Ok, I realize this is just venting - however,it occurs to me after studying up on the more popular tax breaks or credits - specifically, those related to:(a) having children and childcare expensese(b) being in college and/or paying for college-related expenses(c) IRAs(d) various and sundry deductible Schedule A expensesthat lawmakers obviously know that those most eligible to receive these breaks are also those least likely to have the money for such expenses (and therefore may be unable to invest in IRAs, unable to afford children, can't go to college, unable to afford to be in a position to incur misc. business or investing expenses)and that those most likely to have the money for such expenses are more than likely to be disqualified due to AGI limitations.In other words, this is just a way for the Government to appear to be benevolent - but let's face it - those in their peak earning years are the same ones most likely to have need of such breaks, so it just looks like a thinly veiled PR scam to me.I would be interested in hearing dissenting opinions. Actually, I would love to be convinced otherwise.Thanks for listening - MSpice
Maybe I'm just slow this morning, but I really don't understand what it is that you're going on about.It is true that people with lower incomes have fewer discretionary dollars to spend. They may not be able to fully fund an IRA. They may drive beat up jalopies. And they may well find it prudent to put off having kids until they get somewhat on their feet financially. But they also pay far less in taxes than those with higher incomes - indeed, at the lowest level, there is the Earned Income Credit.I would be the last one to claim that our tax system is fair in all respects. It's hideously complex, and if you're stuck taking the standard deduction then you miss out on a few breaks. But in the main, low-income taxpayers pay little in taxes, high-income taxpayers pay a lot. I'm hardly a George Bush Republican, but there's something to be said for his idea that taxpayers in the higher brackets should get the bulk of the tax relief - after all, they pay the bulk of the taxes.You seem to have some funny ideas about Sched A deductions. I've been a low-bracket taxpayer and a high-bracket taxpayer; these days I'm happily retired from a federal government career. (No, not the IRS!) Over the years, the great bulk of my itemized deductions have been just three things: taxes (state/property), interest (home mortgage), and charitable contributions. That's it. It's true that for most people it takes a home purchase to push them into itemized deductions. But I also believe that anyone with a stable job can afford to buy a home - maybe a condo or a townhouse, or maybe a small, older house in a not-so-great part of town. But it's yours, and it's something to build on.Kids are a terrific expense, but also a great joy. If you choose to have them, there are some associated tax breaks. Likewise going to college. It isn't cheap, but it's a damn good idea - and what with loans, financial aid, community colleges, on-line education, and the like, I think that anyone who wants to get a higher education badly enough can manage. Maybe not at Harvard, but the place is less important than the principle. And maybe it'll take 8 years of evening classes instead of 4 years in a frat house, but it still counts in the end. Again, if you pursue college, or help your kids with college, there are certain tax breaks to be had. IRAs are a terrific idea. Maybe you can't fund one fully ($3000/year these days) but any amount is better than none.I guess I'm an optimist. I believe that if you work hard at what you want, and make good choices, you'll succeed in the end - and you'll get some of those elusive breaks/credits you're looking for.Lorenzo
... It's hideously complex, and if you're stuck taking the standard deduction then you miss out on a few breaks. ...I agree with everything Lorenzo wrote except the sentence I quoted above. If you are taking the standard deduction you are getting a tax break that the rest of us are missing. If everyone were forced to itemize deductions, those who currently take the standard deduction would be entitled to a smaller deduction than the standard one.On the other hand, while those of us who itemize deductions may pay less income tax than we would if we took the standard deduction (for the same income level), we have spent real dollars to qualify for the deductions allowed in the tax code. And we spend more dollars than the size of the benefit we receive.One must always keep in mind that the tax laws are designed to accomplish two things: raise money to pay the government's expenses, and provide social engineering. Deductions and credits are established to encourage certain societal behaviors and to discourage others. Ira
Re the standard deduction, irasmilo's right, as usual. In fact, I have a friend who asserts that you will come out way ahead if you take the standard deduction in alternate years, shifting as many deductible-type expenses to the other years. That is, make no charitable contributions in even years, and twice as many in odd years. Pay no state taxes in even years, and twice as much in odd years. Likewise property taxes. Ok, you may wind up paying the odd penalty here and there, but allegedly you'll recoup that with higher average deductions. This sounds loony to me, and I've never tried to work out the details, not do I want the hassle (and possible jail time every other year). But still, it's nice to see that there are some original thinkers out there...
Re: every other year deductionsYes, this works nicely. The IRS mandates that deductions have to be applied in the year they were paid, but they can't tell you in which year you have to pay things that are deductable. For example, lets take an overly simple case of a single person with no deductions except for their annual giving to a charity. To make the numbers come out dramatic, lets say this person normally gives $4,000 a year to the charity. For 2001, the standard deduction for a single person is $4,550, so if the person gives the $4,000 this year, it is effectively not deductable for them. (i.e. Donation or not, this person gets the $4,550 standard deduction so the donation doesn't change their tax position at all.) I'm not sure what the standard deduction rates are for 2002, so lets say it is the same as this year. If the person makes the $4,000 donation each year, here is what happens:2001: $4,000 donation made, total deduction = $4,5502002: $4,000 donation made, total deduction = $4,550-----total deductions over the two years: $9,100Now, if this person bunches up the deductions by paying everything in 2002, this is what would happen:2001: $0 donation made, total deduction = $4,550 (remember, they still get the standard deduction amount)2002: $8,000 donation made, total deduction = $8,000 since the actual deductions exceeded the standard deduction.-----total deductions over the two years: $12,550Bunching deductions for which you control the timing into "even/odd" years like this works out. (For examples, charitable contributions, prepaying mortgage interest, prepaying property taxes, etc.) Without working out the math in detail, I think the closer your average "real" deduction level is to the standard deduction and the less your unmovable deductions are, the more you benefit by this bunching. Just make sure the bunching is legitimate: If you contribute some $$$s at the end of December you can't say "oh, lets pretend it was paid a week later in January" to achieve the bunching. Again, the IRS can't mandate when you pay a deductable item, but they do mandate that is has to reported in the year paid. This takes some planning.
...Bunching deductions for which you control the timing into "even/odd" years like this works out. (For examples, charitable contributions, prepaying mortgage interest, prepaying property taxes, etc.)... This doesn't work as well with prepaying mortgage interest and property taxes because you can only prepay one payment worth. Most mortgage lenders will consider extra payments (more than one month early) as a reduction in principal. However, if you pay estimated state income taxes, you can time your 4th quarter payment. The payment is typically due on 1/15 of the next calendar year. You can make the payment on 12/31 to bunch. Ira
>This doesn't work as well with prepaying mortgage interest and property taxes because you can only prepay one payment worth.You are correct that mortgage interest is hard to prepay well in advance. Estimated property taxes can be easily paid the full year in advance, however, if there isn't any property tax escrowing being done. If it is being escrowed, it would get a bit more complicated but even in this case I bet one could directly prepay to the local community and then warn the escrow agent to expect a $zero bottom line on the next bill. The escrow agent is there to make sure the property tax is paid to protect the mortgage company, so why would they object to a homeowner paying more in advance?
You are correct that mortgage interest is hard to prepay well in advance. Estimated property taxes can be easily paid the full year in advance, however, if there isn't any property tax escrowing being done. If it is being escrowed, it would get a bit more complicated but even in this case I bet one could directly prepay to the local community and then warn the escrow agent to expect a $zero bottom line on the next bill. The escrow agent is there to make sure the property tax is paid to protect the mortgage company, so why would they object to a homeowner paying more in advance? I really should have said something like "one billing cycle", not one "payment". Once your full real estate tax assessment for the year is fixed, you can pay it in a single payment and can time the payment to bunch deductions. Ira
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar