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Example: If you own a paid-off home, you can deduct your yacht.


16 ridiculous tax loopholes
https://www.msn.com/en-us/money/taxes/16-ridiculous-tax-loop...

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Free Obamacare for millionaires didn't even make the list. <LOL>


intercst
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The yacht thing is ridiculous (but doesn’t that same loophole also apply to RVs? I have a dim memory of that, but it could be wrong...) and the 15 day rental income—there should be a dollar cap on that.

But I really don’t see how the HSA thing counts as “ridiculous.” The cat food thing makes sense to me. Plus it’s probably $200 a year, so so what? What’s the problem re the home office deduction? It’s been around for years and I’ve used it myself.

The kidnapped child one is creepy and weird....

Anyway. Most of these don’t seem that ridiculous. Oddly specific, some of them, like the New Mexico thing, but not really ridiculous. Except the yacht. I’ll give you that one.
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Any article that starts out with "The Internal Revenue Service allows tax deductions ..." is automatically suspect due to poor research or poor understanding of the topic.

The IRS doesn't allow anything. Congress writes the law, not the IRS. The IRS, as a part of the Executive branch of government, enforces the laws that Congress writes. Granted, as a part of those enforcement duties they sometimes have to try to figure out what the heck Congress meant when they wrote the law. So in a few limited cases, it IS OK to say that the IRS allows something. But those are the exceptions.

Next, you don't have to have a paid off house to deduct mortgage interest on your yacht, motorhome, travel trailer, or second residence. You can deduct interest on your primary residence AND a second residence as long as you don't exceed the stated limits.

With two significant errors in the first two slides, I didn't bother with the rest. It's dropped below my "garbage article" threshold.

--Peter
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The yacht thing is ridiculous (but doesn’t that same loophole also apply to RVs? I have a dim memory of that, but it could be wrong...)

Not only does it apply to RVs, it applies to ALL 2nd homes, as long as they have cooking and bathing facilities. And it's permissible even if you still have a mortgage on your main home, so the way it was characterized in the article about only applying if your main home is paid off isn't really as bad as it should have been portrayed.

15 day rental income—there should be a dollar cap on that

It's actually a 14 night limit, not 15 days. But since the rental time cap was put in place specifically so that people in Augusta, GA could rent out their homes for the Masters golf tournament, I doubt there will ever be an income cap place on that. Now, with Airbnb and VRBO, many more people would be able to take advantage of this loophole than just those who happen to have a major golf tournament in their town, so it's actually less 'ridiculous' now than when it was put into place.

But I really don’t see how the HSA thing counts as “ridiculous.”

Especially since many people now have access to HDHP insurance policies - for some, it's the only type of policy their company offers. For people who are eligible for HSAs and can afford to pay for medical expenses without having to tap the HSA, HSAs actually are better retirement vehicles than 401(k)s, because the money tax-free going in (like Traditional IRAs) and will also be tax-free coming out (like Roth 401(k)s) if you have proof of what was paid for qualified medical expenses, so I would encourage people to max out their HSA before maxing out their 401(k).

Oddly specific, some of them, like the New Mexico thing, but not really ridiculous.

The specificity of all loopholes is directly attributable to Congress and the lobbyists.

AJ
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But I really don’t see how the HSA thing counts as “ridiculous.

I wouldn't say it is ridiculous necessarily. The part that is a little sketchy in my view is the HSA is a far more useful as a retirement account than a tool to lower your medical expenses. The only hitch is you have to keep track of your past years' medical expenses so you can deduct them in the future. But if you are willing to do that, it is the best retirement account available. And of course, people with the highest marginal rates get the most benefit from the tax deduction, and that group is the one the needs the least help affording medical costs.
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Not only does it apply to RVs, it applies to ALL 2nd homes, as long as they have cooking and bathing facilities.

Almost, but not quite. A home must have sleeping, cooking, and toilet facilities to qualify.

Ira
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The specificity of all loopholes

Rec just for using "specificity" in a sentence... :)

Draggon
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of course, people with the highest marginal rates get the most benefit from the tax deduction, and that group is the one the needs the least help affording medical costs.

That's the problem with using "tax deductions" to encourage or subsidize certain behaviors--it always has greater benefits to those with higher tax rates.

Now, let's drop this line of thought before some congressman/woman concludes that all should have higher tax rates so they can get better benefits from tax deductions for government-approved activities.
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With two significant errors in the first two slides, I didn't bother with the rest.

I follow "Money" on Twitter, and have found that of every ten interesting looking Tweets, following the link results in one or two useful articles. It's as if most are written for people who feel that they should be reading up on money and finance issues, but aren't really all that interested in anything that requires thought to be able to benefit them. I subscribed (for free) to "Money" magazine for a couple years because I traded points from frequent flier miles that were expiring. I got a lot more actionable items from the couple boards I followed on TMF.
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"That's the problem with using "tax deductions" to encourage or subsidize certain behaviors--it always has greater benefits to those with higher tax rates. "

I might be wrong, but I believe Canada 'solved' that issue by using tax credits rather than deductions. The same (lowest bracket) tax rate is used to calculate the tax credit for all 'deductible' items. So everyone gets essentially the same benefit for those items.

So the rich don't get an increasing benefit for deductions, just the same benefit as everyone. Of course, they don't have the issue of medical costs either because they collect those taxes via the income tax system and provide medical care for all.
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I might be wrong, but I believe Canada 'solved' that issue by using tax credits rather than deductions. The same (lowest bracket) tax rate is used to calculate the tax credit for all 'deductible' items. So everyone gets essentially the same benefit for those items.

So how does that work for things that vary, like the mortgage interest or property taxes one pays? Even using the lowest bracket to calculate the credit, someone who has a larger income could benefit more because they can buy a more expensive home, which leads to having a larger mortgage and higher property taxes to get credits for. So, I'm not seeing how that 'fixes' the issue of higher income taxpayers getting more benefit.

AJ
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Mortgage interest is not deductible in Canada. Neither is property tax in most circumstances (unless it is an expense against rental income or "work at home" self-employment).
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For one thing, mortgage interest is not deductible in Canada, so no tax credit is involved.
I'm not sure about property taxes, it's been a long time since I lived there but I suspect they are not considered deductible either.

Rationally, it doesn't seem to make sense to reduce federal income taxes for local property taxes. They are 2 separate entities. Why should the feds receive less money because we pay more to a local government?

In any event, higher income people will always be better off because they have more money. It's more a matter of trying to equalize the effect of taxes as much as possible.
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Mortgage interest is not deductible in Canada. Neither is property tax in most circumstances (unless it is an expense against rental income or "work at home" self-employment).

So what is deductible in Canada, and is there any variation in what higher income taxpayers spend on that vs. lower income taxpayers? I only used mortgage interest and property taxes as examples because they are 2 things that are deductible in the US, and it seemed as though the 'solution' was being proposed to solve an issue that the US has.

It still seems to me that the 'solution' of offering tax credits only works if there is no variation in what those with higher income spend vs. those with lower income. For instance, it looks like Canadians can deduct, or claim credits for, child care expenses https://www.canada.ca/en/revenue-agency/services/tax/individ... Do you really think that a high income taxpayer is going to pay the same amount for child care as a low income taxpayer, and therefore get the same credit on their tax return? Especially since the child care costs can be anything from subsidized daycare up to and including boarding school, or a live in nanny? https://www.canada.ca/en/revenue-agency/services/tax/individ...

AJ
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Example: Assume low-income person pays 10% income tax and high-income person pays 25% income tax.

There is NO deduction from income, there are only tax credits.

In Canada, if the low-income person spends 10,000 per year on child-care, he gets a tax credit of 1000. If the high-income person spends 20,000 per year, he gets a credit for 2000.

In the deduction system we use in the US, the low-income person would deduct 10,000 from his income which means he saves 1000 in taxes but the high-income person would deduct 20,000 from his income which means he saves 5000 in taxes rather than the 2000 under the Canadian system.

It's not really complicated, it just takes a different way of looking at income taxes. In the US, individuals look for ways to reduce our taxable income. In Canada, that's not possible so individuals look for ways to reduce the taxes due. But the rich are no more advantaged in their search than the poor.

So it's not equality of outcome (they pay different amounts), but it is equality of tax rates which seems as fair as likely possible.
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Rationally, it doesn't seem to make sense to reduce federal income taxes for local property taxes. They are 2 separate entities. Why should the feds receive less money because we pay more to a local government?

Why should someone be taxed on income that they pay in taxes?
Isn't that like be double taxed?

Mike
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"Why should someone be taxed on income that they pay in taxes?
Isn't that like be double taxed?"


Well yes it is, but it's not double taxing by the same government that is taxing the income.

It's nothing unusual - sales taxes, hotel taxes, fuel taxes, road taxes, car rental taxes and a host of taxes that show up on your TV and phone bills are a few that aren't strictly deductible.

Our tax system is almost as messed up as our healthcare system...
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Example: Assume low-income person pays 10% income tax and high-income person pays 22% income tax.

There, fixed that for you, since the marginal rate that used to be 25% is now 22%

In Canada, if the low-income person spends 10,000 per year on child-care, he gets a tax credit of 1000. If the high-income person spends 20,000 per year, he gets a credit for 2000.

So the high income person still benefited more from the tax system, since they got a $2000 credit vs. the $1000 credit that the lower income person got.

In the deduction system we use in the US, the low-income person would deduct 10,000 from his income which means he saves 1000 in taxes but the high-income person would deduct 20,000 from his income which means he saves 5000 in taxes rather than the 2000 under the Canadian system.

Actually, in the US, the child care tax adjustment is a credit, and it's capped at $2000, of which $1400 is refundable. And the lower the person's AGI is, the higher the percentage of income that's returned - up to 35% In this case, the highest the AGI could be to still be paying in the 10% bracket with a standard deduction ($24k for MFJ; $18k for HoH and $12k for Single) would be someone who was MFJ and made $43,050 At an AGI of $43k and above, the taxpayer gets a 20% credit - so the low income taxpayer would get 20% of $10000, or $2000 The high income taxpayer would get 20% of $2000, or $4000 - except that the credit is capped at $2000, so they get $2000, just like the low income taxpayer.

So it's not equality of outcome (they pay different amounts), but it is equality of tax rates which seems as fair as likely possible.

Not sure why the same outcome in the US isn't more fair than the outcome in Canada, where both the high and low income taxpayers get the same benefit in the US, while in Canada, the high income taxpayer gets more benefit.

AJ
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Ralph asked me to pop in on this discussion. Can't answer all questions as I'm 71 and using up lifespan. }};-D

Somewhat interestingly one of my SIL's is an "Expert Witness Corporate Tax Law" in both Canada and US though the vast majority of his work is US.

Tim

RE: Hix. The tmf tax discussions

OK I found the thread but it isn’t what I thought it was. Yes Canadians don’t get a deductions for mortgage interest. Probably part of the reason our mortgage default rate is less than a quarter of 1%?

Mike: Yes we don’t get to deduct property taxes for a privately owned property. Property taxes are municipal and they provide all the services but do not collect income tax like provinces and feds do. Municipalities are also not allowed to run an operating deficit so set the rates accordingly.

I can’t really help with the Childcare thingy as it all changed ~ three years ago and my kids are in their late 40s. You are however welcome to read or post this stuff.

https://www.canada.ca/en/revenue-agency/services/child-famil...

Neuromancer is correct that effectively everyone gets the same benefit.

Re: Of course, they don't have the issue of medical costs either because they collect those taxes via the income tax system and provide medical care for all.

Fundamentally correct, importantly ‘Single Payer is a bit of out of place as each province runs their own paid for jointly by the Province and the Feds from revenue that must meet Federal standards. There are also employment taxes collected from employers and employees that cover CPP (Canada Pension Plan), EI (Employment Insurance) and income tax deductions. We also have a federal sales tax and all but one provinces has a provincial sales tax, usually they are combined as an HST (Harmonized Sales Tax) at point of sale. The HST is not collected on food, prescriptions or children’s clothing.

Income tax is of course the big gorilla in the room. One major difference is that Canada collects income tax only on residents like most of the rest of the world. Canadians who work overseas do not pay income taxes to Canada on their overseas earnings. I worked in Germany for many years and quite enjoyed paying a small “treaty rate” on my Canadian military pension.

The rest I’m not even going to try to explain as there are lots of places to find the info online.

https://www.canada.ca/en/services/taxes/income-tax/personal-...

https://www.canada.ca/en/revenue-agency/services/tax/individ...

<<<Federal tax rates for 2018
• 15% on the first $46,605 of taxable income, +
• 20.5% on the next $46,603 of taxable income (on the portion of taxable income over 46,605 up to $93,208), +
• 26% on the next $51,281 of taxable income (on the portion of taxable income over $93,208 up to $144,489), +
• 29% on the next $61,353 of taxable income (on the portion of taxable income over 144,489 up to $205,842), +
• 33% of taxable income over $205,842.
>>>
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One major difference is that Canada collects income tax only on residents like most of the rest of the world. Canadians who work overseas do not pay income taxes to Canada on their overseas earnings. I worked in Germany for many years and quite enjoyed paying a small “treaty rate” on my Canadian military pension.

Well speak of the devil, someone must have noticed my post and decided to fix the problem? }};-D

I posted this over on METaR, anything else I can help y'all with?


Tim

https://boards.fool.com/us-tax-woes-good-bad-and-ugly-340912...
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