Perspective on Income Taxes

[frayne]

Folks, there are industries built around keeping our current tax system convoluted and complicated, and they ain't going away ever ! Too many with vested interests in keeping the system just the way it is. The best any of us can do is play the hand we are dealt, the best we can, based on the rules as we know them at any point in time.

[MichaelB]

Quote:

Originally Posted by copyright1997reloaded No comment on other posts, but I will note that a 40K 1982 salary is roughly the same as a 152K salary today (using average wage index to compare). So, to look at marginal and effective rates you would need to compare it to a 152k/year salary in todays $.

The marginal tax rate in 1982 for $35k of taxable income was 39%, which is greater than the highest marginal tax rate today (37%).

[Car-Guy]

Quote:

Originally Posted by frayne Folks, there are industries built around keeping our current tax system convoluted and complicated, and they ain't going away ever ! Too many with vested interests in keeping the system just the way it is. The best any of us can do is play the hand we are dealt, the best we can, based on the rules as we know them at any point in time.

+1 Absolutely agree with that!

[Koolau]

Quote:

Originally Posted by Car-Guy +1, however, without going into detail, "I'm okay" with helping those who really tried and just couldn't make ends meet...

Heh, heh, I'll PM you my address. I could use about $50K this year, thank you.

[Koolau]

Quote:

Originally Posted by Gumby There was a time in my life when my marginal tax rate was 39.1% federal and 6.85% state, so I'm running short on sympathy for all those who are being "penalized for success".

Yeah, I used to have to pay AMT for heaven's sake! Don't recall even making $50K at the time.

Much better now.

[Chuckanut]

Quote:

Originally Posted by Sunset Wealthy folks would just buy items from other countries and pay no sales tax to US, like they do now, same with large corporations.

Isn't that what happened with the luxury tax on Yachts years ago? The yacht businesses went overseas, jobs were lost in the USA, and the government did not get the increase in revenue that it projected. IIRC.

I have to constantly remind myself that, as a group, we elect these people.

[Montecfo]

Quote:

Originally Posted by Sunset Wealthy folks would just buy items from other countries and pay no sales tax to US, like they do now, same with large corporations.

We have laws on the books now in every state that has a sales tax which include a parallel tax on the "use" of goods otherwise subject to sales tax. It is called the "use tax" as in sales and use taxes.

So this issue is relatively easy to address.

[mwilson]

Quote:

Originally Posted by TheWizard They've already simplified the tax code by eliminating deduction of more than $10,000 of SALT, thus making a lot of us take the standard deduction instead...

2017 tax bill also complicated things by trying to make the 1040 fit on a postcard - which lasted 1 year before being expanding to nearly a whole page PLUS the new schedules 1, 2, 3.

The tax bill also introduced more complexity in the QBI/qualified business income deduction (which has 70%+ marginal rates around the phaseout potholes) and dealing with the various state attempts to get around the SALT cap.

The cherry on top is that it increased my tax prep fees by 50% while taking away the deduction for those fees!

[jollystomper]

Quote:

Originally Posted by frayne Folks, there are industries built around keeping our current tax system convoluted and complicated, and they ain't going away ever ! Too many with vested interests in keeping the system just the way it is. The best any of us can do is play the hand we are dealt, the best we can, based on the rules as we know them at any point in time.

+1. Best one can do is educate ones self on the legal options one has available to them to best manage taxes. I recall the first time our tax bill was over $50K, DW was shocked when she saw that on the return. Of course I pointed out to her that "well, we paid that much because we made a lot, and were still able to save/invest" .

Frankly - and I hope this does not start the bacon sizzling - I am more concerned with the constant "finger pointing" that keeps vocalizing either "those people are not paying enough in taxes!" or "those people pay too little in taxes!". Divide and conquer at its finest.

[scrabbler1]

Quote:

Originally Posted by mwilson 2017 tax bill also complicated things by trying to make the 1040 fit on a postcard - which lasted 1 year before being expanding to nearly a whole page PLUS the new schedules 1, 2, 3. The tax bill also introduced more complexity in the QBI/qualified business income deduction (which has 70%+ marginal rates around the phaseout potholes) and dealing with the various state attempts to get around the SALT cap. The cherry on top is that it increased my tax prep fees by 50% while taking away the deduction for those fees!

After seeing her on C-Span in February of 2019, I wrote Nina Olson, who at the time was the head of the Taxpayer Advocate's office, about how the new tax forms were terrible because of the way they chopped up the old 1040 into pieces and made us file several of those extra schedules, some of which contained one number (or, even no numbers) which got copied back onto 1040. Apparently, Ms. Olson did something which worked because the 2019 forms had moved several items back onto the 1040 form, so I didn't have to file most of those new schedules again.

The one item they still have on a separate schedule which puts me in the one-number territory is the ACA net subsidy (credit) from Form 8962. With all the people who use the ACA, why can't that one get back on 1040 so the one-number schedule would disappear, too?

[pb4uski]

While from a public policy perspective it's tempting that everyone that has income pays income tax, even if it is just a little, the practical reality is that it would be an administrative nightmare, adding tens of millions of tax returns to collect $100-$1,000 per taxpayer or household. And the IRS is stretched so thin they can't go after the bigger fish. Besides, if you have millions of low income people filing tax returns how many errors are likely? It's the stuff of nightmares.

[CardsFan]

I'll try to get back on topic.

My data does not go as far back as Midpack's, but from what I can pull together, in the 2000's while working our Fed effective tax rate ranged from 15% to 20%. I am sure it was higher in the 80's and 90's.

Since retiring, our effective Fed rate has been as low as 5-6% (Roth conversions only in the 12% bracket, no SS), to a high of 12% (Roth conversions almost to the top of the 22% bracket and started SS).

Since current conversions are about what our RMD's would be if we started today, around 12% is where I expect us to be for at least the next 10 years (of course if the current brackets sunset, then a few points higher).

So, I can b*tch and moan and complain about taxes, or I can look at this and say "In the grand scheme of things, our taxes are pretty reasonable"

[braumeister]

Quote:

Originally Posted by pb4uski if you have millions of low income people filing tax returns how many errors are likely? It's the stuff of nightmares.

When this income tax began, over a century ago, the first 1040 form was four pages long with one page of instructions. Even worse, there were no tables with precalculated amounts; the taxpayer had to actually do the math. I shudder to think what that would be like for most people today. Truly a nightmare.

[aaronc879]

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Originally Posted by Yipper The proposal actually eliminates income tax, estate tax and corporate income tax.

What about State sales tax. Is this in addition to the State tax?

[MichaelB]

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Originally Posted by pb4uski While from a public policy perspective it's tempting that everyone that has income pays income tax, even if it is just a little, the practical reality is that it would be an administrative nightmare, adding tens of millions of tax returns to collect $100-$1,000 per taxpayer or household. And the IRS is stretched so thin they can't go after the bigger fish. Besides, if you have millions of low income people filing tax returns how many errors are likely? It's the stuff of nightmares.

We do have more than 100 million people paying taxes on their incomes automatically with little effort or complications. They are payroll taxes, which are taxes on wages with another name.

[Cobra9777]

I guess all the mods have been napping today. This thread should have been shut down before post #10.

Quote:

Originally Posted by Midpack PLEASE don’t turn this thread into political commentary on income taxes, that was not the intent.

Well, when you use words like "confiscatory" in the OP, it's like poking a sleeping bear with a stick.

[fishfactory]

Midpack, I am also converting big time right now believing that they will raise rates drastically over time despite the fact that the total dollar amount actually collected varies little over the wide range of tax rates.

[Sunset]

Quote:

Originally Posted by Montecfo We have laws on the books now in every state that has a sales tax which include a parallel tax on the "use" of goods otherwise subject to sales tax. It is called the "use tax" as in sales and use taxes. So this issue is relatively easy to address.

For the average Joe they will pay on their car, and fishing boat, but if I buy a $40M yacht in Greece and register it in Antigua, my State won't even know about it, and I wouldn't feel any need to report it since the money was not spent in the USA.

Maybe it's one reason Cruise ships are registered in the Bahamas and not Florida.

[athena53]

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Originally Posted by Sunset For the average Joe they will pay on their car, and fishing boat, but if I buy a $40M yacht in Greece and register it in Antigua, my State won't even know about it, and I wouldn't feel any need to report it since the money was not spent in the USA. Maybe it's one reason Cruise ships are registered in the Bahamas and not Florida.

On your last sentence- no, it's FAR more complicated than that. US-flagged vessels are subject to US maritime law, which means they can't get away with hiring nationals from developing countries and paying them crap wages, among other things.

On Use taxes: yeah, I was the average Jane- bought a car in IA because that's where my old one broke down, didn't have to pay IA taxes but got nailed with MO taxes when I registered it in MO.

But, to your point, the "rich" (however you want to define them) have alternatives ordinary mortals don't, some of them perfectly legal, such as re-domiciling to FL to avoid personal income taxes. Tax them beyond a certain level and they won't just sit there and pay them. They'll hire a good accountant and find a way out of them.

[sroby2020]

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Originally Posted by Midpack Federal taxes were WAY more confiscatory then! Looks outrageous to me today.

The current tax rates are abnormally low. I suspect that when they expire in 2025, the party that controls Congress/Senate will either jack them way up, or keep them low for a few more years. I would love it if they would stay low for the next 30 years... I guess if they go way up after 2025, then my conversions may stop.
I too, am doing my Roth conversions for about 7 more years, maxing out the conversions to the high end of the 24% bracket (MFJ). The main reason is that, as some have mentioned, with pensions, Social Security and then RMD's it would give me way more taxable income than I need or desire.