tax_reform

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

/ L. M. Walker / 4 Comments

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

/ L. M. Walker / Leave a comment

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?

The GOP’s “Abolish the IRS” Crackpots

/ L. M. Walker / 2 Comments

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

Separating the Wheat from the Chaff

:: By: Larry Walker, II ::

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

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

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

Rafael Edward “Ted” Cruz

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

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

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

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

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

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

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

Randal Howard “Rand” Paul

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

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

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

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

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

Benjamin Solomon “Ben” Carson

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

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

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

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

Carly Fiorina

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

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

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

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

Michael Dale “Mike” Huckabee

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

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

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

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

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

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

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

Scattering the Chaff

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

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

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

References:

Matthew 3:12

Trump’s Dynamic Tax Policy

2016 Conservative Tax Plans: Trump vs. Carson

Top GDP Growth Rates in U.S. History

Photo Credit:

More Than A Sunday Faith

Trump’s Dynamic Tax Policy

/ L. M. Walker / 3 Comments

Lower Rates Across The Board

:: By: Larry Walker, II ::

Here’s an excerpt from Donald Trump’s Tax Plan which may be found on his official website www.donaldjtrump.com :

TAX REFORM THAT WILL MAKE AMERICA GREAT AGAIN

The Goals of Donald J. Trump’s Tax Plan

Too few Americans are working, too many jobs have been shipped overseas, and too many middle class families cannot make ends meet. This tax plan directly meets these challenges with four simple goals:

  1. Tax relief for middle class Americans: In order to achieve the American dream, let people keep more money in their pockets and increase after-tax wages.

  2. Simplify the tax code to reduce the headaches Americans face in preparing their taxes and let everyone keep more of their money.

  3. Grow the American economy by discouraging corporate inversions, adding a huge number of new jobs, and making America globally competitive again.

  4. Doesn’t add to our debt and deficit, which are already too large.

The Trump Tax Plan Achieves These Goals

  1. If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.

  2. All other Americans will get a simpler tax code with four brackets – 0%, 10%, 20% and 25% – instead of the current seven. This new tax code eliminates the marriage penalty and the Alternative Minimum Tax (AMT) while providing the lowest tax rate since before World War II.

  3. No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.

  4. No family will have to pay the death tax. You earned and saved that money for your family, not the government. You paid taxes on it when you earned it.

Again, this is only an excerpt; you may read the rest of Trump’s detailed tax plan on his website: Trump – Make America Great Again!

Under the Trump Plan, those in the lowest quintile, and most in the second and third quintiles (depending on marital status) won’t pay any income taxes at all. This is brilliant, considering that as a whole it’s estimated that those making less than $50,000 currently receive back roughly $37 billion more from the government, each year, than they pay in (see table below). This is due to a series of redundant, and costly tax expenditures. Removing upwards of 75 million households from filing requirements actually amounts to savings of no less than $370 billion, in government speak.

When it comes to simplifying the tax code, eliminating the filing requirements of some 75 million households turns out to be a big money saver. It will directly reduce the processing and subsequent examination, by the Internal Revenue Service, of around half of all tax returns currently filed. Since most individuals under this threshold only file to receive refundable tax credits, or to determine that they don’t owe any taxes at all, and around 37% of all individual returns audited involve the Earned Income Credit, once Trump’s plan is implemented the size of the IRS may be reduced dramatically.

Under Trump’s plan, if you are single, the first $25,000 you earn won’t be taxable, and if you are married, the first $50,000 you earn will be exempt from taxes (see table below). This will amount to a huge tax cut for the many, at the expense of a few. Compared to Dr. Ben Carson’s idea, where the government would get up to $2,500 or $5,000 from the same, Trump’s plan is a huge windfall for the working poor and middle class. Are you for lower taxes? Will this help you?

Trump’s plan lowers the top marginal tax rate to 25%, or to the same level imposed from 1925 to 1931 under the 1924 Mellon Tax Bill. So this is not a shot in the dark, but rather a return to policies the U.S. had in place during the Roaring Twenties, back when the country truly was great. Compared to the present tax code, Trump’s plan will reduce income taxes for a married couple making $85,000 per year from around $8,800 to just $3,500 (assuming 2015 taxable income of $65,000). Does this appeal to you? Is there some part of this plan that you don’t comprehend?

According to Trump, the huge reduction in rates will make many of the current exemptions and deductions unnecessary or redundant. “Those within the 10% bracket will keep all or most of their current deductions. Those within the 20% bracket will keep more than half of their current deductions. Those within the 25% bracket will keep fewer deductions. Charitable giving and mortgage interest deductions will remain unchanged for all taxpayers.”

Trump’s tax plan also reduces corporate taxes from a top rate of 39% to just 15%, making the U.S. one of the most attractive places to do business worldwide. But then he goes a step further, by applying the same 15% cap to income earned by freelancers, sole proprietors, unincorporated small businesses and pass-through entities (i.e. partnerships and S-corporations), which are all taxed at the individual level. According to Trump, these lower rates will provide a tremendous stimulus for the economy, as in significant GDP growth, a huge number of new jobs and an increase in after-tax wages for workers.

Finally, Mr. Trump’s plan eliminates the death tax, reduces or eliminates deductions and loopholes available to the wealthy, phases out the tax exemption on life insurance interest for high-earners, ends the current treatment of carried interest for speculative partnerships, adds a one-time repatriation of corporate cash held overseas at a discounted 10% tax rate, ends the deferral of taxes on corporate income earned abroad, and reduces or eliminates corporate loopholes that cater to special interests.

Coupled with his well aired balanced trade initiative, which seeks to eliminate our ongoing trade deficits with China, Mexico, Japan and other nations, every true Conservative is forced to concede that Donald Trump has a viable, solidly conservative, plan for this economy, and is indeed a serious candidate. Like him or not, when you lay Donald Trump’s tax reduction plan next to any other candidate’s, it’s clear that his plan will have the greatest positive impact on 99% of all Americans. No other plan comes close. It’s time for the mainstream media to stop focusing on the small stuff, and begin taking Trump and his policies seriously.

Related:

2016 Conservative Tax Plans: Trump vs. Carson

Top GDP Growth Rates in U.S. History

30-Year Trade Deficit with Mexico

30-Year Trade Deficit with China

2016 Conservative Tax Plans: Trump vs. Carson

/ L. M. Walker / 3 Comments

Placing Principles before Personalities ::

Every time in this century we’ve lowered the tax rates across the board, on employment, on saving, investment and risk-taking in this economy, revenues went up, not down. ~ Jack Kemp

:: By: Larry Walker, II ::

Dr. Ben Carson doesn’t really have a tax plan at all, yet he’s number 2 in the polls among conservative Republicans. On the other hand, Donald Trump has a very detailed tax reduction plan. In a nutshell, Trump’s plan eliminates taxes on individuals making less than $25,000 and on couples making less than $50,000, lowers the top marginal rate to 25%, just as Calvin Coolidge did under the 1924 Mellon Tax Bill, and lowers the top corporate tax rate to just 15%. It’s time for conservatives to grow up and start focusing on principles rather than personalities. Do that and Trump wins easily.

Dr. Ben Carson’s Tax Theory

Here’s the entirety of Dr. Ben Carson’s Tax Plan which may be found on his official website www.bencarson.com :

The American People Deserve a Better Tax Code

The current tax code now exceeds 74,000 pages in length. That is an abomination.

It is too long, too complex, too burdensome, and too riddled with tax shelters and loopholes that benefit only a few at the direct expense of the many.

We need wholesale tax reform.

And, we won’t get that from career politicians in Washington. They’re too deeply vested in the current system to deliver the kind of bold, fresh, new reforms that the American people are demanding.

We need a fairer, simpler, and more equitable tax system. Our tax form should be able to be completed in less than 15 minutes. This will enable us to end the IRS as we know it.

Yep, that’s it. Thus far, Dr. Carson has been able to skirt by without offering more than a shallow critique of the current tax system. His overly simplistic solution fails to address landlords, freelancers, investors, owners of pass-through entities, owners of multiple entities, corporations, trusts and estates, and the death tax to name a few. A simple tax form that takes 15 minutes might work for someone who receives one or two W-2 Forms, a pension, or Social Security benefits, but it’s not going to cut it for the varied real-life complexities that many Americans face in this day and age.

“It is too long, too complex, too burdensome, and too riddled with tax shelters and loopholes that benefit only a few at the direct expense of the many.” Yeah, yeah, that’s what they all say, but what’s Carson’s alternative? In an interview with FOX Business Network’s Stuart Varney, Dr. Carson elaborated on his tax proposal, stating that it would be based on the Old Testament Biblical principle of tithing. Great, just like the Israelites were commanded to do around the year 1300 B.C.

Dr. Carson stated: “You make $10 billion, you pay a billion. You make $10, you pay one [dollar]. [Of] course I would get rid of all the deductions and all of the loopholes but here’s the key, people, they look at a guy who put in a billion dollars, he’s got $9 billion left, that’s not fair — we need to take more of his money. That’s called socialism. And what made America … a great nation was we had a very different attitude. We would say he just put in a billion dollars, let’s create an environment that’s even better for him so that next year he can make $20 billion and put in $2 billion. That’s how we went from nowhere to the pinnacle of the world in record time. And it’s growth, it’s not taking what’s there and dividing it up and making it smaller.”

According to Dr. Carson’s statement above, “What made America a great nation was we had a very different attitude… That’s how we went from nowhere to the pinnacle of the world in record time,” as if to say that America once had a flat-rate tax structure. But when was that? Perhaps he’s confusing America with pre-Christian Israel, because prior to 1861, and between the years 1873 and 1912, the U.S. government was funded strictly through customs duties and tariffs levied on imported goods.

And, although a 3% flat-rate tax was proposed under the Revenue Act of 1861, as a temporary means of funding the Civil War, no revenue was ever raised under the act, and it was quickly replaced by a progressive rate structure under the Revenue Act of 1862. At no time since the Revenue Act of 1913, and at no time prior, has the U.S. ever been funded by a flat-rate income tax. So where is Dr. Carson coming from?

Okay, so if you make $10, $10,000 or $25,000 under Dr. Carson’s arrangement, you’ll pay $1, $1,000 or $2,500 in taxes. Never mind that depending on the size of your family, after your living expenses have been met, you might not have a penny left wherewith to pay it. Yet this he fathoms as fair. And, according to Dr. Carson, his program is great if you make $10 billion a year, but that’s primarily because you’ll see a 49% reduction in your effective tax rate, from where it is today. But for those less fortunate, including the entire middle class, Carson’s theory will result in a massive tax hike.

Under Dr. Carson’s 10% Deal, individuals within the lowest, second, middle and fourth quintiles, that currently pay average effective individual tax rates of -7.5%, -1.3%, 2.4% and 5.8%, respectively, will see their tax rates rise by at least 72%, and by as much as 233%. Increasing the rate to 15% only compounds the problem. What’s wrong with this picture? Well, for one, the only growth it produces is among the uber-wealthy. In fact, it appears to be just another means of benefiting “only a few at the direct expense of the many” – a direct contradiction to his stated goal.

So let me get this straight. Under Dr. Carson’s tax program, those in the highest quintile, including billionaires, who currently pay an average effective tax rate of 14.2%, will receive a 30% to 49% tax cut, while those in the lower quintiles receive a 72% to 233% tax hike. And how is this supposed to help the economy? More importantly, how does it help you and me? Well, it doesn’t. What Dr. Carson’s strategy actually does is make the rich richer and the poor soul down to his last $10 a dollar poorer.

Carson mentions nothing about corporate tax reform, disincentivizing corporate inversions, balancing trade, growing the economy, or expanding the workforce. He claims his proposal will be revenue neutral, which is at best a farce, but even if it somehow were – why would anyone care? Dr. Carson’s approach ransacks the middle class, plunders the working poor, and only profits the wealthiest among us. It’s a strategy unworthy of consideration by serious-minded conservative voters, as in my opinion is the entire Carson candidacy. Phooey!

Donald Trump’s Tax Plan

Here’s an excerpt from Donald Trump’s Tax Plan which may be found on his official website www.donaldjtrump.com :

TAX REFORM THAT WILL MAKE AMERICA GREAT AGAIN

The Goals of Donald J. Trump’s Tax Plan

Too few Americans are working, too many jobs have been shipped overseas, and too many middle class families cannot make ends meet. This tax plan directly meets these challenges with four simple goals:

  1. Tax relief for middle class Americans: In order to achieve the American dream, let people keep more money in their pockets and increase after-tax wages.

  2. Simplify the tax code to reduce the headaches Americans face in preparing their taxes and let everyone keep more of their money.

  3. Grow the American economy by discouraging corporate inversions, adding a huge number of new jobs, and making America globally competitive again.

  4. Doesn’t add to our debt and deficit, which are already too large.

The Trump Tax Plan Achieves These Goals

  1. If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.

  2. All other Americans will get a simpler tax code with four brackets – 0%, 10%, 20% and 25% – instead of the current seven. This new tax code eliminates the marriage penalty and the Alternative Minimum Tax (AMT) while providing the lowest tax rate since before World War II.

  3. No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.

  4. No family will have to pay the death tax. You earned and saved that money for your family, not the government. You paid taxes on it when you earned it.

Again, this is only an excerpt; you may read the rest of Trump’s detailed tax plan on his website: Trump – Make America Great Again!

Under the Trump Plan, those in the lowest quintile, and most in the second and third quintiles (depending on marital status) won’t pay any income taxes at all. This is brilliant, considering that as a whole it’s estimated that those making less than $50,000 currently receive back roughly $37 billion more from the government, each year, than they pay in (see table below). This is due to a series of redundant, and costly tax expenditures. Removing upwards of 75 million households from filing requirements actually amounts to savings of no less than $370 billion, in government speak.

When it comes to simplifying the tax code, eliminating the filing requirements of some 75 million households turns out to be a big money saver. It will directly reduce the processing and subsequent examination, by the Internal Revenue Service, of around half of all tax returns currently filed. Since most individuals under this threshold only file to receive refundable tax credits, or to determine that they don’t owe any taxes at all, and around 37% of all individual returns audited involve the Earned Income Credit, once Trump’s plan is implemented the size of the IRS may be reduced dramatically.

Under Trump’s plan, if you are single, the first $25,000 you earn won’t be taxable, and if you are married, the first $50,000 you earn will be exempt from taxes (see table below). This will amount to a huge tax cut for the many, at the expense of a few. Compared to Dr. Carson’s idea, where the government would get up to $2,500 or $5,000 from the same, Trump’s plan is a huge windfall for the working poor and middle class. Are you for lower taxes? Will this help you?

Trump’s plan lowers the top marginal tax rate to 25%, or to the same level imposed from 1925 to 1931 under the 1924 Mellon Tax Bill. So this is not a shot in the dark, but rather a return to policies the U.S. had in place during the Roaring Twenties, back when the country truly was great. Compared to the present tax code, Trump’s plan will reduce income taxes for a married couple making $85,000 per year from around $8,800 to just $1,500 (assuming taxable income of $65,000). Does this appeal to you? Is there some part of this plan that you don’t comprehend?

According to Trump, the huge reduction in rates will make many of the current exemptions and deductions unnecessary or redundant. “Those within the 10% bracket will keep all or most of their current deductions. Those within the 20% bracket will keep more than half of their current deductions. Those within the 25% bracket will keep fewer deductions. Charitable giving and mortgage interest deductions will remain unchanged for all taxpayers.”

Trump’s tax plan also reduces corporate taxes from a top rate of 39% to just 15%, making the U.S. one of the most attractive places to do business worldwide. But then he goes a step further, by applying the same 15% cap to income earned by freelancers, sole proprietors, unincorporated small businesses and pass-through entities (i.e. partnerships and s-corporations), which are all taxed at the individual level. According to Trump, these lower rates will provide a tremendous stimulus for the economy, as in significant GDP growth, a huge number of new jobs and an increase in after-tax wages for workers.

Finally, Mr. Trump’s plan eliminates the death tax, reduces or eliminates deductions and loopholes available to the uber-wealthy, phases out the tax exemption on life insurance interest for high-earners, ends the current treatment of carried interest for speculative partnerships, adds a one-time repatriation of corporate cash held overseas at a discounted 10% tax rate, ends the deferral of taxes on corporate income earned abroad, and reduces or eliminates corporate loopholes that cater to special interests.

Coupled with his well aired balanced trade initiative, which seeks to eliminate our ongoing trade deficits with China, Mexico, Japan and other nations, every true Conservative is forced to concede that Donald Trump has a viable solidly conservative plan for this economy, and is indeed a serious candidate. Like him or not, when you lay Donald Trump’s tax reduction plan next to Ben Carson’s tax the poor philosophy, it’s clear that only one has a workable plan. Dr. Ben Carson may be a nice man, but it’s time to admit that there isn’t any substance behind his shallow rhetoric. It’s time for Conservatives to stop focusing on personalities, and start taking Donald Trump and his policies seriously.

Trump’s Dynamic Growth Policies

/ L. M. Walker / 4 Comments

Top GDP Growth Rates in U.S. History

:: By: Larry Walker, II ::

In an October 4, 2015 interview on Meet the Press, Donald Trump was asked which government programs he will cut so his tax reduction plan won’t blow a hole in the deficit.

Trump’s first response described how we are going to save a lot in administrative costs by exempting millions of Americans from filing income tax returns. Under his plan, single individuals making under $25,000 and couples making less than $50,000 will not owe any income tax, and will thus not be required to file tax returns. This totally makes sense to me, as I outlined a similar plan in a post entitled, Tax Simplification, Part II – Saving $1,756 Billion, Overnight. Although it’s only part of the answer, it may actually be a bigger deal than some imagine.

Next, Mr. Trump remarked that his dynamic revenue plan focuses on growth. “We’re going to grow the economy. If China grows at 7%, they’re having a terrible year. We’re saying we can’t grow at 3% or 4%.” Overriding the host’s rude interruptions, Mr. Trump continued, “If we do 6% or 7% under my plan, everybody benefits.”

Snarky host, Chuck Todd, blurted out, “We’ve never done [sic]; we’ve never had a year at 6% or 7%.”

Of course, the public should be aware of Mr. Todd’s background. Although he may sound like an economic expert to some, he actually attended George Washington University from 1990 to 1994, majoring in political science with a minor in music, but never graduated. He certainly lacks proficiency in matters involving business, economics, or finance.

Mr. Todd would have no idea that the U.S. economy has in the past grown at rates as high as follows:

  • 10.8% (1934)
  • 12.9% (1936)
  • 17.7% (1941)
  • 18.9% (1942)
  • 17.0% (1943)

He would likewise have no clue that, back in the good old days, the U.S. economy grew in the 7% to 8% range (see chart below):

  • 7.3% (1984)
  • 7.1% (1955)
  • 8.1% (1951)
  • 8.7% (1950)
  • 8.0% (1944)
  • 8.8% (1940)
  • 8.0% (1939)
  • 8.9% (1935)

In fact, Ronald Reagan was the last American president to put together a cogent pro-growth economic plan which thrust GDP above the 7.0% mark. Of course Mr. Todd could have looked this up before making a fool out of himself and NBC, but like many of his colleagues, he suffers from the recency effect. He is unable to see beyond the pathetic growth rates of -3.0% to 2.5%, which the U.S. has realized since 2009 (i.e. their new normal).

Mr. Trump continued to discuss how his tax plan will disincentivize corporate inversions (where U.S. companies move overseas to capitalize on lower tax rates and cheap labor). He described how his plan will incentivize U.S. companies to bring an estimated $2.1 trillion (or more) in profits held overseas back to the U.S. for domestic investment. Both policies work to raise GDP, expand the workforce and boost tax revenues.

Trump also discussed his plan to balance our longstanding trade deficits with China, Mexico, Japan and other nations through imposing a scaled tariff. Since over the last decade, trade deficits with the three named countries alone amount to $2.7 trillion, $602.6 billion, and $716.5 billion, respectively, Trump’s balanced trade initiative could add another $4.1 trillion to the national economy.

Mr. Todd continued to interrupt, “We still have a hole in the deficit that this tax plan blows open; unless you tell us what you’re cutting.” Of course this is a classic gotcha question, since most liberals view cutting anything, even waste, fraud and abuse, as a negative.

Given the anemic growth rates he and other liberals are accustomed to, failing to account for the $1.8 trillion saved by exempting millions from income tax filing requirements, and gains realized through disincentivizing corporate inversions, recovering overseas profits, and balancing trade, Chuck Todd concluded that Donald Trump’s tax plan may add as much as $10 trillion to the debt over 10 years.

To this, Mr. Trump simply reiterated, “If we can get it (i.e. the growth rate) up to 5% or 6% it’s a huge difference.”

Mr. Todd again interrupted, “Okay, 6% is something we have not done.”

Trump refuted, “Well, we used to do it in the old days.”

It turns out that Mr. Todd is wrong, and that Mr. Trump, who has the kind of thinking America needs to solve its trade, growth, and debt problems, is correct. The chart here shows U.S. GDP growth rates from 1930 through 2014. Growth of 6% or more has been achieved numerous times in the past and is entirely possible in the future. The first step in getting there is to stop listening to know-nothing media pundits. The second step is to elect a president with notable acumen in financial matters.

“Solving a multi-trillion dollar problem just may require the mind of a billionaire.”

References:

Data Worksheet

Bureau of Economic Analysis – Interactive Data

30-Year Trade Deficit with Mexico

30-Year Trade Deficit with China

Tax Simplification, Part II – Saving $1,756 Billion, Overnight

Big U.S. firms hold $2.1 trillion overseas to avoid taxes: Study

An Economic Program for Stimulating U.S. Economic Growth

Phantom Tax Credit for Elderly and Disabled

/ L. M. Walker / 1 Comment

A Tax Credit in Name Only (TCNO)

– By: Larry Walker, II –

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

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

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

Maximum Credit

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

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

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

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

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

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

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

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

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

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

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

Limitations

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

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

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

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

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

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

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

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

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

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

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

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

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

  • $10,000 if Married Filing Jointly

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

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

The Problem

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Solution

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

Related:

Taxing Social Security Taxes

#Taxes

References:

U.S.Inflation Calculator

2012 Schedule R

2000 Schedule R

1990 Schedule R

1985 Schedule R

1984 Schedule R

1983 Schedule R

1981 Schedule R

1980 Schedule R

The Fiscal Responsibility Cliff

/ L. M. Walker / Leave a comment

Talk About Crazy Bastards…

– By: Larry Walker, II –

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

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

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

References:

Under Obamacare, Medicare Double Taxation Begins in 2013

Obamacare’s Effect on Small Business

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

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

Proposed regulations – Net investment tax

Related: #TAXES

Tax Fairness | Reverse Parity

/ L. M. Walker / Leave a comment

It’s Magic!

– By: Larry Walker, II –

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

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

So what’s the effect?

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

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

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

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

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

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

What’s wrong with this picture?

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

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

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

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

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

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

Reverse Parity Tax Effects

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

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

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

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

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

Related:

Taxing Social Security Taxes

#Taxes