Your Tax Question - 044

Okay, so you did not ask but I thought this was ironic so I will share. Of course taxes are frustrating but sometimes it is just bewildering to me what is actually in the code.

The government considers income to be any and all increase to your wealth. Any deductions that you receive from that income is solely and strictly at the leisure of legislative grace. There are two reasons that Congress will issue these reliefs to you: 1) to avoid double taxation and 2) to create a social action.

Under the concept of social action Congress has legislated (made law) that people who are involved in illegal activities are allowed to recapture their costs before they figure their net profit. Unless you are a drug dealer then you are not allowed to deduct these expenses from your business... ... ... I guess I am dumbfounded that congressional leaders actually think that this would actually be a deterrent to potential drug dealers. Maybe white collar drug dealers but really, Congress needs to visit the Cass Corridor of Detroit, or Woodward Avenue before they waste time coming up with this stuff.

I've also been thinking about how Congress does not tax Municipal Bonds (The investments of government municipalities). Is there a bit of admission that the activities of government need to have an added bonus to make them competitive in the market place? I find it thought provoking that none of my investment friends have suggested that I could make good money in muni-bonds. In fact, the only time they suggest such a vantage point is as I am to reach retirement for a safer investment... ... ... I'm just thinking.

So, these thoughts were not meant to help you as much as they were to share with you some of the ideas that are flitting through my head as I consider the tax code. I hope you didn't get scared off.

John

Your Tax Question - 043

Dear John, I was wondering why I should have you fill out my taxes rather than use the free services on the internet or buy the $30.00 software program. I can't imagine that your work is so special that it warrants me paying you more than those other services. Sincerely, James

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Dear James,

When I do your taxes there is something miraculous that happens. The heavens part and the sun shines down upon the earth in its full splendor, you can actually hear the angels of heaven singing the hallelujah chorus, and the sky rains down milk-chocolate.

Any other questions?

John

Your Tax Question - 042

Dear John, I heard that my employer would begin figuring the cost of my insurance premiums so that the IRS can tax me on that benefit as part of my salary. Grrrrr, this just fries me!!! How can the IRS charge my "fringe-benefit" as part of my salary? Frustrated, Sue

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Hi Sue,

Yes, your W-2 form for 2010 is required by The Affordable Care Act (May 23, 2010) to include the amount that your employer paid for your insurance benefits. However, you will not be paying taxes on this amount for it is supposed to be for information only.

The reason that our fringe benefits are presently not taxed as income is because of the grace of Congress. Congress allowed that perk in order to encourage companies to provide health coverage to its employees. If Congress ever wants to change its mind (for whatever reason) the IRS is only ever just one vote from collecting taxes on your fringe benefits. The frustration we feel about this is because we have never thought about insurance premiums that our companies pay for our insurance as taxable income - when it in reality it always has been.

Take care,

John

Your Tax Question - 041

Dear John, As the time to vote comes upon us, I hear certain political candidates platforming on their desire to initiate a Flat-Tax. I was wondering if you could explain how a Flat-Tax would benefit me as an American tax payer. Yours, Pete
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Hi Pete,

Thanks for asking about the Flat-Tax, I will try to explain it as I understand it.

The American system of taxation is based upon certain foundational concepts, and one of these concepts is the Pay-As-You-Go Concept and another is the Ability-To-Pay Concept.

If a straight Flat-Tax were enacted you would simply figure out your income at the end of the year and then pay a flat % rate as your tax. Receiving one giant bill on what you have earned in a year would be burdensome (even if that bill was just 10% of your gross income) for most people who live pay-check-to-pay-check. And because of the Ability-To-Pay Concept most people would not have the ability to pay that one giant bill at the end of the year. So these two concepts (Ability-To-Pay & Pay-As-You-Go) are to be respected when developing any basis for taxation in our country.

With that said then, a Flat-Tax system would be very beneficial to some people while being very burdensome to many other people.

* A Flat-Tax would make tax planning and preparation very easy but on the flip side of the coin It would also destroy the need to employ tax preparers, tax planners, accountants, CPA's, and the like. Yes, simplifying the system sounds good but have we considered how much of our economy depends on the system that we have? Imperfect as it is, it still is beneficial.

* And a Flat-Tax would be very beneficial to people the more wealthy they are and harder on the lower wage earners. 10% is easier to afford when you earn $100k verses $20k. It is still 10% to each but affording rent after taxes is still easier with $90k than with $18k.

In all honesty Pete, I would like the simplification of a Flat-Tax even though I would have to find other employment but I think the problems it would create for the lower wage earners and poor money mangers among us would be more harmful than good. However, what do I know, I'm just a tax guy.

My answer simply glances the depth of the discussion about Flat-Tax but I hope that it sheds a little light on it for you.

Best,
John

Your Tax Question - 040

Dear John, I read this booklet that has me a bit confused about what income actually is. It said that it is not legal for the government to charge taxes on the money that I earn from my labor. It makes sense but I am a little apprehensive about it. What is income in the government's eyes? Thanks, Clark.

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Hi Clark,

I am not sure what booklet you are referring to but I remember reading something that wanted me to invest in gold because they claimed that the IRS and the government was up to no good. I remember being impressed with the logic of the argument but I largely forgot about it and did not invest in their gold. That said, let me try to explain what income is in the government's eyes.

Income is simply the increase of wealth in any given tax period be it an increase from labor (earned income) or capital (unearned income). The concept of income is all-inclusive and only those items that Congress has granted grace from are excluded from determining income. For a good explanation of Gross Income for income tax purposes check out the article at Wikipedia.

When you are reading different materials about income taxes, always keep in mind that no matter what someone else explains it is always you who are responsible for your taxes. When the IRS comes knocking and asking for Clark, it will be you who is responsible for all penalties and fines.

Hope this helps,

John

PS. If you need further assistance please email me.