Two Points on the GOP’s Tax Hikes and Jobs Act

Tax Hikes and Jobs Act

Point #1

Like a broken record, Republican promotors of the Tax Cuts and Jobs Act insist that by raising the 2018 standard deduction for single filers from $6,500 to $12,200, for couples from $13,000 to $24,400, and by lowering selective tax rates, that their plan will usher in a huge tax cut for the middle-class. It, in fact, does no such thing.

Whenever challenged with the reality that their proposal will result in a tax increase on many of their constituents, they exclaim, “Yes, but we are doubling the standard deduction!” Yet, not one of them ever mentions that they are, simultaneously, repealing the personal exemption deduction of $4,150, per person.

In 2018, the standard deduction for single filers will be $6,500, and for married taxpayers filing jointly $13,000, while the personal exemption will be $4,150 (per person). That means a single non-itemizer would already have received $10,650 ($6,500 standard deduction + $4,150 personal exemption) of tax exempt income before the proposal, versus $12,200 after. And, a married couple, without children and not itemizing, would already have received $21,300 of tax exempt income before the proposal, versus $24,400 after.

For single filers, the difference between $12,200 and $10,650 isn’t double, it’s only $1,550. For married couples, the difference between $24,400 and $21,300 is a mere $3,100. This isn’t a doubling of the standard deduction. It is effectively an increase to the standard deduction of $1,550 for single filers and $3,100 for couples without children. So, please stop lying to us.

Furthermore, since this is income that would have been taxed at a rate of 10% before the proposal, the amount of taxes saved will be just $155 for singles, and $310 for couples without children. Those with at least one child will start out in the hole, and must rely on an expansion in tax credits just to get back to par.

Point #2

According to the Congressional Research Service, more than 50% of taxpayers with adjusted gross incomes of $50,000, or more, itemize their deductions. Those with $50,000 to $100,000 of adjusted gross income claim average itemized deductions of $19,187, while those with $100,000 to $200,000 in income claim an average of $25,598 (see table below).

Share of Itemized Deductions and Average Claimed

So, more than half of taxpayers, who pay most of the income tax, itemize. And, the Republican bill seeks to eliminate their deductions for state and local taxes, real estate taxes, medical expenses and unreimbursed employee expenses. This won’t end well.

Share of Avg Itemized Deductions by Income

Among the deductions Republicans seek to disallow, according to the Congressional Research Service, on average, most itemizers with adjusted gross incomes of $50,000 to $100,000 stand to lose a least the following (see table above):

  • State and local taxes: $2,879
  • Real estate taxes: $3,494
  • Total $6,373

And, most itemizers with adjusted gross incomes of $100,000 to $200,000 will, on average, lose at least the following:

  • State and local taxes: $6,033
  • Real estate taxes: $4,883
  • Total $10,916

Although Republicans are also repealing medical expenses and unreimbursed employee expenses, they are not included here because they are not claimed by the bulk of taxpayers. On the other hand, state and local taxes, and real estate taxes are claimed as often as the mortgage interest deduction.

You might say that mortgage interest, real estate taxes and state and local taxes go hand in hand. But, that doesn’t mean one should discount the importance of deductions for medical and unreimbursed employee business expenses.

Almost everyone knows at least one infirm or elderly person that spends all or most of their income on medical care. This is not by choice. Denying them the ability to offset their income will force many into a tax liability where none previously existed.

Collecting taxes from the elderly and infirm, those with the least ability to pay, is of course detestable, but well within the spirit of this horrible bill. The same applies to sales persons and other employees who spend much of their time on the road and are not reimbursed for all the expenses they must incur to earn their pay.

Add the loss of deductions for the state and local taxes, and real estate taxes to the loss of the $4,150 (per person) personal exemption deduction, and single itemizers with adjusted gross incomes between $50,000 and $100,000 stand to lose total deductions of at least $10,523, while married itemizers (without children) lose $14,673.

Thus, under the Republican proposal, an average single itemizer with adjusted gross income between $50,000 and $100,000 stands to lose $10,523 in deductions, which equates to an $1,884 tax hike (at 17.9%). An average married couple (without children) in the same bracket will lose $14,673 in deductions, which equates to a $2,421 tax hike (at 16.5%).

Single itemizers with incomes between $100,000 to $200,000 will lose total deductions of $15,066, while married filers (without children) lose $19,216. Thus, an average single itemizer with adjusted gross income of $100,000 to $200,000 will see a $3,254 tax hike (at 21.6%), while a married couple in the same bracket will see their taxes rise by $3,728 (at 19.4%).

Losing the ability to deduct state and local taxes, real estate taxes, medical expenses and employee business expenses may impair a taxpayer’s ability to itemize at all. That’s because mortgage interest and charitable contributions, alone, for the majority, will not be enough to exceed the proposed $12,200 and $24,400 standard deduction. Thus, taxes will rise more on some taxpayers than others.

At this point, Republican lawmakers will say, “But, you have to look at the whole package. We are also lowering tax rates, and your boss is going to give you a $4,000, or more, pay raise.”

Expanding the 12% bracket to the first $45,000 of taxable income for single filers, to $90,000 for couples; and the 25% bracket to incomes of $200,000 and $260,000, respectively, doesn’t make up all the shortfall for those losing deductions. Although the average tax rate will drop by 1.2 percentage points on single filers, and 1.4 percentage points on couples, middle-class itemizers will at best break even. That’s because a greater amount of their income will be subject to income taxes. At worst, they are punished with a tax hike.

Apples to apples, if deductions were not being disallowed, the GOP’s proposed adjustment to the tax brackets would be a good thing. But, this isn’t apples to apples, it’s apples to applesauce. The GOP is telling more than 50% of middle-class taxpayers, who currently itemize their deductions, “We’re going to tax you on a greater amount of your income, but you’ll save money because we’re taxing it at a lower rate.”

Voilà! That explains why a majority, already carrying the burden of taxes, now face a Republican tax hike. Meanwhile, health insurance premiums continue to spin out of control, and if you’re fortunate enough to afford it, it will no longer be deductible. If this bill passes, you better hope that pay raise comes fast, otherwise the public will vote against every one of you in 2018.

The GOP’s tax reform proposal effectively raises the standard deduction by $1,550 for single filers, and by $3,100 for married couples without children, while lowering it for couples with at least one child. It takes away average deductions of $10,523 to $19,216 for more than half of middle-class taxpayers that itemized their deductions. The lowering of tax rates and expansion of tax credits are fancy mechanisms designed to mitigate a portion of the damage. This is not a tax cut, it’s a tax hike by design.

Another Way

To avoid raising taxes on the middle-class, the GOP could increase its proposed standard deduction on single filers from $12,200 to $21,800, and on couples from $24,400 to 43,600. That way, more than 50% of middle-class taxpayers won’t be punished. A move in this direction would promote simplicity and fairness. It would also be more in line with the original proposal that put DJT in the White House.

 

What the Republican Tax Reform Plan Lacks

According to White House Press Secretary, Sarah Sanders, “Very few people itemize. I think it’s around 20% of people that actually itemize. Those things will be offset by other tax credits that are part of this plan…”

Ms. Sanders would be correct, if she was referring to households earning less than $50,000 per year, a figure which barely skirts the middle-class. However, as you can see in the chart below, 41.7% of households earning between $50,000 and $75,000 itemize. The figure jumps to 58.5% for those earning $75,000 to $100,000, and rises to 78.8% for those earning between $100,000 to $200,000.

Itemized_Deductions-21

On average, 30.1% of taxpayers itemize. A figure which comprises roughly 44,000,000 households. This is something neither the White House nor Congress should take lightly. Any effort to reform the tax code should at least begin with the facts.

The Republican tax reform plan proposes to eliminate the $4,050 (per person) personal exemption, and limit a household’s ability to itemize deductions, replacing both concepts with a higher standard deduction. The proposed standard deduction is $12,000 for single filers, and $24,000 for married couples.

In tax year 2016, the standard deduction and personal exemption(s) combined were $10,350 (6,300 + 4,050) for single filers, and $20,700 (12,600 + 8,100) for married couples. Keep in mind that taxpayers able to claim dependents were allowed additional personal exemptions of $4,050 for each. Dependents include children and in many cases elderly parents.

Under the Republican framework, single taxpayers, who currently do not have enough deductions to itemize, and are not claiming dependents, will receive an extra $1,650 (12,000 – 10,350) of tax free income. Since this income was previously taxed at 10%, their savings under the Republican plan are a mere $165.

Married taxpayers filing jointly, who currently do not have enough deductions to itemize, and are not claiming dependents, will receive an extra $3,300 (24,000 – 20,700) of tax free income. Since this income was previously taxed at 10%, their savings under the Republican plan are a mere $330.

The Republican framework further eliminates the 10%, 15%, 28% and 33% tax brackets. Commencing at 12%, the new framework then jumps to 25%, then 35% and potentially up to 39.6%. We don’t yet know where each bracket will end, but we do know that the plan represents a 20% tax hike at the lowest level. Not good.

2016 Tax Bracket Single

2016 Single Tax Rate Schedule

Actually, in raising the bottom tax rate from 10% to 12%, the Republican plan takes back all of the initial tax savings, placing both single filers and couples in the red. Thus, for non-itemizers, the premise of a higher standard deduction combined with the elimination of the personal exemption results in less than nothing in terms of a tax cut.

Furthermore, married and single non-itemizers with dependent parents or children turn out to be big losers. So, if the framework does nothing for non-itemizers, what will it do for those that currently itemize? I’ll use myself as an example.

For tax year 2016 I filed as Single with no dependents, had itemized deductions of just over $20,000, and claimed a personal exemption of $4,050. Rounding it off, my total deductions were $24,000. That means my taxable income was computed as total income minus $24,000. That’s where the tax brackets kick in.

Of the $20,000 I claimed in itemized deductions, around $6,000 was mortgage interest, $9,000 were employee business expenses (which don’t appear to be part of the discussion), and the remainder were real estate and state and local income taxes.

Being single in 2016 meant the first $9,275 of taxable income (i.e. income above my deductions of $24,000) was taxed at 10%, the next $28,374 at 15%, and the next $53,499 at 25% (see table above).

Moving forward, instead of being allowed to claim my usual itemized deductions and personal exemption of roughly $24,000, the Republican framework will limit me to a new standard deduction of $12,000 (for single filers). Thus, $12,000 of my income that was previously un-taxed will now be subject to a 12% income tax.

So, where $12,000 of my income wasn’t previously taxed, the Republican plan taxes it at 12%, thereby increasing the government’s coffers by an extra $1,440. And, this is just the starting point.

Where the next $9,275 of my income was previously taxed at 10%, the Republican plan taxes it at a rate of 12%, favoring the government by an additional $186. So far, the government is ahead by $1,626. Will an adjustment in the tax brackets make up for my shortfall?

Now, where my next $28,374 of income was previously taxed at 15%, it will presumably be taxed at 12%, assuming the new 12% bracket covers at least the first $49,649 of taxable income (12,000 + 9,275 + 28,374). Compare this to the chart above. If correct, this saves me $851 in taxes (3% of 28,374). Yet, the government is still ahead by $775. If the bracket isn’t extended, I am forced even further into the abyss.

In fact, to break even the 12% tax bracket must be extended to $55,611, for a single person in my shoes (49,649 + (775 / (.25 – .12))). But, since the Republican framework is billed as a big beautiful tax cut, not just a crafty way to simplify the code, at the expense of the middle-class, the 12% bracket must be extended further for me to realize an actual reduction in taxes.

To receive a modest tax cut of $1,440, the 12% tax bracket must apply to taxable income of $0 to $66,688. That’s what it will take for me to lose my current itemized deductions and personal exemption, and wind up with a modest tax cut. It may take more, or less for you, but you get the gist.

Yet, according to the White House, the average American family will receive a $4,000 tax cut. For a taxpayer in my shoes to receive a $4,000 tax cut, the 12% bracket for single individuals must be extended to taxable income of up to $86,380.

So, my new benchmarks for the Republican plan are as follows (yours may differ). If the 12% bracket, for single individuals, ends at $55,611 or less, then the bill is garbage. If the bracket extends to the first $66,688 of taxable income, then it’s alright. And, if the 12% bracket for single filers applies to taxable incomes of up to $86,380, then I’m all in.

Tax brackets for married individuals filing jointly should be roughly double the single brackets. That means the 12% bracket for married couples should apply to taxable income of no less than $111,222 to break even, $133,376 for a modest tax cut, and more optimally to $172,760 to be in line with the administration’s rhetoric.

If you think the Republican middle-class tax hike will be made up for by tax credits, first know that refundable tax credits are not in line with Republican principles. The refundable child tax credit, earned income tax credit, and education tax credit are wealth redistribution mechanisms, favoring special interests, supported by liberals and socialists, and should be abolished under a true Republican administration.

Leaving refundable tax credits in the tax code lends nothing towards simplification, or fairness. As I have long advocated, it is enough not to owe any income taxes at all, that should be as good as it gets. Going beyond this, into the realm of refundable tax credits, only leads to government dependence and unnecessary red ink.

To sum it up, if the 12% tax bracket doesn’t apply to taxable incomes of at least $66,688 for single individuals, and $133,376 for married couples, then the Republican tax plan is little more than a sham, favoring special interests, and will end up confiscating and redistributing even more wealth from the middle-class than it does today.

Alternative Plan:

As an alternative, Republicans could simply raise the standard deduction as proposed, keep the deduction for personal exemptions, maintain the current framework for itemizing, and lower tax rates starting from the bottom up. Add to this a business tax cut and you’ve got something that makes sense.

References:

Tax Foundation: Who Itemizes Deductions?

Affordable Care Excise Tax, Part IV

What Marketplace?

:: By: Larry Walker II ::

“Putting thoughts into words is vastly different from putting truth into words. For words are not truth. As ardently as writers sort and select and polish their words, at the end of the day they are still words. They are not, in themselves, truth…” ~ Lionel Fisher

The act of naming the federal government’s unlawfully subsidized website an “Exchange” or “Health Insurance Marketplace” doesn’t make it one. In a true marketplace, when a product or service is inadequate new competitors are allowed to step in and offer something better. But free competition is stifled when a government controlled, crony capitalist managed, overpriced monstrosity places rigid restrictions on the types of products and services offered. This is precisely the case with the health insurance plans offered by the U.S. government’s imaginary marketplace.

The federal government should do away with the individual mandate, including the vile affordable care excise tax, and open the “marketplace” to catastrophic plans. What kind of marketplace bars consumers from choosing between all possible options, and then imposes a tax for failing to make a purchase? That would be a government-run marketplace.

What is a Catastrophic Health Care Plan?

According to the federal government catastrophic health care plans are meant to provide protection from worst-case scenarios. They generally require you to pay all of your medical costs up to a certain amount (i.e. a deductible), which is usually several thousand dollars. Also according to the government, “they are basically the same as either not having insurance, or opting for a Bronze plan.” A statement that reveals something many have already discovered regarding the latter.

After reaching your deductible, costs for essential health benefits are generally paid by the plan. But here’s the key; catastrophic plans have lower monthly premiums than comprehensive plans. Although they primarily protect you from worst-case scenarios like serious accidents or illnesses, they also cover 3 primary care visits per year at no cost, even before you’ve met your deductible. They also cover free preventive services. Such features make them better than most comprehensive options.

As the law stands today, only U.S. residents under the age of 30 are allowed to purchase low-priced catastrophic health care policies. Those age 30 and over are out of luck, unless they have applied for and received a government approved hardship exemption. Those over the age of 30 aren’t even allowed to view the costs and benefits of such plans until they have obtained the burdensome bureaucratic sanctioned privilege.

Small Business Owners

Many Americans have money tied up in small businesses. The fact that some receive K-1 Forms from S-corporations or partnerships, reporting that they earned “X” amount of dollars, doesn’t mean they actually received a dime. Yet they are forced to pay income taxes on such earnings whether or not physically received. This is hardly fair, but now it’s worse.

If forced to remove all, or even a portion, of their earnings (or capital) from such enterprises each year, in order to comply with the Individual Mandate, many small business owners may not have sufficient funds to cover upcoming salaries, payroll taxes, debt service payments, general operating expenses, and income taxes. For these, catastrophic health insurance plans may be the best option.

Most Democrats are clueless about what I just said. Knowledgeable Democrats and unelected bureaucrats will say, “No problem, just fill out a 14 page hardship application, attach copies of your personal and business tax returns (and all other required backup documentation), and the federal government will get back to you and let you know whether or not you qualify for a catastrophic plan.” However, if a bureaucrat decides you can afford it, then you’ll either need to purchase an overpriced government approved plan, or pay the affordable excise tax.

The federal government doesn’t have a problem reducing any American to the level of a means-tested welfare program applicant, but resource allocation decision makers should. Are small business owners working 12 to 18 hour days to be treated like welfare applicants? I think not. They shouldn’t need a bureaucrat’s permission to purchase whatever type of health insurance meets their needs, and if none of the available options fit, they should be free to go without (i.e. free from a punitive excise tax).

Individual Market

If you’re single and think you might be able to afford up to $6,300 in medical bills each year (the bronze plan deductible for individuals), but are not sure you would be able to after having already forked over five thousand dollars (or so) in government mandated health insurance premiums upfront, you’re not alone.

If you’re married and not sure whether you could manage $12,600 in medical bills annually (the bronze plan deductible for couples), but are fairly certain you would not be able to after having been forced to pay ten thousand dollars (or so) in government-mandated health care premiums upfront, you’re not crazy.

Exorbitant health insurance deductibles, $6,300 for singles and $12,600 for families, coupled with pricey monthly premiums are precisely Obamacare’s problem, not to mention the unconscionable excise tax levied for noncompliance. The federal government may have forgotten that it already snatches 17% to 50% of its most productive citizen’s income each year, in the form of Social Security taxes, Medicare taxes, excise taxes and income taxes, but those affected by such and also subject to the Individual Mandate have not.

It’s been reported that middle class Americans, those most affected by Obamacare’s inflated premiums, are beginning to skip medical checkups and scrimp on their own health care, because once the premiums have been paid there isn’t much of anything left to cover the associated deductibles and out-of-pocket expenses dictated by an out of touch overlord.

Millions of middle class Americans don’t need to break their piggy banks trying to comply with the individual mandate, to know they would be forced to cut back on their own personal health care. After having wasted thousands of dollars a year to satisfy the Democratic Party’s seemingly drunken delusion, that every U.S. resident can afford health insurance, what they will be left with is a worthless insurance policy, not better health care.

To spell it out in terms anyone should be able to understand: Gross income minus federal and state income taxes, Social Security and Medicare taxes, rent or mortgage payments, utility bills, car payment(s), auto insurance, auto fuel and maintenance, debt service, food, clothing and personal expenses, retirement savings, and other family obligations, equals next to nothing for most of America. Yet, being well aware of this, the Democratic Party made the purchase of what it calls “minimum essential coverage” mandatory.

Quid Pro Quo

To better visualize the idiocy of Obamacare let’s compare it to a vehicle service contract and extended warranty. I recently purchased the package on a new vehicle. It covers the first five years or 60,000 miles for a one-time premium of $5,000. The cost was fairly steep, but what do I get in return?

When my truck needs an oil change, any regularly scheduled maintenance, or if any part fails, it’s covered. There are no deductibles or out-of-pocket costs. In other words, I don’t have to worry about shelling out another dime for nearly any situation which may occur with the truck over its first 5 years, or 60,000 miles. Not bad.

In comparison, an Obamacare bronze plan would cost me around $5,000, each and every year, subject to annual inflation increases. In addition, I would be forced to cover the first $6,300 I incur in medical expenses (the deductible), each and every year out of my own pocket. So over a five year period, I am expected to cover $25,000 in Obamacare premiums (subject to inflation), plus another $31,500 in out of pocket costs. Had this been the case with my truck, I would have bit the bullet.

Although a human being, at least in Western civilized society, is in theory worth more than a vehicle, that doesn’t mean a single middle class American can magically come up with $56,500 ($113,000 for a married couple), over a five year period, to comply with the Democratic Party’s pipe dream. Yet, for middle class taxpayers in their 50’s that’s what Obamacare demands. Let me check my bank book and see if I’ve got an extra $56,500 lying around from the last five years. What about you?

When it comes to getting something for something, that’s not what we find when it comes to the individual mandate. Thanks, but I’ll take a pass on Obamacare. Anyone that thinks this is a rational plan was either already covered by a governmental or employer health care plan, or is pitifully out of touch with reality. But this is always the case with big government programs run amok. Unless a program affects people in a personal manner, most tend to be idealistic or apathetic.

Fixing Obamacare

As revealed in Part III, in spite of Obamacare, 30 million U.S. residents are projected to remain uninsured indefinitely. Among them, 26 million are expected to claim an exemption from the penalty. Did I say penalty? Sorry, I meant excise tax. In its present form, the law is without question a colossal failure, and ignoring the results of the most recent landslide election would be a monumental miscalculation.

Government intervention in the health insurance market, in the form of excise taxes, tax credits, subsidies and regulations has led to the unintended consequences of artificially high insurance premiums and lofty deductibles. Imposing an excise tax on consumers least able to comply with the mandate, forcing them to choose between purchasing an overpriced policy or paying a tax, has created another unintended consequence – animosity toward one’s own government.

How can we amend this broken concept?

  1. The federal government should simply drop its individual mandate and let the market operate freely. That means no subsidies and no excise taxes.

  2. Then, it should allow anyone desiring to purchase a catastrophic health insurance policy the right to do so, regardless of age or household income.

Any hope of reducing costs, restoring national allegiance, and encouraging the uninsured to enter (or reenter) what used to constitute a health insurance marketplace rests on this combination. If the federal government is sincerely concerned with the welfare of all of its citizens and residents, it will repeal the individual mandate and establish a true marketplace.

The End; hopefully of Obamacare.

Related:

Affordable Care Excise Tax, Part I

Affordable Care Excise Tax, Part II

Affordable Care Excise Tax, Part III

#Healthcare

Picture credit: Emergency Physicians Monthly

Affordable Care Excise Tax, Part III

Paying Your Fair Share

:: By: Larry Walker II ::

In Tax Simplification, Part II, I expounded on a 2010 Annual Report to Congress, in which National Taxpayer Advocate Nina E. Olson focused on the need for tax reform as the No. 1 priority in tax administration. In particular, she focused on the problem of delivering social benefits through the tax system, which complicates the mission of the Internal Revenue Service (IRS), resulting in a dual mission of welfare administration as well as revenue collection. But instead of taking heed, the federal government doubled down, adding a new health care excise tax and health insurance premium tax credit to the IRS’s burden.

Telephone hold times with the IRS can sometimes run as long as four to seven hours these days, and if you don’t believe me try calling yourself. A taxpayer facing a federal tax lien, levy or wage garnishment doesn’t have a choice. He or she must call immediately in order to prevent an adverse action, but unless they have a day to spare and a very powerful battery, may wind up on the phone for several days just trying to get someone on the line. The federal government has taken an agency best suited for revenue collection, and turned it into a socialist style welfare office, long lines and all.

In Part 2, I affirmed that the shared responsibility payment isn’t a fee, because nothing is received in return. Nor is it a penalty, because failure to purchase health insurance doesn’t constitute a crime. The individual shared responsibility provision imposes an excise tax on a tiny minority of U.S. residents who don’t have government-mandated health insurance or qualify for one of several exemptions. Although Internal Revenue Code – Section 5000A refers to it as a penalty, in general, if it involves filling out a federal income tax form (i.e. Form 8965), and is assessed on and payable with your personal income tax return, it’s a tax.

Opting Out

Many U.S. residents opted out of government mandated health insurance last year. Most simply couldn’t handle the government dictated concoction of monthly premiums and annual deductibles. For these, the Affordable Care Act’s punitive excise tax only makes matters worse. To those affected by this odious tax, it represents a discriminatory confiscation of wealth they are least likely to possess.

For example, the lowest cost Bronze Plan in the state of Georgia currently costs a married couple in their late 40’s to early 50’s (without children and with annual income of around $80,000) a monthly premium of around $622. Conjoined with an annual deductible of $12,600, their insurance policy won’t cover a dime of medical expenses until they have exhausted slightly over a quarter of their annual income ($20,064 / $80,000).

If the couple reasons that they may be able to afford the first $7,464 in medical bills, but would be screwed if they had to pay an additional $12,600, they would be better off not wasting their money on insurance premiums. Once having come to this conclusion, in steps the government to impose the execrated tax. The couple is then forced to hand over 1% of their income (above the filing threshold) in 2014, 2% in 2015, 2.5% in 2016, and more thereafter.

In this example, the government-inflicted excise tax is meant to encourage, or if you will, coerce the couple into purchasing a service they deemed impractical from the get go. But will it? Since the problem boils down to its exorbitant overall cost, how does a government imposed tax of $597, $1,194 or $1,493 help this couple? Newsflash: It doesn’t. Taking money away from one middle class taxpayer and handing it to another serves no meaningful purpose.

What is the purpose?

The premise behind the Affordable Care Act (ACA) was originally as follows: Too many Americans are being denied access to medical care. Health care is a fundamental right for every American. Therefore, every American should have universal access to health care. Anything less is immoral. Yet, in spite of an unprecedented level of government intervention, according to the Congressional Budget Office (CBO), roughly 30 million nonelderly U.S. residents will remain uninsured in 2016, and every year thereafter.

One critical detail, virtually forgotten in its more than 20,000 pages of regulations, is that prior to implementation of the ACA, 42 million U.S. residents were uninsured, according to an annual report from the U.S. Census Bureau. And now, after upending the entire American health care system, and throwing another monkey wrench into U.S. tax administration, come to find out that 71% of them will remain uninsured for the duration.

But at least 12 to 13 million got covered, right? Well perhaps, but not without taxpayer assistance, or what’s known in the real world as additional government debt. According to the Heritage Foundation, roughly 6 million of the newly insured were added to taxpayer-funded Medicaid programs. And according to H&R Block, the other 6.8 million purchased health insurance, but only after employing taxpayer-funded subsidies (i.e. premium tax credits).

In short, 30 million of the 42 million who were uninsured prior to the ACA will remain uninsured in 2016 and every year thereafter. And, of the 12 to 13 million newly insured, every last one received a taxpayer handout. What’s up with that? Couldn’t we have achieved the same result without maiming the tax code?

Ironically, and according to the U.S. Census Bureau, around 30 million U.S. residents, age 18 or older, never made it past the 11th grade, but that’s another story. Although not likely the same 30 million who will never have health insurance (because they get theirs for free), you can bet Progressive’s will constantly characterize them as hard-working Americans worthy of evermore governmental assistance (i.e. a higher minimum wage, free child care, free junior college, free health care, etc… etc…)

Right, so they didn’t make it past the 11th grade, but now it’s our job to hand them a free ride? Are you kidding me? These are not hard-working Americans; they are society’s losers. Close to half probably aren’t even legal. Oops! The notion of robbing the middle class, in order to dole out freebies to a bunch of flunkies is absurd. If you want something in life, work for it like the rest of us. But I digress. The affordable excise tax, being levied against the true middle class, is damnable.

Are you paying your fair share?

Now get this. Of the 30 million (or so) who will remain eternally uninsured, the majority are expected to be exempt from the new excise tax. That’s right! Despite the federal government’s ultimatum, the CBO estimates that 23 million will qualify for one or more of the following exemptions:

  1. Not lawfully present. Any individual who is neither a U.S. citizen, U.S. national, nor an alien lawfully present in the U.S. If you are in the U.S. illegally, then according to the law you are exempt.

  2. No filing requirement. An individual whose household income is below the minimum threshold for filing a tax return. The requirement to file a federal tax return depends on filing status, age, and types and amounts of income. If you are not required to file a return, then no other action is required.

  3. Income below the federal poverty level. You were determined ineligible for Medicaid because your state didn’t expand eligibility for Medicaid under the Affordable Care Act.

  4. Plans are unaffordable. You have no affordable coverage options because the minimum amount you must pay in annual premiums is more than 8% of your household income.

  5. Indian tribes. Any member of a federally recognized Indian tribe. You may claim this exemption directly on your tax return through self-attestation.

  6. Incarceration. Any individual in jail, prison, or a similar penal institution or correctional facility. You may claim this exemption through self-attestation when you fill out your federal tax return.

For more on exemptions, see Part 2. So in the year 2016, only around 7 million of the 30 million uninsured will have to deal with this new excise tax, in one fashion or another. The CBO estimates that among the 7 million, 3 million will either request hardship exemptions, or simply refuse to pay (i.e. take advantage of the IRS’s inability to administer and collect the tax).

All in all, the CBO believes a mere 4 million hapless Americans will be forced to fork over an estimated $4 billion in affordable care excise taxes in the year 2016. The figure climbs to an estimated $5 billion a year from 2017 to 2024. Note: The CBO neglected to offer estimates for tax years 2014 and 2015, which will likely involve higher numbers subject to the tax due to novelty of the law.

In brief, 4 million pay, while 26 million get a pass. Well, so much for the vaunted Fair Share theory! Perhaps all should be granted immunity, or at least an opportunity to purchase catastrophic health insurance policies, as I pleaded for in Part 1.

Squashing the Real Middle Class

Among the doomed 4 million (i.e. those subject to the affordable care excise tax), the CBO estimates that roughly 74% will be from what many consider to be the middle class (i.e. income exceeds 200% of federal poverty guidelines), with the remaining 26% in the low income category (i.e. income below 199% of federal poverty guidelines).Great!

So by the year 2016, out of 30 million perpetually uninsured Americans, comprising roughly 10% of the population, only 4 million, or just over 1% of the population, will be forced to pay what the Supreme Court said, “…may reasonably be characterized as a tax.” The bulk of the disheartened will represent the middle class, with a minority from the lower middle class. Wow!

Prior to the ACA, 42 million U.S. residents were uninsured. Following its implementation, 30 million, or 71%, will remain uninsured indefinitely. Of the 12 to 13 million newly insured, every single one is on the government dole, either through free Medicaid or subsidized health insurance premiums. In 2016, 4 million uninsured American citizens will be forced to hand over 2.5% of their income to the federal government in exchange for nothing, while another 26 million, in essentially the same boat, will remain uninsured but at least suffer no further humiliation. So the U.S. is finally taxing the 1%, eh?

Although the ACA focuses its excise tax on a tiny fraction of permanently uninsured Americans, at the same time it provides subsidies for people making up to four times the federal poverty line (i.e. $46,680 for a single person, $62,920 for a family of two, and $95,400 for a family of four). Can you say overpriced? As a general rule, when a product or service is subsidized it’s being sold at a premium (i.e. the insurance is overpriced). But not to worry, the ACA’s premium tax credits turn out to be a load of bull as well.

According to the Washington Examiner as many as 3.4 million of the 6.8 million who received taxpayer subsidized health insurance may owe money back to the federal government. H&R Block estimates that as many as half of the 6.8 million people who received insurance premium subsidies under the ACA benefited from subsidies that were too large. Oh, for crying out loud!

At this point, if you’re a left-winger you’re probably thinking, “Yippee, we did it!” If you’re conservative you’re likely saying, “I told you so.” And if you find yourself in the cross hairs of the affordable excise tax, you’re probably muttering words you dare not convey in public.

To be continued…

Related:

Affordable Care Excise Tax, Part I

Affordable Care Excise Tax, Part II

Affordable Care Excise Tax, Part IV

#Healthcare

Affordable Care Excise Tax, Part II

Effing the Middle Class

:: By: Larry Walker II ::

In Part 1, we voiced concern that in constitutional law sense, an excise tax is usually an event tax as opposed to a “state of being” tax, the recent exception to this principle being the “minimum essential coverage” tax under Internal Revenue Code section 5000A as enacted by the Patient Protection and Affordable Care Act (Public Law 111–148), whereby an indirect tax is imposed on the condition of not having purchased health insurance coverage.

This is not the first time in history the United States has forced its middle class to pay a tax supposedly for our common good; Social Security and Medicare taxes come to mind. However, this is the first time the federal government has ordered its middle class to either engage in an act of commerce, or else hand over a percentage of its hard earned income.

Nearly 18 million state and local government employees as well as a few conscientious religious objectors are exempt from Social Security taxes, while the rest of us are bound to a sinking ship. Is it fair that millions of Americans get a better deal, while the masses are forced to contribute to the welfare of others?

Under the Affordable Care Act it’s worse. Those who voluntarily purchase private company health insurance plans, predetermined by the federal government as meeting their needs, and deemed affordable to them based on contrived criteria, are allowed to escape the new tax, while those in need (i.e. stuck in the middle and still uninsured) get screwed.

If the principle behind the affordable care tax were applied consistently across the board, then those participating in qualified retirement plans should be exempt from Social Security tax, and owners of long-term care insurance contracts should be excluded from Medicare tax. This would be fair and equitable, but as it stands the new tax represents a major departure from Americanism.

Under this latest departure from common sense, the poor receive free health care through state-run Medicaid programs, the rich can handily afford the best of insurance plans, and the middle class are either stuck with high premiums compounded by soaring deductibles, or slapped with an excise tax for not purchasing a government mandated plan.

Members of the middle class, and those once aspiring, who refuse on principle, or are for myriad reasons unable to purchase a government mandated health insurance plan, and not meeting one of several exemptions, are subject to this new “state of being” tax. In other words, the state of being stuck between a rock and a hard place makes the middle class a prime target for funding government subsidies to the poor.

If you and your family did not have minimum essential coverage in 2014, you will need to meet a specific exemption to avoid paying the new excise tax. If you would like to obtain coverage for 2015, the deadline for doing so is February 15, 2015. To obtain coverage, your options include:

  • Health insurance provided by your employer;

  • Health insurance purchased through the Federal website (healthcare.gov), or your State’s Marketplace;

  • Coverage provided under a government sponsored program (i.e. Medicare, Medicaid, Veterans Administration);

  • Health insurance purchased directly from an insurance company; or

  • Other health insurance coverage that is recognized by the Department of Health & Human Services.

Who is exempt?

The Affordable Care Act mandates individuals without health insurance to pay an excise tax on top of their regular federal tax obligation, however there are exemptions. If you are exempt from the requirement to maintain minimum essential coverage, the excise tax won’t apply when you file your 2014 federal tax return. An exemption may apply if you meet one of the following criteria:

  1. You have no affordable coverage options because the minimum amount you must pay in annual premiums is more than 8% of your household income; or

  2. You have a gap in coverage for less than three consecutive months; or

  3. You qualify for one of the hardship exemptions listed below, or belong to an exempt group (explained later).

Numbers 1 and 2 (above) may be claimed directly on your income tax return, but a hardship exemption (number 3) must be approved by a government bureaucrat. To claim a hardship exemption, you must complete and mail an application to what’s being called the Health Insurance Marketplace (i.e. the federal government). Upon approval, you will receive an “exemption certificate number” (ECN), which must be included on your tax return to receive the exemption.

Please be aware, that if you do not qualify for exemption numbers 1 and 2 (above), and think you may qualify for one of the following hardship exemptions, the time to submit an application is now. If you wait until tax season, the filing of your tax return may be delayed (awaiting receipt of an ECN), or you may have to file without an exemption and amend your return later. Choosing the latter will affect the amount of your refund or balance owed.

If any of the following hardships apply to you, you must submit an application for exemption as discussed in Part 1:

  1. You were homeless.

  2. You were evicted in the past 6 months or were facing eviction or foreclosure.

  3. You received a shut-off notice from a utility company.

  4. You recently experienced domestic violence.

  5. You recently experienced the death of a close family member.

  6. You experienced a fire, flood, or other natural or human-caused disaster that caused substantial damage to your property.

  7. You filed for bankruptcy in the last 6 months.

  8. You had medical expenses you couldn’t pay in the last 24 months that resulted in substantial debt.

  9. You experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member.

  10. You expect to claim a child as a tax dependent who’s been denied coverage in Medicaid and CHIP, and another person is required by court order to give medical support to the child. In this case, you don’t have the pay the penalty for the child.

  11. As a result of an eligibility appeals decision, you’re eligible for enrollment in a qualified health plan (QHP) through the Marketplace, lower costs on your monthly premiums, or cost-sharing reductions for a time period when you weren’t enrolled in a QHP through the Marketplace.

  12. You were determined ineligible for Medicaid because your state didn’t expand eligibility for Medicaid under the Affordable Care Act.

  13. Your individual insurance plan was cancelled and you believe other Marketplace plans are unaffordable.

  14. You experienced another hardship in obtaining health insurance.

If any of the 14 hardships (above) apply to you, and you wish to be excluded from the affordable excise tax, then you must submit a hardship application, along with proper documentation supporting your claim. If approved, you will be granted an ECN to enter on your tax return. Good luck with that. If denied, you may need to pay the tax, or if you are expecting a refund the IRS will conveniently subtract it out.

Exempt Groups: The following individuals are exempt from coverage:

  1. Religious conscience. Any member of a religious sect that is recognized as conscientiously opposed to accepting insurance benefits. The Social Security Administration administers a similar process allowing exemption from Social Security and Medicare taxes. You must submit an application to claim this exemption.

  2. Health care sharing ministry. Any member of a recognized health care sharing ministry. Health care sharing ministries (HCSM) provide health care cost sharing arrangements among persons of similar and sincerely held beliefs. HCSMs are operated by not-for-profit religious organizations acting as a clearinghouse for those who have medical expenses and those who desire to share the burden of those medical expenses. You may claim this exemption directly on your tax return through self-attestation.

  3. Indian tribes. Any member of a federally recognized Indian tribe. You may claim this exemption directly on your tax return through self-attestation.

  4. No filing requirement. An individual whose household income is below the minimum threshold for filing a tax return. The requirement to file a federal tax return depends on filing status, age, and types and amounts of income. If you are not required to file a return, then no other action is required.

  5. Incarceration. Any individual in jail, prison, or a similar penal institution or correctional facility. You may claim this exemption through self-attestation when you fill out your federal tax return.

  6. Not lawfully present. Any individual who is neither a U.S. citizen, U.S. national, nor an alien lawfully present in the U.S. If you are in the U.S. illegally, then according to the law you are exempt. Well, imagine that.

You’ve Been Grubered

The affordable excise tax maxes out at 1% of household income (above the filing threshold) in 2014, increases to 2% in 2015 (i.e. a 100% increase), then to 2.5% in 2016 (i.e. an additional 25% hike) and is automatically adjusted for inflation thereafter. What’s the rationale behind the dramatic rate of increase? Is inflation expected to rise by 100% in 2015 and by another 25% in 2016? Are middle class wages expected to grow at anywhere near this clip?

You’ve got to give it up for the Grubers (i.e. Democrats), for pulling the wool over our eyes and sneaking this baloney into law. As if their deception wasn’t bad enough on its own, what’s even more disturbing is their blatant persistence in calling this “state of being” excise tax a fee or penalty, even after the Supreme Court ruled it to be a tax. One has to wonder just who they are trying to fool at this point? Certainly members of the middle class, who are beginning to feel the pinch, are not fooled.

If the affordable care tax is indeed a fee, doesn’t the act of paying a fee normally correspond with the receipt of some good or service? Sure, but in the matter at hand, what does the middle class get in return for this so-called fee? Do we receive health insurance? Nope.

All the middle class winds up with is less money to cover its uninsured, out-of-pocket, health care expenses, and less to put towards compliance with the nefarious Act. So how exactly does this help the uninsured? Well, it doesn’t help this group.

If the affordable care tax is a penalty, doesn’t the assessment of a penalty normally succeed an act of wrongdoing? Yes, but in this matter, what wrong has been committed? Is the act of paying one’s own health care expenses out-of-pocket (without the benefit of health insurance) a crime? Since the statute waives criminal penalties for non-compliance with the requirement to maintain minimum essential coverage, it’s not a crime.

The Supreme Court agrees, its Chief Justice having stated that, “The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax…” Had the court deemed it a penalty, the entire law could have been ruled unconstitutional. Face it, the affordable excise tax is just that, a tax. It’s not a fee, nor is it a penalty, so it’s high time you Grubers cut the B.S. and start calling it what it is. Hopefully, the new Congress will bring an expeditious end to this looming catastrophic nightmare.

To be continued…

Related:

Affordable Care Excise Tax, Part I

Affordable Care Excise Tax, Part III

Affordable Care Excise Tax, Part IV

#Healthcare

Affordable Care Excise Tax, Part I

What the Individual Mandate means for you and your family

:: By: Larry Walker II ::

Under the Affordable Care Act, beginning in 2014, State governments, insurers, employers, and selected individuals are supposed to share in the responsibility of providing health insurance coverage.

The Act’s shared responsibility provision, also known as the individual mandate, requires you and each member of your family to either:

  • Have minimum essential coverage; or
  • An exemption from the responsibility to have minimum essential coverage; or
  • Pay an Excise Tax.

You will report minimum essential coverage, claim an exemption therefrom, or make an excise tax payment when you file your 2014 federal income tax return in 2015.

Now let’s stop and think about what this means. What it means for me, since I chose not to purchase health insurance this year, instead choosing to pay my own health care expenses out-of-pocket, is that on top of what I have already paid this year (which incidentally comes to less than 10% of my income so none of it will be tax deductible), I am also being punished by way of an excise tax. An excise tax for what exactly? For not purchasing a service which I deem to be worth less than its cost, due to high deductibles coupled with premiums?

‘State of Being’ Tax

In the United States, an Excise tax is an indirect tax on listed items. In constitutional law sense, an excise tax is usually an event tax (as opposed to a state of being tax). A recent exception to this “state of being” principle is the “minimum essential coverage” tax under Internal Revenue Code section 5000A as enacted by the Patient Protection and Affordable Care Act (Public Law 111–148), whereby an indirect tax is imposed on the condition of not having health insurance coverage.

In case you didn’t catch that, excise taxes are usually assessed on events, such as the purchase of a quantity of a particular item like gasoline, diesel fuel, liquor, wine, cigarettes, airline tickets, tires, trucks, etc. Such a tax is usually included in the price of the item—not listed separately like sales taxes. To minimize tax accounting complications, excise taxes are generally imposed on quantities like gallons of fuel, gallons of wine or liquor, packets of cigarettes, etc. and are usually paid by the manufacturer or retailer.

Other examples of excise taxes imposed in the U.S. relate to such things as luxury passenger automobiles, heavy trucks and trailers, “gas guzzler” vehicles, tires, petroleum products, coal, vaccines, medical devices, recreational equipment, firearms (see National Firearms Act), communications services (see Telephone federal excise tax), air transportation, policies issued by foreign insurance companies, wagering, water transportation, removal of hard mineral resources from deep seabeds, chemicals, certain imported substances, non-deductible contributions to certain employer plans, and many other subjects.

Excise taxes are normally passed on to the consumer who eventually consumes the product. The price for which the item is eventually sold is usually not considered in calculating the amount of the excise tax. Income taxes, value added taxes (VATs), sales taxes, and transfer taxes are examples of other excise taxes but are typically not called such (in the United States) because of the different ways they are imposed. In the U.S. the only taxes called excise taxes are essentially taxes on quantities of enumerated items (whiskey, wine, tobacco, gasoline, tires, etc.). Other taxes on certain events may technically be considered excise taxes, but may or may not be collected under the name “excise tax.”

Virtually every excise tax levied since the founding of this nation (perhaps since the dawn of time) has been levied for actively participating in some event. If you buy gasoline, you pay an excise tax on each gallon purchased, but if you don’t own a vehicle and don’t purchase gasoline, the tax is not levied. If you use a land-based or mobile telephone service, you pay an excise tax, but if you don’t have a phone, you don’t get charged. If you legally purchase tobacco, you pay an excise tax, but if you don’t smoke, you are spared. And I might add, if you are caught bootlegging a couple of loose cigarettes (loosies) on a street corner, you’re liable to get choked by a corybantic cop, and left to die on a New York sidewalk.

Anyway, will someone please explain to me why a person choosing not to engage in an event should be taxed? In effect, I’m damned if I do, and damned if I don’t. If I pay the premiums for the least expensive health insurance policy that the government insists I can afford (without so much as bothering to check my balance sheet), won’t I still have to pay the first $6,300, or more, in medical expenses to meet its annual deductible? Yes. And, if my out-of-pocket expenses turn out to be less than the deductible, barring some major catastrophe, won’t I have needlessly wasted my money? Yes. So what’s the point?

If it was up to me, and by the way it should be, I would purchase a low-cost catastrophic health care plan, just in case something happens down the road. The only thing standing in my way is the federal government. That’s because under the misnamed Patient Protection and Affordable Care Act, catastrophic plans are only allowed to persons either under the age of 30, or to those over 30 who wish to go through the torture of completing an eleven, or more, page hardship exemption application, which must then be approved by a nameless, faceless government bureaucrat.

Catastrophe in the Making

My first problem with having to complete a hardship application is that I shouldn’t have to. If I want to buy a catastrophic plan, I should have the freedom to do so. Secondly, after looking over the application and all the information my government wants from me, my initial thoughts are as follows: Why don’t they know most of this already? Followed by, it’s none of your damned business. Here are just a few examples from the requisite exemption application.

  1. Tell us about yourself (name, address, county, phone numbers, and email address). – [Okay.]

  2. Tell us about members of your household (your spouse and dependents). – [Okay.]

  3. Provide everyone in your household’s name, date of birth, sex, social security number. – [Incidentally, just beneath the space where your SSN is entered, it says in bold type: You are not required to have an SSN to get this exemption. Really, but if I don’t have a social security number, why would I need an exemption? Duh!]

  4. Are you pregnant? – [Not that I’m aware of.]

  5. Were you in foster care at age 18 or older? – [Uh, what does this have to do with anything?]

  6. Have you used tobacco in the last 6 months? – [If I did will my request be denied?]

  7. Are you a U.S. Citizen or U.S. national? – [Shouldn’t you wizards know this by my name, date of birth, and social security number entered at the top? Don’t tell me you didn’t bother to add citizenship status to your Master-File database.]

  8. Are you a naturalized or derived citizen? – [Uh, what perchance is a derived citizen? And again, if you don’t know this by the information entered above, then you have serious yet solvable problems.]

  9. Optional: What is your race? – [Do I have a better shot if I’m a person of color?]

  10. Are you enrolled in health care coverage? – [If I was enrolled in health care coverage, then I wouldn’t be wasting my time?]

  11. Are you offered health coverage from a job? – [I’m self-employed, and haven’t offered myself coverage.]

  12. What company do you work for? – [Does it really matter?]

  13. How much money do you make and how often are you paid? – [Ah, now we’re getting down to brass tacks.]

  14. How many hours do you work each week? – [Too many, but since I’m not paid by the hour, does it really matter?]

  15. When did you start this job, and when will it end? – [When will it end? Perhaps sooner than it should, due to this lousy law.]

  16. What months do you expect to have income from this job this year and next? – [Who knows? Hopefully all of them.]

  17. Are you self-employed? If so, what type of work do you do, and how much is your net income? – [Yes. Why does it matter what I do? And I’m not sure what my net income is yet, because you guys are still working out the final details of the 2014 tax law. However, I’m pretty sure I’m not making much headway burning valuable time and energy reading all of your rules and regulations, and filling out this application.]

  18. When did you start this self-employment and when will it end? – [When will it end? Why don’t you tell me, since you’re mucking up the works, and have predetermined that I can afford your prescribed coverage?]

  19. What month’s do you expect income from self-employment over the next two years? – [Two years? I’m not sure, but at this pace my prospects are dimming.]

  20. Tell us about your other income (unemployment, retirement, pension, farming/fishing, rental/royalty, alimony, social security, etc…) – [Gross, or after expenses, principal debt repayments and taxes?]

  21. Now tell us about deductions you claim on your tax return (alimony paid, IRA deduction, student loan interest, and other…) – [What about my out-of-pocket medical expenses, mortgage interest, property taxes, state income taxes, employee business expenses and other itemized deductions? I guess these don’t count.]

  22. Now do the same for your spouse and any dependents you claim on your tax return. – [Damn it. Oh, I almost forgot; good thing I’m still technically single.]

  23. Proof of yearly income: Submit proof of each type of income listed for each person on this application (copy of your most recent tax return, original W-2 and 1099 Forms, one or more pay stubs, financial statements, Schedule C, Form 1120S, lease agreements, court documents for alimony, etc.) – [Are you kidding me? Anything else before we get to the long-awaited catastrophic health plan?]

  24. Just one more question before you sign. Is anyone listed on this application incarcerated? – [WTH? Not yet anyway.]

  25. Now just sign, date and wait. – [Well alrighty then, but since this statement is not sworn under penalties of perjury, does that mean it can be a complete fabrication without consequence? And since this is a pseudo-government agency, how long before I get an answer — months or years?]

After assessing the prospect of completing and submitting the requisite hardship application along with supporting documents, and awaiting approval or denial from a faceless, faraway bureaucrat; solely to obtain permission to purchase a catastrophic health care plan, which is all I really want and need; I’m seriously leaning towards just forking over the 1% excise tax next year, another 2% in 2016, and 2.5% in 2017. What a catastrophe! So not only am I paying my actual out-of-pocket health care expenses, some of which already include excise taxes, but on top of that I’m being unfairly taxed (based on a percentage of gross income above the filing threshold) for the privilege of doing so. This is a travesty of justice.

The bottom line: An “event tax” should not be imposed on anyone who chooses not to participate in the event. The Affordable Care Excise Tax, being levied against Americans for not purchasing health insurance, is thus immoral. No American should be subject to an excise tax for choosing to take personal responsibility for his or her own health care expenses, without insurance. And, no American, desiring to do so, should be denied, or forced to jump through hoops for the right to purchase a catastrophic health care policy. You may proceed with this unjust confiscation of my money (if you will), and then go blank yourselves, or you can do what only true Americans would do. Open the damned “marketplace” so that health insurance plans available to selected Americans are available to all Americans.

Related:

Affordable Care Excise Tax, Part II

Affordable Care Excise Tax, Part III

Affordable Care Excise Tax, Part IV

#Healthcare

Phantom Tax Credit for Elderly and Disabled

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

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

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

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