2012 Taxes: I'm Stupified...

[travelover]

Talk about feeling like you are cheating the system. Ole Warren pays 0% tax on his $40billion BECAUSE HE NEVER SELLS anything. Well, at least Warren will pay his fair share to our Federal Tax system when he dies. Oh wait, he is going to take advantage of the unlimited Charitable deduction, and never pay ANY SHARE, let alone his "fair share". Warren $40,000,000,000, US Tax system $0. But he can give advice about how much other people should pay in Federal Taxes. And people give credence to his advice. Warren Buffet, THE BIGGEST HYPOCRITE IN THE WORLD!!!!!

Don't ever feel guilty about not paying tax because you are in the 15% bracket, unless you start lobbying for higher tax rates for others.

I wasn't aware that we are taxed on our net worth, thanks for clarifying that.

 

[imoldernu]

Some people here, haven't had to pay federal income taxes in more than 23 years.

 

[pb4uski]

Talk about feeling like you are cheating the system. Ole Warren pays 0% tax on his $40billion BECAUSE HE NEVER SELLS anything. Well, at least Warren will pay his fair share to our Federal Tax system when he dies. Oh wait, he is going to take advantage of the unlimited Charitable deduction, and never pay ANY SHARE, let alone his "fair share". Warren $40,000,000,000, US Tax system $0. But he can give advice about how much other people should pay in Federal Taxes. And people give credence to his advice. Warren Buffet, THE BIGGEST HYPOCRITE IN THE WORLD!!!!!

Don't ever feel guilty about not paying tax because you are in the 15% bracket, unless you start lobbying for higher tax rates for others.

I think you need to check your facts and are also being a bit harsh.

Buffett has disclosed in a Forbes article that he paid 19% of his income in taxes in 2006 and disclosed a 17.7% effective tax rate more recently (2011 I think) so your assertion that he pays zero is factually incorrect.

It would be true that much of his wealth are unrealized capital gains and would not be taxed until such gains are realized (the same as it is for us less affluent folk).

If he gives his money to charity and never personally benefits from his extreme wealth what is the matter with the fact that he didn't pay tax on it? Besides, I'm guessing that his charitable deductions will do more good than if some of it went to the federal government and was then wasted on some pork barrel projects.

I wasn't aware that we are taxed on our net worth, thanks for clarifying that.

I assume he is talking about estate taxes, but ol Warren will avoid those by giving his money away.

 

[Midpack]

Talk about feeling like you are cheating the system. Ole Warren pays 0% tax on his $40billion BECAUSE HE NEVER SELLS anything. Well, at least Warren will pay his fair share to our Federal Tax system when he dies. Oh wait, he is going to take advantage of the unlimited Charitable deduction, and never pay ANY SHARE, let alone his "fair share". Warren $40,000,000,000, US Tax system $0. But he can give advice about how much other people should pay in Federal Taxes. And people give credence to his advice. Warren Buffet, THE BIGGEST HYPOCRITE IN THE WORLD!!!!!

Don't ever feel guilty about not paying tax because you are in the 15% bracket, unless you start lobbying for higher tax rates for others.

I think you need to check your facts and are also being a bit harsh.

If he gives his money to charity and never personally benefits from his extreme wealth what is the matter with the fact that he didn't pay tax on it? Besides, I'm guessing that his charitable deductions will do more good than if some of it went to the federal government and [some] was then wasted on some pork barrel projects.

+1, you indeed need to check your facts gcgang.

Warren's money is and will probably do more good in the form of charitable contributions than it would as taxes. What most charities do, would fall to government to do less efficiently more often than not (there's a role for both).

We need tax reform in the US, individual & corporate. There are more inequities and unintended consequences due to loopholes and deductions than rates - by a mile! While there are some corporations legally paying no taxes, there are others paying 35% plus/minus year after year, though many people want to paint all corporations with the former 'no taxes' brush. They're all public corporations so you can readily see what they pay in taxes in their annual reports - it's easy.

I can't think of many people more out front about the need for tax reform than Warren Buffett. Can you gcgang?

 

[HawkeyeNFO]

Some people here, haven't had to pay federal income taxes in more than 23 years.

Avoiding taxes is your responsibility.

Evading taxes is a crime.

When you tell most people your stories, they tend to think it's all the same thing.

 

[pb4uski]

Avoiding taxes is your responsibility.

Evading taxes is a crime.

When you tell most people your stories, they tend to think it's all the same thing.

While I agree, I would say avoiding taxes is a right rather than a responsibility, but that is a bit nit picky on my part. One of my favorite quotes with respect to taxes is from Judge Learned Hand:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

 

[LOL!]

Actually, I'm surprised that anyone is paying income taxes. The ol' 47% is now the new 94%. The money that was tax-free going in is also tax-free coming out.

Here's a good illustration from the TheFinanceBuff:
Fiscal Cliff Deal and Dividends and Capital Gains

 

[travelover]

............
I assume he is talking about estate taxes, but ol Warren will avoid those by giving his money away.

 

[audreyh1]

Actually, I'm surprised that anyone is paying income taxes. The ol' 47% is now the new 94%. The money that was tax-free going in is also tax-free coming out.

Here's a good illustration from the TheFinanceBuff:
Fiscal Cliff Deal and Dividends and Capital Gains

Thanks very much for that excellent link:

The new law is very generous to wealthy retirees, especially early retirees. When you manage your income to stay under the top of the 15% bracket (close to six figures for married filing jointly after you include exemptions and deductions), you can harvest capital gains every year. Eventually all your qualified dividends and long-term capital gains will be tax free!

 

[RunningBum]

The new law is very generous to wealthy retirees, especially early retirees. When you manage your income to stay under the top of the 15% bracket (close to six figures for married filing jointly after you include exemptions and deductions), you can harvest capital gains every year. Eventually all your qualified dividends and long-term capital gains will be tax free!

What changed in the new law? This has been true for some time, right?

Except I don't get the claim that "all" will be tax free. Only that you can keep under the top of the 15% bracket, right?

There's another trick that many of us know, which is to do a partial Roth conversion up to the top of that 15% bracket (including divs and cap gains, less deductions and exemptions). You'll owe some tax (10% up to 15%) on the conversion, but none on divs/CGs, but it's very likely to be a winner in the long run.

 

[MichaelB]

I assume he is talking about estate taxes, but ol Warren will avoid those by giving his money away.

Well, technically, he will avoid them by being dead. His estate will not pay because he gave his shares away, to a charitable cause.

 

[audreyh1]

What changed in the new law? This has been true for some time, right?

Except I don't get the claim that "all" will be tax free. Only that you can keep under the top of the 15% bracket, right?

There's another trick that many of us know, which is to do a partial Roth conversion up to the top of that 15% bracket (including divs and cap gains, less deductions and exemptions). You'll owe some tax (10% up to 15%) on the conversion, but none on divs/CGs, but it's very likely to be a winner in the long run.

If those gains and divvies are in a Roth IRA where withdrawals are tax free - you get the "all" will be tax free part. This scenario assumes that you can convert all your traditional IRAs and 401Ks so that most of your investment income will ultimately be tax free.

 

[RunningBum]

If those gains and divvies are in a Roth IRA where withdrawals are tax free - you get the "all" will be tax free part. This scenario assumes that you can convert all your traditional IRAs and 401Ks so that most of your investment income will ultimately be tax free.

Nowhere does the article even mention Roth conversions. The author doesn't make any hints about assumptions so I don't know what the scenario is here. If you have millions in unrealized capital gains, I don't see how you'll fit them all in under the 15% line unless you live to be 200, so I object to the unqualified "all will be tax-free" claim.

And again, I fail to see what "the new law" changes that the 2012 tax code didn't allow in this respect.

There's nothing really wrong in the article, other than not listing the assumptions and making it sound like this is a change, at least as far as I have read about the 2013 tax changes.

If I'm missing an actual tax law change to what I'd call middle income early retirees, I'd like to be pointed to it.

 

[audreyh1]

Nowhere does the article even mention Roth conversions. The author doesn't make any hints about assumptions so I don't know what the scenario is here. If you have millions in unrealized capital gains, I don't see how you'll fit them all in under the 15% line unless you live to be 200, so I object to the unqualified "all will be tax-free" claim.

And again, I fail to see what "the new law" changes that the 2012 tax code didn't allow in this respect.

There's nothing really wrong in the article, other than not listing the assumptions and making it sound like this is a change, at least as far as I have read about the 2013 tax changes.

If I'm missing an actual tax law change to what I'd call middle income early retirees, I'd like to be pointed to it.

Sorry, I read that in someone else's comment and got them crossed. I thought that was what he was referring to.

Maybe he is advocating tax gain harvesting every year to keep upping the retirement fund basis so you never have enough gains in any year to make them taxable. Maybe he thinks that is what he can do.

It is a new law that makes it permanent. The old one was temporary and expired after 2012.

 

[RunningBum]

Sorry, I read that in someone else's comment and got them crossed. I thought that was what he was referring to.

Maybe he is advocating tax gain harvesting every year to keep upping the retirement fund basis so you never have enough gains in any year to make them taxable. Maybe he thinks that is what he can do.

Oh, I agree he is, it's just that not everyone will be able to get them all for free. As a single filer, dividends alone push me fairly close to the top of the 15% bracket, even after deductions. I don't have much in unrealized cap gains now, but I do have a good sized IRA I would like to get fully converted to Roth, and I don't think I'll make it. I really was trying to figure out if there was a change that made this more possible, and haven't found one. Except for ...

It is a new law that makes it permanent. The old one was temporary and expired after 2012.

That's a good point, and while it doesn't change the strategy I had for 2012, it is good to know that I can do the same for the foreseeable future. Yes, it is a good deal for early retirees especially. Thanks.

 

[ejman]

I haven't paid much at all in federal taxes since I retired back in 2002. I guess being part of the great unwashed making less than $100K a year does have it's benefits. I just never dreamed that the crazy low tax rates for us retired paupers would be made "permanent" Wonders never cease. I wish the state of Oregon would get on the bandwagon now. I pay far more in State taxes than I do in Federal taxes. Time to move to Texas I guess!

 

[audreyh1]

I haven't paid much at all in federal taxes since I retired back in 2002. I guess being part of the great unwashed making less than $100K a year does have it's benefits. I just never dreamed that the crazy low tax rates for us retired paupers would be made "permanent" Wonders never cease.

The great unwashed, untaxed masses?

 

[Htown Harry]

Don't feel bad, Midpack. In fact, thanks very much for posting. (And great chart, LOL!)

For 5 years+ I have been reading innumerable posts with "I'm planning to harvest my capital gains" and until this thread I didn't fully understand the meaning.

Disclosures: Solidly in the middle of the accumulation phase. I'm several years away from RE and withdrawals. I haven't filed a schedule D or had dividend-paying investments in my after-tax accounts for number of years, i.e. I buy and hold almost 100% non-dividend-paying stocks in those accounts to minimize current taxes.

Even if I had filed Sch. D, our taxable income exceeds the 15% bracket - I probably would not have any reason to make Midpack's discovery even if I did have current taxable dividends and capital gains to report.

Also, all along I have been assuming that the "base" 15% dividend and capital gains rate I see in the news is applied to the first dollar and the last dollar of that year's div / CG income.

Thus I was reading the CG-harvesting posters' strategy as targeting the combined total of taxable income, dividends and LTCG's to avoid their next $1 of income being taxed at 25%. It made perfect sense in that context, as a way to manage taxes on discretionary withdrawals made from taxable accounts. Why make a withdrawal of $10 with $6 effectively taxed at 15% and $4 taxed at 25% when only $6 of cash is needed for living expenses?

It's now clear to me that I wasn't paying close attention. To learn that "capital gains harvesting" has been a much sweeter deal is revelation.

And to hear that it's now set to continue going forward with the fiscal cliff deal is even better news.

Time to rethink some of my biases against taxable accounts...

 

[samclem]

As a single filer, dividends alone push me fairly close to the top of the 15% bracket, even after deductions.

About those deductions: now that the 0% CG rate is permanent (within the 15% bracket) it increases the value of those deductions for those of us in the 15% bracket. Every dollar of deductions is another dollar of tax-free CGs we can harvest before hitting the top of the 15% bracket. This increases the case for keeping a mortgage (if, together with other deductions it will put one over the standard deduction), and for "bunching" itemized deductions to get above the standard deduction every other year or so.

There, I worked the much-loved mortgage issue into this.

Ah, the games we play. I wonder what percentage of Americans miss out on all of this? It's crazy.

 

[scrabbler1]

I haven't paid much at all in federal taxes since I retired back in 2002. I guess being part of the great unwashed making less than $100K a year does have it's benefits. I just never dreamed that the crazy low tax rates for us retired paupers would be made "permanent" Wonders never cease. I wish the state of Oregon would get on the bandwagon now. I pay far more in State taxes than I do in Federal taxes. Time to move to Texas I guess!

While I still pay more in federal income taxes than I do (New York) state income taxes, the gap between the two has shrunk significantly. When I worked full-time (before the Bush tax cuts), my state income tax bill was about 1/3 of my federal income tax bill. Later, when I worked part-time (and my investment income rose a lot), my state income tax bill became 40% of my federal income tax bill. But since I ERed 4 years ago, my state income tax bill became at least 75% of my federal income bill, often only a few hundred dollars apart. This is mainly due to my growing stock dividends and all LTCG (especially as a percent of my overall income) being taxed at 0%. Even a recent tax cut in my NY taxes does little to change the equation.