IRS

The GOP’s “Abolish the IRS” Crackpots

/ L. M. Walker / 2 Comments

“In this world nothing can be said to be certain, except death and taxes.” ~ Benjamin Franklin ::

Separating the Wheat from the Chaff

:: By: Larry Walker, II ::

Each 2016 GOP presidential candidate has proposed to reform the tax code. While seven have offered legitimate proposals, five have advanced theories which are basically maniacal. Those proposing to abolish, or end, the Internal Revenue Service (IRS) may further be classified as crackpots, because, let’s face it, that’s never ever going to happen.

With taxes of such fundamental concern, it’s difficult to take anything else these kooks say seriously. Unless such candidates are willing to revise and clarify their ideas, they should drop out of the race immediately, so conservative voters may focus on genuine tax reform proposals.

Just who are these crackpots and why is their reasoning amiss? That should be evident by now, but let’s run through them, one by one.

Rafael Edward “Ted” Cruz

First there’s Senator Ted Cruz, who might have a better shot if he used his real name, and dropped his flawed and incomplete tax proposal. Senator Cruz proposes a 10% flat tax on individuals, a 16% flat tax on businesses, and to abolish the IRS.

His Simple Flat Tax Postcard lumps all income onto one line, rendering it virtually impossible to verify. Apparently wages, interest, dividends, capital gains, rents, pensions, social security benefits, etc. are all one in his mind. He proposes a $10,000 standard deduction per filer, and a $4,000 personal exemption for each dependent. He would maintain the Child Tax Credit, Earned Income Tax Credit and deductions for charitable contributions and mortgage interest, all without the necessity of an IRS.

Cruz would replace the corporate income tax with a Business Flat Tax of 16%. The tax would apply to “gross revenues minus expenses for equipment, computers, and other business investments”. That means no deductions for salaries, rent, utilities, supplies, and other ordinary and necessary business expenses. Although he would eliminate the payroll tax, this is made up for by effectively assessing businesses a 16% tax on the salaries and wages paid (i.e. since they will no longer be deductible).

Although his idea might seem fair and simple to the average working Joe, it’s not practical in the real world. That’s because, according to Senator Cruz, a small business would basically fork over 16% of its gross business income, without regard to its net cash flow. If its net income percentage is 16%, it would hand it all over to the government, and if it has a bad year and loses money, it would still owe a 16 percent tax on its gross revenues. Great! How many small businesses would survive under this scam?

But that’s not the end of it. According to Cruz’s proposal, small business owners would then owe an additional 10% tax on the salaries and dividends received from such businesses, after the standard deduction and allowance for exemptions, or charitable contributions and mortgage interest. In other words, through stealthy double-taxation, a small business owner could wind up owing as much as 26% on his or her compensation. Yeah, good luck getting this passed without mass resistance!

If the scheme were ever to see the light of day, which is highly implausible, then who would we mail the checks to? Since there will no longer be an IRS, not to mention three or four other agencies, would we simply forward more than 160 million checks to the White House? Who will verify whether everyone required actually files a “postcard-sized” tax return? Who would verify whether those that do file actually pay the full amount due? What happens when they can’t pay in full, or at all? Who will verify whether the amount of gross income reported is accurate?

Folks, this is not a well thought out plan, and it certainly won’t abolish the IRS, so as far as I’m concerned, you can strike Senator Cruz off the short list.

Randal Howard “Rand” Paul

Then there’s Senator Rand Paul, whom I admire, other than for his flawed tax proposal. He proposes to “blow up” the tax code and start over. He has advocated “abolishing the IRS, and replacing it with a simplified, revamped tax code”. He proposes a 14.5% flat tax on individuals and businesses.

For individuals he would allow a $15,000 standard deduction (per filer), and a $5,000 per person exemption, while maintaining the Earned Income Tax Credit and Child Tax Credit. How’s that for pandering? You can have your cake and eat it too. He would then eliminate all deductions other than mortgage interest and charitable contributions. Good luck handling all of this without the IRS.

For businesses, he would levy the tax on revenues minus “allowable expenses”, such as the purchase of parts, computers and office equipment. He would allow the immediate expensing of all capital expenditures, ending the notion of depreciation. Great, but that means no deductions for some of the largest expenses most small businesses incur, such as salaries and wages, rent and utilities, health insurance and retirement contributions.

Following Senator Paul’s approach, small businesses would basically fork over 14.5% of their gross business income, since after the first year most won’t have much in the way of “allowable expenses”. Once that’s done, whether or not there’s anything left over, its owners would then fork over another 14.5% of the salaries and dividends received from their businesses, after subtracting the standard deduction, or charitable contributions and mortgage interest (i.e. the only deductions he would allow), personal exemptions, and allowable tax credits.

Although the plan sounds reasonable on its surface, how would it be carried out without the IRS? Who would we send the checks to? Who would ensure basic compliance? Who will dole out the tens of millions of Earned Income Tax Credit refunds and guard against fraud? It doesn’t sound like Senator Paul will be abolishing the IRS anytime soon, so why the facade? This contradiction removes Senator Paul from serious contention.

Benjamin Solomon “Ben” Carson

As for Dr. Ben Carson, had it not been for money raised prior to his candidacy, by a PAC originally established for the purpose of repealing Obamacare, he wouldn’t even be in this race. Dr. Carson proposes that we all pay mandatory tithes to the federal government, as if it’s our new God, or something. Under his theory (which has yet to be set to pen and paper), individuals and businesses would simply hand the federal government a flat 10% of their gross income without the benefit of any deductions, which would put an end to the IRS.

Carson’s design would result in a 72% to 233% effective tax hike for those in the lowest, second, middle and fourth income quintiles, while at the same time granting an effective tax cut of 30% to 49% for those with the highest incomes. It’s a great plan if you make more than $200,000 a year, but for everyone else it will amount to a humongous tax increase.

Under Dr. Carson’s theory, a small business owner would simply fork over 10% of his (or her) gross business income, without the benefit of any deductions for salaries, rent, utilities, mortgage, state taxes, materials, supplies, depreciation, subcontractors, etc. Then contribute another tenth of the gross salary and dividends received from his or her business, again without the benefit of any deductions. This may seem fair to the average working Joe, until he receives the inevitable pay cut or pink slip, whichever comes first. Just do the math.

If Carson was somehow elected, and his plan were to survive public and Congressional scrutiny, once he abolishes the IRS, who would process our tax payments? Who would ensure basic compliance? Without the IRS, or an IRS-like agency, gross income would likely become whatever voluntary compliers chose to report, leading to a huge decline in tax revenues. In fact, without the IRS, his program would have no chance of success. Ben Carson should either go back to the drawing board, or simply get out of the race. His tax reform proposal eliminates him from serious consideration.

Carly Fiorina

Next we have Carly Fiorina. Although she hasn’t specifically advocated for the complete elimination of the IRS, she has proposed reducing the U.S. tax code from its current 73,000 pages (actually it’s only around 5,084 pages) down to just three pages. Just what would be on those three pages is anybody’s guess. What’s so bad about that? Well, here are a couple of examples.

Let’s say you’re halfway through reporting an installment sale on an owner financed property. Under Carly’s theory, I suppose you would just throw that notion out the window and just pay tax on the full amount received each year going forward, including the return of capital. That’s because, in Carly’s world, it would be far too complicated to determine the amount actually gained on the transaction.

If you have a net operating loss carryforward for the next 20 (or so) years, a charitable contributions carryforward for the next five, or a Section 179 carryover, I suppose you would forget about claiming these as well. Why? Because, there’s no way on earth one could cover such concepts within a three-page income tax code. Furthermore, there would no longer be any distinction between Corporations, S-Corporations, Partnerships, or Exempt Organizations, all too arduous to cover in just three pages.

Ms. Fiorina sure knows how to talk the talk, but at the end of the day that’s all it is. She doesn’t really have a tax reform plan, just a quirky notion that complex ideals can be compressed into thrifty one-liners. Her lack of judgment, in this matter, eliminates her from further consideration.

Michael Dale “Mike” Huckabee

Finally, there’s Mike Huckabee, who proposes to abolish the IRS by enacting the FairTax. Under the Fair Tax, businesses and individuals would pay a 23% national consumption tax on new purchases, above the poverty line. Federal taxes would be collected by retail businesses at the state level, so the IRS could be done away with, or at least its collection function.

According to the plan, “you have control over your own money and what your overall tax rate will be”. In other words, if you only buy used goods, or purchase everything under the table, you could wind up not paying any taxes at all. Just like in Greece, eh!

Then there’s that good old “Prebate”, the program’s key to fairness. The Prebate is akin to today’s standard deduction. Its function is to ensure that no American has to pay the FairTax on the basic necessities of life. Under this concept, every head of household in the United States would receive a monthly check from the government. That is, after having been raked for a 23% consumption tax at retail. How would this work?

Well, first every head of household in the United States would file a simple report with the government (each year) reporting the name and Social Security number of everyone living under their roof. Then, if you’re single you would receive a check from the government for around $183 per month. If you have a household of eight, you would receive around $742 per month. If there are 16 people in your household, you would receive around $1,242 every month. That seems simple, right?

Well, it won’t be so simple once the IRS has been abolished. Who’s going to verify that the individuals claimed on 160 million (or so) “annual reports” actually live in the households claimed? Who will ensure that the same dependents aren’t claimed by multiple FairTax patrons? Furthermore, what agency will process the 160 million annual “Prebate” reports, and issue some 1.9 billion monthly Prebate checks (160 million times 12 months) each and every year?

The IRS, as we know it, already has problems verifying dependents, and accurately issuing a much smaller number of annual tax refunds. It’s constantly battling against the issuance of fraudulent refunds on an annual basis. Accelerating the refund cycle from annually to monthly will only exacerbate such problems. So once the IRS has been abolished, which government agency will carry out these tasks?

Simply hoping and believing that people won’t cheat, when there’s no longer an agency to police the system, would be (well) stupid. So that eliminates Huckabee.

Scattering the Chaff

Along with death and taxes, I’m afraid the IRS will be with us, in some form or fashion, for the duration. No matter whose tax policies you favor, a governmental agency will be needed to administer them. Trumpeting the end of the IRS plays well in certain quarters, but generally among anarchists rather than rational minded conservatives.

Lower taxes, tax simplification and tax reform are ideals most of us agree upon. But as for irrational, radical, fundamental transformations haven’t we had enough? When it comes to income tax policy, we must separate the wheat from the chaff. We have thus eliminated Ted Cruz, Rand Paul, Ben Carson, Carly Fiorina, and Mike Huckabee from serious consideration. Please go away!

That leaves Donald Trump, Rick Santorum, Marco Rubio, John Kasich, Lindsey Graham, Chris Christie, and Jeb Bush. It also makes Trump the only viable outsider, not to mention the only one proffering to reduce income tax rates to the lowest levels since the Revenue Act of 1926. The seven offer varyring rates, exemptions and methods, some more appealing than others, but neither advocates the crackpot scheme of abolishing the IRS. It’s up to each of us to determine what’s in our own, and in our country’s best interests. To that end, abolishing the IRS serves no useful purpose.

References:

Matthew 3:12

Trump’s Dynamic Tax Policy

2016 Conservative Tax Plans: Trump vs. Carson

Top GDP Growth Rates in U.S. History

Photo Credit:

More Than A Sunday Faith

PRISM Schism

/ L. M. Walker / 1 Comment

Heads or Tails?

– By: Larry Walker II –

Carla Dean: “Well, who’s gonna monitor the monitors of the monitors?” – Quotes from Enemy of the State

PRISM is allegedly a covert collaboration between the NSA, FBI, and nearly every tech company you rely on daily. PRISM has allegedly allowed the government unprecedented access to your personal information for at least the last six years. I say allegedly because every tech company in question denies its existence.

According to the Washington Post:

The National Security Agency and the FBI are tapping directly into the central servers of nine leading U.S. Internet companies, extracting audio and video chats, photographs, e-mails, documents, and connection logs that enable analysts to track foreign targets… Equally unusual is the way the NSA extracts what it wants, according to the document: “Collection directly from the servers of these U.S. Service Providers: Microsoft, Yahoo, Google, Facebook, PalTalk, AOL, Skype, YouTube, Apple.”

However, Apple, Microsoft, Yahoo, and Google have all given full-throated denials of any involvement whatsoever. According to Google (emphasis mine):

You may be aware of press reports alleging that Internet companies have joined a secret U.S. government program called PRISM to give the National Security Agency direct access to our servers. As Google’s CEO and Chief Legal Officer, we wanted you to have the facts.

First, we have not joined any program that would give the U.S. government—or any other government—direct access to our servers. Indeed, the U.S. government does not have direct access or a “back door” to the information stored in our data centers. We had not heard of a program called PRISM until yesterday.

Second, we provide user data to governments only in accordance with the law. Our legal team reviews each and every request, and frequently pushes back when requests are overly broad or don’t follow the correct process. Press reports that suggest that Google is providing open-ended access to our users’ data are false, period. Until this week’s reports, we had never heard of the broad type of order that Verizon received—an order that appears to have required them to hand over millions of users’ call records. We were very surprised to learn that such broad orders exist. Any suggestion that Google is disclosing information about our users’ Internet activity on such a scale is completely false.

Schism

Now we hear that the federal government may be launching an investigation in order to find the person who leaked details regarding PRISM to The Guardian and Washington Post newspapers. In other words, the government wants to know who, within its ranks, blew the whistle. Sounds like another government-manufactured conundrum to me.

Great, so now the government is going to waste time and resources finding out who leaked the details of a program which never existed. Seems to me like the White House would be a great place to start, especially since its Deputy National Security Adviser, Ben Rhodes, has a master’s degree in fiction-writing from New York University. What’s up with that? I mean, in the mind of a fiction writer, wouldn’t it seem like one of the best ways to deal with a series of scandals would be to manufacture an even bigger one, and then quash it?

By that time won’t everyone have forgotten about Benghazi, the IRS Scandal, James Rosen, Eric Holder, Verizon, the Budget Crisis, Illegal Immigration, the Secret Kill List, Obamacare and everything else? Well, not in the real world. Nevertheless, for my two cents, if there is a leak investigation, in an effort to save both time and precious taxpayer resources, it should be performed by a Special Prosecutor, and should begin and end at 1600 Pennsylvania Avenue.

——————–

Addendum

I’ve actually known about Comverse Technology, Inc. since around 1994. The company merged with Verint Systems, Inc. early this year. This video discusses how the Verint Communications and Cyber Intelligence products and solutions help make the world a safer place (i.e. a less private place).

Verint CIS Solutions from Verint on Vimeo.

Phantom Tax Credit for Elderly and Disabled

/ L. M. Walker / 1 Comment

A Tax Credit in Name Only (TCNO)

– By: Larry Walker, II –

A couple of weeks ago I wrote about how during this year’s continuing education courses it suddenly dawned on me that the base amounts used in calculating the taxability of social security benefits are exactly the same in tax year 2012 as they were in 1985. Well here’s another example of elder abuse. Congress has failed to inflation adjust the limitations on the Credit for the Elderly or the Disabled since it was last upgraded back in 1984. I am frankly surprised that this credit is still around, since in its present form it’s completely useless to 99.999% of taxpayers. Why is it still taking up space in IRS instruction booklets?

Back in 1981, when my study of tax law began, it was known simply as the Credit for the Elderly. It initially applied to persons over the age of 65, or under 65 if they had taxable income from a public retirement system. In tax year 1984 it became known as the Credit for the Elderly and the Permanently and Totally Disabled. It was also in 1984 that the same limitations that are in place today were established. Since 1988 it has been known simply as the Credit for the Elderly or the Disabled.

Although it sounds appealing, due to the failure to adjust for inflation, it has become a tax credit in name only (i.e. completely useless). How’s that, you say? Well, like I said, its name may have changed over the years, but the initial amounts and income limitations have not.

Maximum Credit

The maximum amount of the credit is limited to 15.0% of the following initial amounts, based on one’s filing status. (Note: For the disabled, the initial amounts used in calculating the tax credit cannot be more than the amount of the taxpayer’s taxable disability income.)

  • $5,000 if Single, Head of Household or Qualifying Widow(er)

  • $7,500 if Married Filing Joint and both spouses qualify

  • $5,000 if Married Filing Joint and only one spouse qualifies

  • $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Thus, on paper, the maximum amounts of this nonrefundable tax credit (at 15.0% of the initial amounts) are limited to the following:

  • $750 if Single, Head of Household or Qualifying Widow(er)

  • $1,125 if Married Filing Joint and both spouses qualify

  • $750 if Married Filing Joint and only one spouse qualifies

  • $562.50 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Since this is a nonrefundable tax credit, even if you are magically somehow able to qualify, you can only actually use the credit if you have a regular income tax liability. In other words, the credit cannot be used to offset self-employment taxes, penalties on retirement distributions, or other taxes found on lines 56 to 60 of Form 1040. The credit is figured on Schedule R and entered on line 53 of Form 1040.

Limitations

It sounds fantastic, and maybe it was in 1984. But since hardly anyone can qualify for the credit anymore, it’s really meaningless today. The main problem here is that the same income limitations in place in 1984 are in effect in 2012. So who can qualify today?

If your adjusted gross income (AGI) is equal to or greater than the following amounts, then you do not qualify for the tax credit.

  • $17,500 if Single, Head of Household or Qualifying Widow(er)

  • $25,000 if Married Filing Joint and both spouses qualify

  • $20,000 if Married Filing Joint and only one spouse qualifies

  • $12,500 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Additionally, if the nontaxable part of your Social Security and other nontaxable pensions is greater than the following amounts, you are also excluded from the credit. No, really.

  • $5,000 if Single, Head of Household or Qualifying Widow(er)

  • $7,500 if Married Filing Joint and both spouses qualify

  • $5,000 if Married Filing Joint and only one spouse qualifies

  • $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Finally, if one-half of your Excess Adjusted Gross Income (defined as adjusted gross income minus the following limits), plus the nontaxable portion of your pensions is greater than the initial amount of the credit, you are also disqualified.

  • $7,500 if Single, Head of Household or Qualifying Widow(er)

  • $10,000 if Married Filing Jointly

  • $5,000 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

In other words, you must reduce the initial amount of the credit, by one-half of your Excess AGI and your total nontaxable pensions.

The Problem

Think inflation. The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012. So a single retiree with an average benefit would receive around $14,760 per year. A married couple with an average benefit would receive around $29,520 per year. So with that, let’s see whether or not it’s even possible to qualify for this tax credit.

Example 0: Let’s say you are single, over the age of 65, and receive social security benefits of $14,760. Since social security isn’t taxable until half of your social security plus your other income (both taxable and tax exempt) exceeds $25,000, if that is your only source of income, then none of it is taxable, and the Credit for the Elderly or the Disabled doesn’t apply. So let’s try to figure out the precise circumstances under which the credit does apply.

  1. In order for 50% of your social security benefits to be taxable, your income from other sources (both taxable and tax exempt) must be greater than $17,620 [17,620 + 7,380 (½ of social security benefits) = $25,000].

a) But if this is the case, then your adjusted gross income is also likely to be more than the AGI limit of $17,500, so you will not qualify for the credit.

b) And since only half of your social security is taxable, because the nontaxable portion of $7,380 (14,760 / 2) is greater than the $5,000 limit for nontaxable pensions, you don’t qualify.

c) Also, since your adjusted gross income is likely greater than $17,500, subtracting the limit for excess adjusted gross income of $7,500 leaves $10,000, which when divided by 2 is equal to or greater than the initial amount of $5,000, which means you don’t qualify. Got it?

  1. In order for 85% of your social security benefits to be taxable, your income from other sources (taxable and tax exempt) must be greater than $26,620 [26,620 + 7,380 (½ of social security benefits) = $34,000]. But then, you are also likely disqualified due to both (a) and (c) under #1 above. Got that?

  1. And there’s another problem. Because the standard deduction for a single person over the age of 65 in 2012 is $7,400 [5,950 + 1,450], and the personal exemption allowance is $3,800, your adjusted gross income must be greater than $11,200 to even have an income tax liability. In other words, if your adjusted gross income is under $11,200, you don’t qualify. But if your AGI is between $11,200 and $17,500, and the nontaxable portion of your social security benefits is less than $5,000 (item #1 (b)), then you might qualify.

a) However, if your AGI is between $11,201 and $17,499, then in this example, the nontaxable portion of your social security benefits will be greater than $5,000 which disqualifies you under item #1 (b).

  1. Even if you don’t receive social security, and the nontaxable portion of your other pension income is less than the $5,000 limit, when calculating the credit, you must then subtract one-half of your excess AGI plus your nontaxable pensions, from the initial credit amount, in order to determine your limited tax credit. So at the low end, your Excess AGI would be $3,700 (11,200 – 7,500), and at the high end it would be $10,000 (17,500 – 7,500). But this poses further problems.

a) The initial amount of your tax credit is limited to $5,000, but this must be further reduced by one-half of your excess AGI, which will either be $1,850 (3,700 / 2) at the low end, or $5,000 (10,000 / 2) at the high end, plus the nontaxable amount of your pensions (i.e. up to $5,000). So at the low end, assuming a nontaxable pension of $5,000, the initial amount of your credit is limited to -0- (5,000 – 1,850 – 5,000), and at the high end it is also reduced to -0- (5,000 – 5,000 – 5,000).

  1. Finally, if none of your income is from social security, you don’t have any other nontaxable pensions, and assuming all other criteria are met, then in order to qualify for the tax credit, the adjusted gross income of a single taxpayer is limited to being between $11,201 and $17,499. Simple, right?

a) However, since the amount of the actual tax credit is further limited to 15.0% of the initial amount (after the reduction of one-half of excess AGI), the maximum amount of the credit can be no greater than $472.50 [(5,000 – ((11,201 – 7,500) / 2)) * 15.0%], and this would be further limited to the amount of income tax actually owed.

b) At the low-end, a single retiree with AGI of $11,201 qualifies for the maximum credit of $472.50 [(5,000 – ((11,201 – 7,500) / 2)) * 15.0%], but would have an income tax liability of $0 [(11,201 – 11,200) * 10.0%]. Thus, the credit is useless.

c) In the mid-range, a retiree with AGI of $14,350 would have a tax liability of $315 [(14,350 – 11,200) * 10.0%], and would qualify for a tax credit of $236 [(5,000 – ((14,350 – 7,500) / 2)) * 15.0%]. That would about cover the cost of calculating this monstrosity.

d) At the high-end, a retiree with AGI of $17,499 would have a tax liability of $630 [(17,499 – 11,200) * 10.0%], and would qualify for a tax credit of $0 [(5,000 – ((17,499 – 7,500) / 2)) * 15.0%]. Thus, the credit is once again useless.

Summary: In order for a single retiree to qualify for the Credit for the Elderly or the Disabled, his Adjusted Gross Income must fall between $11,201 and $17,499, and he must either not be on social security, or the nontaxable portion of his combined pension income must be less than $3,150 (5,000 – 1,850). The mid-range amount of the final tax credit for such a rare individual would be around $236 (between -0- and $472.50), while the maximum credit would only be available against an income tax liability of -0-. Thus, in order to qualify for the optimal credit, a single retiree would have to have an adjusted gross income of around $14,350, with no income from social security and no other nontaxable pension income.

The results for married couples and the disabled are similar. The example above is just a long way of proving that the Credit for the Elderly or the Disabled has become obsolete due to the failure of Congress to adjust its 1984 initial amounts and limitations for inflation.

Solution

The table below shows the limitations in force in 1984 and 2012, along with the inflation adjusted amounts. As you can see, a simple inflation adjustment would more than double the income limitations, likely causing at least some elderly and disabled taxpayers to qualify. So why hasn’t this been done? Is it too hard, or has Congress simply forgotten?

The maximum amount of the credit would increase to 15.0% of the following initial amounts, based on filing status. (Note: For the disabled, the initial amounts used in calculating the tax credit cannot be more than the amount of the taxpayer’s taxable disability income.)

  • To $11,131 from $5,000 if Single, Head of Household or Qualifying Widow(er)

  • To $16,697 from $7,500 if Married Filing Joint and both spouses qualify

  • To $11,131 from $5,000 if Married Filing Joint and only one spouse qualifies

  • To $8,348 from $3,750 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Thus, on paper, the maximum amounts of the nonrefundable credit (at 15.0% of the initial amounts) would increase as follows:

  • To $1,670 from $750 if Single, Head of Household or Qualifying Widow(er)

  • To $2,505 from $1,125 if Married Filing Joint and both spouses qualify

  • To $1,670 from $750 if Married Filing Joint and only one spouse qualifies

  • To $1,252 from $562.50 if Married Filing Separate and you did not live with your spouse at any time during the tax year.

Now that’s more like it. It’s not all that, but it’s better than what we have today. Inflation Indexing should be an integral part of tax reform. It’s not right to screw our seniors and disabled out of a tax credit, when an automatic adjustment is granted in other areas of the tax code. We should have more respect for the elderly and disabled.

The following example is based on one used by the IRS. It calculates the tax credit before and after the proposed inflation adjustments:

Example 1 (before) – You are 66 years old and your spouse is 64. Your spouse is not disabled. You file a joint return on Form 1040. Your adjusted gross income is $14,630. Together you received $3,200 from social security, which was nontaxable. You figure your credit as follows:

You cannot take the credit since your nontaxable social security (line 2) plus your excess adjusted gross income (line 3) is more than your initial amount on line 1.

Example 1A (after) – The same circumstances as in example 1, except that all limitations have been adjusted for inflation.

Your potential tax credit is now $1,189.65 which will be limited by the amount of income tax shown on line 46 of your Form 1040 tax return.

Example 1B – This is the income tax calculation for the couple in Examples 1 and 1A.

Since the sum of the taxpayers’ standard deduction, additional standard deduction for one spouse being over the age of 65, and the deduction for personal exemptions are greater than their adjusted gross income; the taxpayers’ do not have a tax liability. Thus, in this case, although they qualify for the tax credit in Example 1A, they are not able to, and do not need to use it. However, what’s changed is that after the inflation adjustment, the couple could potentially have up to $38,000 of adjusted gross income (or around $24,000 more than in the example) and still qualify for the tax credit.

Conclusion

The Credit for the Elderly or the Disabled is a Tax Credit in Name Only (TCNO). In its present state it is completely useless to 99.999% of Americans. It’s easier for a camel to go through the eye of needle than to qualify for this phantom credit. Its initial amounts and limitations should immediately be adjusted for inflation (although the numbers probably need a bit more tweaking). If Congress refuses to make these simple adjustments, then all references to this tax credit should be purged from the Internal Revenue Code, from all income tax forms and publications, and from the IRS’s computers. It costs money to print B.S., and frankly, it’s a waste of time to calculate and explain to a senior or disabled person why they are not qualified.

Related:

Taxing Social Security Taxes

#Taxes

References:

U.S.Inflation Calculator

2012 Schedule R

2000 Schedule R

1990 Schedule R

1985 Schedule R

1984 Schedule R

1983 Schedule R

1981 Schedule R

1980 Schedule R

The Fiscal Responsibility Cliff

/ L. M. Walker / Leave a comment

Talk About Crazy Bastards…

– By: Larry Walker, II –

Hiking tax rates now, in advance of the pending 2013 Medicare Tax Increase from 2.9% to 3.8% on those making $200K ($250K if married), the new 3.8% Medicare Tax on Investment Income including capital gains, the 2014 health insurance tax on individuals of $695 to $2,085 (plus inflation) depending on family size, and the 2014 shared responsibility penalty of $2,000 per employee on companies with 50 or more part-time employees (working 30 hours or more), probably isn’t wise. Legislator’s must pare any further tax increases with the hikes already baked in the cake.

Many of the provisions commonly referred to as the Bush Tax Cuts were phased in gradually between 2003 and 2010 culminating in maximum favorability in 2010. Since Congress has already extended these temporary provisions for two years, I would have no problem with returning to the pre-2008 tax law right now (i.e. the laws in effect prior to the Stimulus package which only added to the current morass). I would hesitate to call removing the 2010 concessions and Stimulus subsidies a tax hike, because each were designed to be temporary in nature, not extended ad infinitum. However, if Congress insists on raising income tax rates, then any such increases should be gradual (i.e. phased in over a 7 to 10-year period), not jammed in all at once.

Lawmakers should be careful not to turn a blind eye to what’s already beneath the icing while cooking up the next barrage of tax law changes. In my opinion, the Obama Administration is not qualified to address income tax matters; it lacks mathematical fortitude. Its words are mere noise, good for little more than forefinger exercise in locating the mute button, at least for me. You crazy bastards have already screwed up everything for three years in a row. We really don’t have the time or patience for anymore of this nonsense. You’ve talked enough. It’s time to get off the T.V. shows and do some work. Step one should be a mandatory crash course in income tax law for all legislators and the White House. You really should take a timeout to contemplate the monstrosity you’ve already created before making another move.

References:

Under Obamacare, Medicare Double Taxation Begins in 2013

Obamacare’s Effect on Small Business

Get ready to fill out Obamacare’s individual mandate tax form

IRS issues proposed regs. on 3.8% net investment income tax

Proposed regulations – Net investment tax

Related: #TAXES

Tax Fairness | Reverse Parity

/ L. M. Walker / Leave a comment

It’s Magic!

– By: Larry Walker, II –

The current 2012 Tax Rate Schedule is shown below. Applying the Obama-Doctrine, single filers making over $200,000, and married filers making over $250,000 would get a tax hike. However, since there is no cut-off at either $200,000 or $250,000 in the current tax rate schedule, the 33% bracket would need to be split, resulting in a sharp tax increase for a handful of unfortunate individuals.

Thus, taxpayers with taxable incomes between $200,000 ($250,000 if married) and $388,350 would see their taxes rise by 20%, while those with incomes over $388,350 would get that plus a marginal increase of 13.1% on income above the new ceiling (see tables below).

So what’s the effect?

We’ll use the married filing joint filing status in the following examples to determine the overall effect.

# 1 – If you’re married and have taxable income of $400,000, your taxes will increase by 19.4%, or by $9,667.

# 2 – If you’re married and have taxable income of $1,000,000, your taxes will increase by 14.3%, or by $37,267.

# 3 – If you’re married and have taxable income of $10,000,000, your taxes will increase by 13.2%, or by $451,267.

# 4 – If you’re married and have taxable income of $20,000,000, your taxes will increase by 13.2%, or by $911,267.

# 5 – If you’re married and have taxable income of $100,000,000, your taxes will increase by 13.2%, or by $4,591,267.

What’s wrong with this picture?

First of all, those with taxable incomes below $200,000 ($250,000 if married) get to keep the tax rates they’ve had for the last 10 years, plus all the other garbage in the tax code, which is being called –– a tax cut. So in other words, for 95% of Americans, nothing is the new something.

Secondly, those who already pay the highest tax rates will receive a 13.2% to 20.0% tax hike, which is being called –– fair. However, tax rates will go up the most not on millionaires and billionaires, but rather on single individuals with taxable incomes between $200,000 and $388,350 and married couples with taxable incomes between $250,000 and $388,350.

So why not just admit it? This isn’t a tax cut for the middle-class. And it’s not so much a tax hike on millionaires and billionaires. What it represents is a massive tax hike on those with taxable incomes between $200,000 ($250,000 if married) and $388,350, and a more modest hike on millionaires and billionaires. Got it?

If a top marginal rate of 33% has been proven to raise more revenue than higher rates, due to the Laffer Curve (see video: Do High Taxes Raise More Money?), then why are we even talking about raising rates above the 35% mark? Aren’t rates already too high? Couldn’t we achieve the same parity by keeping top rates where they are and simply cutting tax rates on the 95% of Americans with incomes below the new ceiling? Why, yes we could. And here’s what the new tax rate schedule would look like if we were to do just that.

The 10%, 15%, 25%, 28% and 33% brackets are reduced by 13.2% (the same amount of increase currently being proposed on the wealthy), and are thus lowered to 8.7%, 13.0%, 21.7%, 24.3% and 28.6%. Note that the 35% bracket is still lowered to include those with taxable incomes over $200,000 ($250,000 if married), so that those making between $200,000 ($250,000 if married) and $388,350 will still see a modest increase of around 6%, but isn’t this the group we we’re trying to screw anyway? Yep! So there you go.

You say, “But what will your plan do for the deficit”? I say, what does the one on the table do for the deficit? Score them both dynamically (skip the static nonsense) and see which plan raises more revenue in the long-term. Not that it really matters though, since the main goal here is fairness, right? Well, that’s what my plan achieves.

Reverse Parity Tax Effects

So here’s how the Obama-Doctrine stacks up against the reverse parity plan. At current tax rates, married taxpayers filing jointly pay the following taxes (see table below).

Under the Obama Doctrine, married taxpayers filing jointly get nothing at taxable incomes below $250,000, and realize a 13.1% (rounded down) tax increase at upper levels. This means income tax burdens would increase by $451,267 to $4,591,267 for those with taxable incomes between $10,000,000 and $100,000,000, respectively (see table below).

But under the Reverse Parity Plan, married taxpayers filing jointly will realize a 13.2% tax cut at taxable incomes below $250,000, and only negligible savings at upper levels. This means income tax burdens will decrease by $875 to $7,842 for married couples with taxable incomes between $50,000 and $250,000, respectively (see table below). At the same time, income tax burdens will fall by $5,074 for those with taxable incomes over $1,000,000, representing a negligible decline.

It’s the same thing the White House is striving for, except in reverse. The big difference is that under the reverse parity plan the middle-class gets a genuine tax cut, not just smoke and mirrors, while the upper-class pays an effectively higher tax rate, roughly 13.1% more than those with taxable incomes under $200,000 ($250,000 if married), and this is achieved without actually raising tax rates. The only exception, of course, is those poor saps stuck between taxable incomes of $200,000 ($250,000 if married) and $388,350, but that’s life, right?

It’s real simple. If ‘no change’ for 95% of Americans can be deemed a tax cut, then ‘no change’ for the remaining 5% can likewise be deemed a tax hike. It’s magic! Ninety five percent of taxpayers receive a stimulative tax cut, the top five percent get nothing, the Laffer Curve is respected, and fairness is restored. Problem solved. Now it’s time to tackle the real problem, those elusive spending cuts.

Related:

Taxing Social Security Taxes

#Taxes

Taxing Social Security Taxes

/ L. M. Walker / 3 Comments

The Fiscal Responsibility Cliff

– By: Larry Walker –

When I went to work for the IRS back in 1988, the first few weeks were spent in tax law courses. I distinctly remember, at the time, that the base amounts used in determining the taxability of Social Security benefits were $25,000 for single taxpayers and $32,000 for married taxpayers filing a joint return. For some reason when the topic came up this year, during annual continuing education, with all the talk of looming fiscal responsibility (errantly referred to as a cliff), combined with having been read the riot act by several seniors over the past year, it suddenly dawned on me that the base amounts are exactly the same in tax year 2012 as they were in 1985 –– $25,000 and $32,000. What’s wrong with this picture? The same thing that’s wrong with Barack Obama’s $250,000 top tax bracket argument, a failure to adjust for inflation.

My first brush with tax law was actually through a Junior College course in 1981. I helped prepare tax returns commercially for several years thereafter while attending college. Needless to say, I left the IRS in 1994 and moved on to brighter horizons. I returned to my first love in the year 2000 and am still involved in the industry today. With that out of the way, what’s both interesting and disturbing to me is the fact that Social Security benefits were tax-free prior to 1985, but then Congress, in its wisdom, changed the law to ensure that wealthy seniors were paying their fair share, which by my logic merely amounted to forcing them to pay taxes on the taxes they had already paid.

It was in 1985 that a neat little formula was devised whereby if one-half of a taxpayers Social Security benefits plus their other income (both taxable and tax-exempt) was more than the base amount (mentioned above), then up to half of their Social Security benefits would become taxable. As a consolation, if a senior’s sole source of income was Social Security, in other words if they were living near or below the poverty line, then none of the benefits were taxable.

According to the formula, if you are single or married filing separate and did not live with your spouse for the entire year, the base amount is $25,000. If you are married and file a joint return, the base amount is $32,000. And if you are married filing separate but lived with your spouse at anytime during the year, the base amount is $0. To determine how much of your benefits are taxable, you add one-half of your Social Security benefits to other income received from pensions, interest, dividends, capital gains, rental income, business income, tax-exempt interest, etc…, and then subtract from this the applicable base amount. If the result is positive, then the taxable amount of your Social Security benefits is the lesser of one-half of the result, or one-half of your Social Security benefits. Got it?

The obvious dilemma is that the base amounts are exactly the same today as they were in 1985 –– $25,000 and $32,000. Something is deftly wrong with this, because when adjusted for inflation the base amounts become $52,263 and $66,896. That’s a material difference, more than double. In my opinion, if Congress would simply index all limitations, base amounts and tax brackets for inflation (the AMT comes to mind), then the U.S. income tax system would be fair, but as it stands today for many it is not.

Making matters worse, beginning in 1994 Congress decided to up the ante. Taxing 50% of Social Security just wasn’t enough for really rich old folks, so Congress added a second set of base amounts, whereby up to 85% of benefits could become taxable. To distinguish wealthier seniors from the rest, the original base amounts were raised by $9,000 for single filers and by $12,000 for joint filers. Thus, if one-half of your Social Security benefits, plus other income (both taxable and tax-exempt) was greater than $34,000 or $44,000, respectively, then up to 85% of the difference, or 85% of your Social Security benefits were taxable, whichever was less. The same amounts are in force today. There has been no inflation adjustment to the 85% base amounts since 1994.

If the 50% and 85% base amounts were rightly adjusted for inflation, then the former would rise from $25,000 and $32,000, to $52,263 and $66,896; and the latter would increase from $34,000 and $44,000, to $65,923 and $85,110 (see table below).

Now that’s more like it. It’s not all that, but it’s better than what we have today. Inflation Indexing should be an integral part of tax reform. It’s not right to screw our seniors out of money, when an automatic adjustment is granted in other areas of the tax code. We should have more respect for our elders. But even though my proposal would be an improvement, still the premise behind taxing Social Security benefits is errant.

Can you understand why so many seniors complain? Here’s what one fellow said to me recently, “What do you mean 85% of my Social Security is taxable? It wasn’t taxable at all last year. Just because I was finally able to make a little extra money this year, you mean to tell me that now I have to pay half of what I made in taxes? You’re telling me that I’m going to owe about half of what I’ve been able to save this year in taxes. I paid into the system my whole life, that money should be tax free. I might as well just stop working if I’m going to owe half of what I make in taxes, but then how am I supposed to live?”

I basically agreed with him. What he said is true. If you are self-employed and on Social Security, and make around $50,000 on the side, by the time you add in 85% of your Social Security benefits, $50,000 suddenly becomes $60,000 or more. Then when you add together the applicable self-employment taxes, federal income taxes and state taxes, the marginal tax rate quickly approaches 50%. I opined that I think anyone over 65 should be exempt from paying into Social Security while they are receiving benefits, and that the benefits should be tax free. I qualified this by adding that I don’t write the laws, I just apply them.

Congress should recall that we pay Social Security taxes in order to receive a basic subsistence in the future. The Social Security taxes we pay are a tax. Then the federal government has the nerve to turn around and tax seniors on the taxes they have already paid throughout their lives. In effect, what seniors are asked to do is pay a tax on a tax. How much sense does that make in the era of fair this and fair that? You have to admit that this is messed up. So fix it! It’s real simple.

Congress should either increase the Social Security base amounts for inflation, or go back to the pre-1985 policy making Social Security benefits non-taxable, and let the cards fall where they may. Make a choice and live with it. Anyone in Congress, or the White House who doesn’t have a clue about what’s in the current tax law, should study up, shut up, or just resign. Anyone who takes the time to examine what’s actually in the Code will come to the realization that some of this stuff is completely ridiculous. Under current law, it is entirely possible to make over $250,000, write it all off through new equipment purchases, other credits and gimmicks, and end up paying nothing in taxes. Yep, that’s right!

In my opinion, what we need to do is get rid of all of the temporary 2010 provisions including –– repeal of the Personal Exemption Phase-Out (PEP), repeal of the Itemized Deduction Limitation (Pease), 0% Capital Gains Tax, expanded Child Tax Credit, expanded Dependent Care Credit, increased Adoption Credit, increased Earned Income Credit, refundable Education Credit, Alternative Minimum Tax (AMT) patch, Bonus Depreciation, extended Section 179 Deduction, Payroll Tax Cut, and the vast array of Energy Tax Credits, and then go back to the 1986 Code and adjust all limitations, base amounts and tax brackets for inflation. In most cases, just like with Social Security benefits, the results will favor those who are the most deserving. We got by without this chaos before 2010, and we can get by without it today.

Fiscal responsibility isn’t a cliff, it’s an opportunity to correct our errant ways. Respect your elders. By the way, the notion of lowering the top income tax bracket from the current inflation adjusted amount, to the 1993 unadjusted top bracket of $250,000 is equally offensive. That’s not forward thinking. In fact, it’s so backwards it’s laughable. Think inflation!

References:

U.S. Inflation Calculator

1985 IRS Publication 915

1993 IRS Publication 915

1994 IRS Publication 915

2011 IRS Publication 915

Related:

Obama’s 1950s Tax Fallacy

The IRS as Health Insurance Police

/ L. M. Walker / 1 Comment

The charge: Breathing without health insurance.

No Health Insurance? You’re going to jail.

By: Larry Walker, Jr.

Many of us had ‘hoped’ for some simplification of the Internal Revenue Code, which has grown from 14 pages to over 17,000 pages since its inception. But it doesn’t look like that will happen anytime soon. H.R. 3200 will increase the burden of the income tax code by making the IRS the primary enforcer of Mandatory Health Insurance.

Did you hear that? You get your ‘mandatory’ health insurance, but you had better file your tax returns, and file them timely and correctly. Not only that, but you will have to determine what kind of health insurance you have and report it on your tax return, and if you don’t have it, or if it’s not acceptable, then a hefty penalty will be imposed.

It’s found in Title IV, Subtitle A, on pages 167-215 called Amendments to IRS Code of 1986. The expanded powers of the IRS in H.R. 3200 would empower the IRS to require taxpayers to show proof of health insurance coverage, collect fines on individuals and employers who did not have adequate proof of health insurance and determine whether your health insurance was a government approved plan.

So let’s see, will this make life easier, or more convoluted? My theory is that it will not only do the latter, but in the process will deprive all American’s of what if any liberty remains.

Linear thinkers, like Obama and others on the left, are incapable of seeing beyond the end of their noses, so it’s up to us to do our part to shed a little light.

According to Table 16 (below), courtesy of the IRS, at the end of 2008 approximately 9.2 million taxpayer cases were in inventory for filing income tax returns with additional taxes owed to the tune of $94.3 billion (including interest and penalties). And approximately 3.4 million taxpayer cases were in inventory for not filing income tax returns at all, and owe around $21.2 billion.

You don’t suppose there’s any chance that the same 12 million people who either don’t pay, can’t pay, or won’t file income tax returns are the same ones lacking health insurance? Imagine that, the very same people who may owe the government over $100 billion now begging for free health insurance. No I’m not blaming them, but I’m just saying, it may very well be that the tax code is too complicated, that penalties are too stiff, or that income taxes are just way too high. But let’s leave that for another century, and let’s entertain our Messiah’s plan to make taxes more burdensome through Government-run Health Insurance.

Now let’s consider some logic. The IRS, a government agency that allows around 15% to slip through the cracks, will be in charge of a health insurance system that lets around 15% slip through the cracks. What will be the outcome? Do you think it’s possible to achieve 100% compliance with the tax code? Just ask the Obama Administration (Geithner) about ‘that one’. And do you think it’s possible to achieve 100% participation in health insurance, or in anything else human?

Short of placing government security cameras in our houses, a micro-chip in our heads, and completely brainwashing us, 100% participation in anything is not a human attribute. The 80/20 principle is generally good enough for us mere mortals. So on that count, the human factor, the plan fails.

Most likely, the outcome of Obama’s far-left, linear, robotic health insurance plan will be one of the following:

  1. The same 85% who currently comply with income tax laws and have health insurance will continue to comply with income tax laws and buy health insurance, while the same 15% remain on the sidelines. (Most likely)

  2. More people will choose to comply with income tax laws, and more will choose to be covered by health insurance. (You wish)

  3. Less people will choose to comply with income taxes, and less will choose to be covered by health insurance. (Probable)

  4. The 85% who currently comply with income tax laws and have health insurance will revolt, and stop paying income taxes and for health insurance. (Possible)

  5. The ridiculous plan will die in committee, or if passed will subsequently be repealed. (Best)

What do you think?

Sources:

http://www.irs.gov/pub/irs-soi/08db16co.xls

http://www.irs.gov/taxstats/article/0,,id=207457,00.html

http://www.wnd.com/index.php?fa=PAGE.view&pageId=109741

Related:

Unreal– Obamacare Violators Will Face Up to One Year in Jail