Tax & Economic Education

[Bug Lover]

OK - so the last thread I was on got me to thinking about how tax increases can hurt lots of people, not just the so-called rich. Just so happens, I'm both employed by someone else and a small business owner. I also do my own taxes and keep an eye on how my income affects my own return.

My first subject is the inheritance tax. So, right now, that's not much to worry about for most, but there is an expiration date on the bill that raised the taxable value to where it is now. If it is allowed to expire, an estate worth over $600,000 will again become taxable. Maybe you don't think it will affect you, but it might and estate taxes aren't cheap - like 45%.

Suppose you die owning a house, a car, a life insurance policy, an IRA or 401(k), and a few other things, maybe some land you bought for retirement - maybe your parents left you some stocks. Think about this - your house is worth $200,000, your life insurance policy is worth $200,000, you have $100,000 in your retirement fund, and that land you bought for your retirement is worth about $100,000. You're already up to $600,000 and you haven't even counted your other assets.

So, do I have your attention? Most people don't consider themselves "rich enough" to be concerned about the inheritance tax, but if that bill expires, you just might be. You didn't work your hind end off all your life just to give half your estate to the government to turn around and give it to some lazy woman popping out a baby every few years so she can continue to receive welfare.

More tax issues to follow...

[markd79ta]

My niece's dad had to sell half of the family ranch when his mother died in order to pay the tax. That is complete garbage!!!!!!!!!!!!!!!!!!!!!!!!!! When he dies, that family ranch, which goes back 150 years, will be gone.

[Performin Norman]

Estate planning. Just do it. Whether it be living trust, will or whatever works for you. Just make sure you protect your family.

[Bug Lover]

Losing tax deductions

OK - my next subject is losing tax deductions. Maybe you don't make enough to worry about this right now, but by the time your children go to college, you might.

A married couple living in a large city trying to make ends meet both work and live in an average looking ranch house, one of the less expensive houses in their neighborhood. Joe and Mary use most of Joe's income to pay the house note and Mary's income is used for everything else for themselves and their two daughters, one of whom is in college. Last year, they had an adjusted gross income (IRS term - AGI) of about $100,000 - $45,000 for Mary and $55,000 for Joe. (That may sound high to some, but it's not really considering where Mary & Joe live.)

So, when they filed their return, they tried to claim some of the education deductions and credits related to sending their daughter off to college, but because their AGI was over $94,000 they were limited. If their AGI had been $114,000, they would have received no deductions or credits for all those expenses. Not only did they lose the child tax credit when their oldest turned 17, but now they're losing credits that should have helped pay for college.

Now think about this, what if Mary and her brothers own a farm that really only has sizable income once every 5 to 10 years - they grow trees. What happens to those deductions in a year when the income just happens to higher?

There are lots of other deductions that you start losing as your income increases (even when you're struggling to make ends meet), so when someone suggests increasing your 401(k) deduction, you might want to take that advice. Unfortunately, there are politicians out there that would like to tax your 401(k) and/or IRA too. Keep that in mind on election day.

[Bug Lover]

Estate planning. Just do it. Whether it be living trust, will or whatever works for you. Just make sure you protect your family.

Good advice - unfortunately, even the best estate planning is subject to time and changes in tax law. When I worked for the CPA firm, I knew a woman who placed a couple of her assets in a business with the intent of periodically "gifting" portions of the business to her children, so as to reduce her taxable estate. Unfortunately, she died before much could be distributed and before the taxable value was increased to be above $800,000. It didn't take much to get her there because the house she had bought for about $60,000 had increased in value to well above $300,000 and she still had the farm, along with a few other assets used to support her in her retirement. Her family ended up giving the IRS more than $40,000.

[Bug Lover]

Corporations - Part I

Now for a little something else to think about - have you ever heard someone talk about double taxation? I heard someone on TV the other night saying that there was no such thing, but I can tell you that there most certainly is.

A corporation is an entity owned by shareholders. If it is a traditional C-Corporation, the shares may even be traded on the stock market. No, not all corporations are publicly traded, but some are.

When a traditional C-Corporation files a tax return, it is taxed on its income in a manner similar to that of an individual. So, when the corporation pays a dividend, which is a division of the company's profits after taxes, the person who owns stock in that company also pays taxes. That is one way in which we have double taxation and it is the way that most people mean when you hear them discussing it.

[Bug Lover]

Corporations - Part II

In Part I, I referred to a C-Corporation, but there is also something called an S-Corporation. C-Corporations have an unlimited number of shareholders and pay tax directly, while S-Corporations have a limited number of shareholders and don't directly pay tax. The income from an S-Corporation flows through to the tax returns of the individuals who own it in much the same way as a partnership or a sole proprietorship.

According to this article - http://www.acec.org/advocacy/pdf/lp04_scrfm.pdf - "There were nearly 2.6 million S-corporations in the United States in
1998, an increase of about 500,000 since 1980. S-corporations currently outnumber both C-corporations and partnerships." S-Corporations help eliminate the double-taxation problem of a C-Corporation, but when the business income flows through to an individual, it can be a real kicker to your personal tax return. Even the owners of partnerships and LLCs have this problem.

When you own stock in a C-Corporation, you only pay tax when (or if) the company decides to pay a dividend and that is AFTER the C-corp has already paid taxes. With an S-Corporation, you pay tax on the income whether the company gave you a cash distribution or not.

I've been doing bookkeeping and tax stuff for over 25 years and I've seen a lot. I've worked for both types of corporations and have even attempted to work for myself. Increased taxes can be extremely harmful to even the smallest of businesses.

[Jeff_in_Atl]

Most people will read this thread and think how boring and I don't really care but this election will mean big changes in the tax structure which will ultimately effect everybody in either increased taxes or loss of jobs due to higher taxes on their employer. People really should care more but it is boring.