taxed at their parents often much higher tax rate than what theirs would, should, ordinarily be. OK, kid, I sure admire your gumption and congrats on that $6000 you made between a summer job and your three nights a week at a sporting goods store during school, but you, or certainly we, will pay my tax rate on it. Great incentive right. Great help for a family that's paying for college. Right.
---Here's another favorite mentioned before here, and that's the $3000 limit per year on capital losses, something that really burns this year, and again never inflation adjusted in memory. Hell, anyone without more losses this year than that who has some investments just did a ride and slide, making no appropriate action to exit and salvage. Gee thanks, the losses can be carried forward, until arthritis sets in I guess.
---The foreign tax credit rules are particularly out of touch with the world we live in. They were no doubt set up in the days when owning a foreign stock or bond was considered exotic. Now it is absolutely normal for investors to have a mutual fund that has overseas stock positions or to own a stock like Honda or Schlumberger, or to have an Australian or Chinese ETF. Hey tax code, ask Tom Friedman, the markets have globalized. Therefore it is absolutely normal for a retail investor to have "foreign taxes paid" as a line item on their brokerage report. More than $300 leads to the necessity of Form 1116 which is so byzantine as to be impossible, leading to the only reaction possible of just forget it. This was designed for those days of yore when the only taxpayers with the need for the form were wealthy enough to have accountants on retainer. Does the tax code want us peons to participate in the other 95% of the world and have some awareness through the markets of what's going on. I guess not.
Those are a few examples of how much fun the past week has been. Conclusions are: the tax code is there to bring in money to the government and any rule that does so, no matter how out of date or misguided, will remain in the code and untouched by the Congress or the White House until, or if ever, there is a total revamp; the process of going through a return and all of the counterintuitive schedules that are required is so complex as to show a complete disdain by the government bureaucracy for the taxpayer; and the only way to ever get through completing a 1040 with any in an outs to one's finances at all is to follow this rule --- Don't think, don't ever try to logically understand the instructions, just read them , force yourself to do as told blindly, and then live with the results.
What a government.
Note: All of the above is a bipartisan commentary.
---The Alternative Minimum Tax remains as perverse as ever, no longer having anything to do with the very wealthy that it was originally meant to tax appropriately but instead hitting a strata of the middle and upper middle class that basically "earns" their keep in this country. I'll not go further and get on my high horse about that again. Instead here's something specific. For people who live in high tax states, New York for one, the AMT basically wipes out any Schedule A benefit for state and local taxes paid. So the effect is that if an AMT impacted family lives in a state with a high income tax and high property taxes they're both paying into public coffers big time on their home turf and then paying a higher percentage of their income, much higher, than the original 1040 calculation suggests into the national treasury. Alternatively folks who live in low tax states don't pay much at home and also pay less to the feds. Someone explain the logic and fairness here.
---There has always been a Form 8615 that requires that children with some investment income, threshold at least $1800, be required to pay taxes at their parent's rates. For many years the age level that this applied to was 14 or under, a few years ago it was raised to 18 and under, and for tax year 2008 it was raised to 23 and under for young adults who are still supported by their parents, as in going to college. As with almost any tax issue, inflation adjustment of any dollar amount is not a concept that is accepted in Congress so the impact becomes more regressive year by year as in the AMT. Is saving and having a nest egg for a young person's future to be discouraged by the tax code. That said, up until the age of 18 one could grit their teeth and say the concept has some possible merit event though the non-inflation adjusted number was annoying. The new age requirement is, to repeat a word, perverse. So a young person is going to college, their parents are paying an arm and a leg and maybe some more important body parts to keep them there, and if the kid gets a summer job to help, or takes some part-time work during the school year for living expenses, that money is taxed at their parents often much higher tax rate than what theirs would, should, ordinarily be. OK, kid, I sure admire your gumption and congrats on that $6000 you made between a summer job and your three nights a week at a sporting goods store during school, but you, or certainly we, will pay my tax rate on it. Great incentive right. Great help for a family that's paying for college. Right.
---Here's another favorite mentioned before here, and that's the $3000 limit per year on capital losses, something that really burns this year, and again never inflation adjusted in memory. Hell, anyone without more losses this year than that who has some investments just did a ride and slide, making no appropriate action to exit and salvage. Gee thanks, the losses can be carried forward, until arthritis sets in I guess.
---The foreign tax credit rules are particularly out of touch with the world we live in. They were no doubt set up in the days when owning a foreign stock or bond was considered exotic. Now it is absolutely normal for investors to have a mutual fund that has overseas stock positions or to own a stock like Honda or Schlumberger, or to have an Australian or Chinese ETF. Hey tax code, ask Tom Friedman, the markets have globalized. Therefore it is absolutely normal for a retail investor to have "foreign taxes paid" as a line item on their brokerage report. More than $300 leads to the necessity of Form 1116 which is so byzantine as to be impossible, leading to the only reaction possible of just forget it. This was designed for those days of yore when the only taxpayers with the need for the form were wealthy enough to have accountants on retainer. Does the tax code want us peons to participate in the other 95% of the world and have some awareness through the markets of what's going on. I guess not.
Those are a few examples of how much fun the past week has been. Conclusions are: the tax code is there to bring in money to the government and any rule that does so, no matter how out of date or misguided, will remain in the code and untouched by the Congress or the White House until, or if ever, there is a total revamp; the process of going through a return and all of the counterintuitive schedules that are required is so complex as to show a complete disdain by the government bureaucracy for the taxpayer; and the only way to ever get through completing a 1040 with any in an outs to one's finances at all is to follow this rule --- Don't think, don't ever try to logically understand the instructions, just read them , force yourself to do as told blindly, and then live with the results.
What a government.
Note: All of the above is a bipartisan commentary.
posted by John Borden at 9:37 AM
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