More details of the GOP tax plan have leaked, and the new tax brackets look enticing (other than that we won’t have the funds to support infrastructure needs in the country) — on an individual level, even with the marriage penalty on the SALT deduction ($10k can be deducted per individual OR $10k per married couple), the actual brackets are promising in removing the marriage penalty for everyone except those who make over $600k as married filers. Continue reading
Since we’re not multi-millionaires (yet?) or owners of multi-national corporations, it’s unlikely the GOP tax plan (likely to pass in some incarnation of the House and Senate approved plans from earlier this month) will be good for us. Continue reading
As I mentioned in my recent post, I’m currently looking into what health insurance to select for next year. I have the options of Anthem HDHP, Anthem PPO, Anthem HMO and Kaiser HMO.
Typically, as a healthy-ish young adult, I’d select the HDHP. I’ve always been a proponent of HSAs, but now I’m not so sure – especially living in California, one of the two states in the country that doesn’t recognize HSAs as pre-tax income. It’s actually a rather complicated tax situation in CA that no one explains well… and I’m unsure if even I’ve been filing my taxes right with my HSA all these years!
What is an HSA?
An HSA is a supposedly tax-free account for healthcare costs. If you have an eligible health plan, you can contribute up to a certain amount per year (~$6900 for a family next year) which is put into the account pre-tax* and then you can invest that money and whatever it grows to you can take out tax free if used for qualified medical expenses at any point in your life. It sounds like a really good deal… and it is… except HDHPs have “high deductibles” and, even more troubling, HSA plans typically have very high fees that eat into any growth you see unless you are a wise investor (AND have access to good investing options, rare in typical employer-sponsored HSA accounts.)
*HSA Rules in California
What makes matters worse, California (and New Jersey) doesn’t recognize the HSA at all. So, any money you put into it is taxed as income. That seems to be handled automatically via the W2, since the employer makes those contributions on your behalf. But then you also (and I didn’t actually know this until yesterday) are supposed to pay taxes on dividends and any interest earned in the account annually. My HSA account is relatively small (it’s now about $7000) BUT I have to go back and amend returns likely if I have any earnings on the account each year. I did actually merge two accounts which, since both accounts did not have the same funds, required selling all of my funds to roll them into the other account last year. I’m guessing that will hit my 2017 taxes — and I’m not clear yet if gains will be taxed as long term capital gains or income. Not one HR person has explained this or mentioned this in all my years working… probably because they aren’t allowed to give tax advice… but it seems like something they should mention.
“Depending on what kind of annual statement the financial institution sends out, it could be extremely difficult to figure out how much HSA income account holders should report on their California tax return each year.” – SF Chronicle
Yup. I don’t recall ever getting annual notices regarding my HSA account’s tax information. The good news is that now that I’ve transferred all of my old funds to HSA Bank, I at least will have my records in one place – for this year. Well, sort of. I have two months worth of HSA funds at my new employer – though I’ve heard they’re actually using HSA bank now and transferring to a new system. I should probably check on that, since I have no idea where my new HSA funds are at the moment. Next year it will be a different bank that apparently provides fewer investment options in “funds.” This may still be worth it for the federal tax savings (over many years, as a retirement health account) BUT it’s troublesome that California is refusing to provide the tax treatment that the rest of the country (except NJ) offers. This state really is an expensive place to live.
HSA Account Math, Family of 2 (Example)
Family Out of Pocket Max: $9000
Monthly Cost (Annualized): $1030(*with employer coverage and contribution)
Max Out of Pocket Family of 2: ~$10k
HSA contribution: $6900
HSA contribution, 3% growth, in 30 years: $16,748
Value of tax deduction, federal: $2415 (35% bracket)
Value of tax deduction, state: $0 (or, -$897)
So, you pay $897 (state tax) + $5650 investment + $10k today = $16547 to have $16,748 in 30 years (*WITHOUT FEES ADDED)
(someone please check my math.)
Now, that doesn’t really work either – because unless you’re invested in TIPS (treasury funds that are tax advantaged), you’ll be taxed on any dividends earned by that investment every year, like it was a taxable account, for state purposes only. That will cut into your growth a bit.
Then, you also have to pay HSA bank fees, which are very high and also cut into your “savings.” Example fees include:
- Maintenance fee and Service Fee: $66 per year (if your bank account balance / non-invested funds – is under $5000)
- Monthly Investment: $21.00
- Using your HSA Card: $2 per transaction (!)
- Access Funds Through Internet Withdrawal: $2 per transaction
In any case, I’m not sure I know enough to call the HSA a sham, but it sure looks like a way for the bank to charge a lot of fees. And, just like any other screwed up government-created account (screwed up due to people in government not agreeing on anything and not giving a shit about the people of this country), the HSA which is supposed to be this brilliant tax free way to save for future healthcare needs is ACTUALLY just a way for banks to make money off of people who likely don’t even realize it.
It’s pretty crazy that there is a $2 fee to even use funds in the account EACH TIME YOU TRANSFER FUNDS OR USE YOUR CARD. This administrative fee might be necessary to cover the cost of running an HSA account, but if that’s the case, is it even worth it?
Now – if you can invest the funds in the market and do better than 3% a year, it gets a little more interesting. Still, because you’re investing in the market, what goes up can come down. As a long term investment it’s probably safe – which is why young people are wise to consider HDHPs and HSAs. However, none of this is discussed in open enrollment meetings. AND, most people consider an HSA just a larger FSA, and put their money in the account pre-tax and then spend their funds down over the course of the year. While there’s nothing wrong with this, per se, you are now paying $2 per doctor’s appointment to use your card. If you go to the doctor a lot, let’s say 20 times a year per family, you just spent $40 on going to the doctor in fees. For someone in a lower tax bracket who isn’t seeing that much in tax savings via a HDHP (since you only save the money from your top tax bracket), it may actually be a scam.
Let’s not forget that in the event of death, your HSA is taxable to your heirs entirely as income at their income tax bracket. While it can be used to pay off qualified medical expenses of the person who died and owned the account, anything left over is taxed as income. However, after 65 an HSA account owner can take out funds for non medical expenses without a 20% penalty. BUT, those funds will be taxed as income, just like a 401k.
So as much as I’m tempted to go the HDHP route next year (assuming we’ll spend the full $9000 out of pocket max) just to get those $6900 in federal funds in to an HSA pre tax, I’m really not sure it’s worth it.
PPO Costs in Comparison…
Family Out of Pocket Max: $5k
Monthly Cost (Annualized): $3k
FSA contribution (*is recognized as pre-tax in CA) = $2650 ($1272 tax savings)
Total Costs including FSA savings: $6728
PPO vs HDHP Costs Today
PPO: $6728 ($9819 remains to invest in post-tax accounts)
HDHP: $16547 (*includes $6900 investment)
PPO vs HDHP investments in 30 years (at 3% interest) – WITHOUT FEES ADDED
IF USED FOR QUALIFYING MEDICAL EXPENSES (TAXED OR NOT TAXED)
PPO: $19945 ($3937 in cap gains tax, CA)
HDHP: $16,748 (minus fees and state taxes – which could be significant over the years)
So, if my math is correct there, the PPO actually ends up being the BEST plan long term anyway, with taxable investments, at least in the state of CA (and probably in other states, although it might look a little better without state tax.
What About if I Don’t Hit My Out of Pocket Max?
Ok, so for arguments sake, let’s look at a more typical HSA scenario. You’re a healthy 20 something with 40 years until retirement. As a single person you can put $3450 into your HSA. You’re smart, so you plan to invest this month over the next 40 years vs spending it from this account. You have a HDHP and your annual out of pocket plan cost is $840. Your employer contributes some money, let’s say $1000, so you’re already ahead, paying -$140 (*minus CA state tax, I’ll get to that in a bit) — so your annual costs are negative, before you start using your account.
You scrounge up the funds to put in the $2400 ($200 per month) into your account this year, which will be augmented by the employer’s contribution up to your max of $3400.
You don’t get sick often, so you don’t hit your medical deductible or out of pocket max. Let’s say you spend $1000 on a few office visits and blood tests due to a scare, but nothing major – no ER visits, no recurring specialist visits. So, now your total cost of healthcare this year is $2400 and you’re getting a federal tax savings on your $2400 investment (but paying state income tax on this.)
Your federal tax savings, since you’re in a lower tax bracket (in your 20s, we assume) is 15% (if you make up to ~$38k.) So your tax savings on this is $360 (if you make $38k-$93k, you’d save $600.) You still have to pay state tax on this income – let’s say that’s $3400*8%=$272 for the sake of simplicity.
So, adding up all the numbers with HDHP, $1000 medical spend and $3400 annual investment as per the rules above
Healthcare cost = -$140 (annual premium) + $1000 (medical expenses) + $2400 (investment) + $272 state tax – $360 tax savings = $3172
In 30 years (to compare to other couple above) you have:
HDP: $8252 – $3172 initial cost = $5080 (gained, as long as it’s used for healthcare)
Now, let’s say this same person used a standard PPO.
The math is tricky because we don’t know how the deductible and coinsurance will play out, but let’s say they have a $250 deductible but a higher monthly fee. It’s a $1080 fee for the year, but with the lower deductible instead of $1000 in healthcare spending, it’s more like $350 due to the low deductible and co-insurance.
Annual healthcare spend = $1430
But we’re not done yet…
Since this person didn’t spend $3172 on healthcare this year (including the $3400 investment), they have $1742 left to invest in taxable accounts.
With the PPO, they have $4228 in 30 years at 3% growth ($2486 taxable at investment gains rates) = 2486-696 = $1789
With the HDHP, they have $5080 (gains) in 30 years at 3% growth
In this case, the HDHP appears to win (significantly.) Even if they take out the HDHP money for non healthcare use and pay the 20% fee in 30 years and income tax on this amount (Let’s say 25% income tax plus 13% state) = $2387.60 you are still ahead of the $1789 if you invested in a taxable account.
This isn’t taking into account HSA fees over the years, which add up and might make both worth a similar amount. AND you’re taking on the risk in the HDHP that you won’t need to use the full out of pocket max ($4500) which clearly makes the math reverse. Very quickly.
So IMO HDHPs and HSAs are only good for young, healthy individuals who have a low chance of needing to use their health insurance each year beyond a few routine doctors visits. Otherwise, I’m not sure they offer better savings than a lower deductible account and saving that money to put into the market. What isn’t covered here is that your investment options will be much broader in a non HSA account, and fees will be much lower (or at least you can choose if you want a higher fee account.)
Is all of that worth ~$600 in gains (per year) — which is probably more like $450 per year after fees? This is if you don’t use your actual health insurance much… one trip to the emergency room and your numbers suddenly won’t look so good.
This is why I’m leaning towards thinking the HSA is a scam for everyone. It’s too risky for the minimal reward you get for investing in it vs a PPO and investing any remaining funds in a taxable account.
Does anyone disagree?
Getting married is wonderful for so many reasons. Taxes is not one of them. Besides the horrific marriage fine levied by our tax lords if you happen to want to be an independent woman and continue working post tying the not, there’s also a whole host of tax intricacies which suddenly make TurboTax no longer a viable option and accountants your new BFF.
My husband is an independent contractor. He usually makes anywhere between $80k and $110k per year, depending on how business is going. As a single person, he was able to take advantage of safe harbors designed to protect self-employed folks from overpaying taxes to avoid fines for coming short on estimated tax payments.
Safe harbors for estimated taxes for single, self-employed folks basically say that you can either pay 90% of your current year’s eventual tax bill OR 100% of your prior year’s tax bill. As a single person, this is pretty easy to figure out — even if it’s hard to guess what 90% of this year’s tax bill will be, you can pay 100% of your prior year’s tax bill and know you’re safe from fines, even if you end up owing more at the end of the year. If business isn’t going quite as well this year, you’ll get a refund, and you’ll give uncle sam a loan for a while, but it won’t be that bad.
Of course, getting married makes this all sorts of more complicated, requiring expensive accounting help to make sense of this mess.
Estimated tax safe harbor for higher income taxpayers. If your 2016 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2017 or 110% of the tax shown on your 2016 return to avoid an estimated tax penalty.
Thank you IRS for an explanation that is not clear at all. It sounds like if your AGI is over $150k as a single OR married person you are considered a higher income taxpayer. This means Mr. HECC would not have been considered a high income taxpayer as a single person, but now that we’re married we’re well over $150k and he can no longer use the safe harbors for his estimated taxes.
Instead, we have to pay 110% of our 2016 taxes (including my taxes) in order to not get penalized this year. Suddenly, my W2 withholdings are no longer an annoyance of over or underpayment to the government, but they can result in substantial penalties.
So – we need an accountant, stat. I consider myself fairly financially literate and the IRS explanation of all of this is the most confusing thing I’ve ever read.
Are any of you married with one partner earning W2 income and the other self employed? How do you manage your estimated tax payments?
There is a lot of misinformation about the marriage tax penalty. While it’s true if one spouse doesn’t work and the other makes any amount of income, the couple will get a “marriage bonus,” once both partners are working and making enough income to live, esp in a high-cost-of-living area, the tax penalty is going to kick in.
The worst marriage penalties are seen when you have kids and lose deductions based on income, but I’m going to share in simple terms why we received a marriage penalty this year – this beautiful first year of our marriage – due tour income.
Federal Taxes Only (State marriage penalty not included below)
Single Filer Tax: $47,749.25
Single Filer Tax: $22381.75
- Total Couple “Single” Federal Tax: $70131
- Married Filing Jointly Tax: $74,217
And, just in case you’re wondering, it is not better to “file separately” as a married couple — this is not the same as filing single (which you can’t do when you’re married.)
Married Filing Separately:
Single Filer Tax: $51,958.50
Single Filer Tax: $22981.25
Total Married Filing Separately: $74939.75
As you can see, if you have somewhat higher incomes, the marriage tax penalty will be quite notifiable.
If we never got married… $70,131 in taxes
Marriage Fine (Filing Jointly) +$4086
or, Marriage Fine (Filing Separately) +$4808.75
This plays out similarly in state taxes.
Yes, we’re fortunate enough to be high-income earners – but we also cannot afford a house. So there’s that.
Unlike many unsuspecting newlyweds, I was well aware of the marriage tax penalty long before I got married. It seemed like a cruel joke that the tax brackets were different for married couples than singles, and that once married you no longer could file as a “single person.” There’s plenty of publicity around the “marriage bonus” but this only applies if you have one working person in the household. If both partners work and make about the same amount of money, you end up screwed.
I got married anyway.
The marriage penalty impacts different classes in different ways. The worst impact is on lower income couples who end up phasing out of tax credits and other benefits such as healthcare allowances if both partners work, even if together the couple is still together earning at poverty levels. For middle income couples in high-cost-of-living areas, the $1k-$10k+ that has to be paid to the government just for the privilege of being married is significant. Is love worth that much? Continue reading
The marriage tax penalty is real and it is painful if you live and work in a region of the country that tops the “highest cost of living” lists. While you can make the argument that this is a “choice” and that incomes tend to be higher in that region versus the rest of the country (if you work in a high-paying field), it still doesn’t balance out. I’m glad that I knew going into marriage it was the worst financial decision of my life (my husband says the wedding was, but actually the cost of the wedding was pennies versus what I’ll personally lose over my lifetime, financially speaking.)
There are numerous benefits to marriage, and above all else I’m a sap who believes in love and cares more about stability and security than wealth. I’m happy to be married. Happier than I thought I’d be (at least a month in) as it shockingly feels very different from being single. I didn’t expect it to feel different at all, especially after dating over a decade and co-habiting for the last two years. The only difference, I thought, would be that I can’t just walk out the door without repercussions, and neither could he.
What’s a girl to do when her short term and long term “gains” are actually bright red losses?
Sell! Sell! Sell!
Now, before you berate me for selling when the market is down, let me explain, I am not selling to get out of the market.
My Vanguard shares were down significantly enough that I wanted to take action. Investing in index funds, I don’t have a strong opinion on one or the other. I had a dividend appreciation fund and a small-cap fund that today were mutually down about $500. That’s a $500 loss I can take against any gains made this year. I could wait for it to go down even more (it probably will) or, I could just pull out the money now and plop it straight into another “different” investment to reap the potential gains (or further losses) of being in the stock market this year.
I pulled out a good $23k from these two investments, and moved them into my Vanguard Healthcare fund which I’m slowly but surely plugging away at the $50k minimum for the Admiral version (I love me a good low-fee admiral fund.) So now my healthcare fund is at about $34k and I’ll have $500 in losses to write off come tax time next year. Not so shabby.
Note I’m not a tax professional and I don’t actually know what I’m doing, so get some real advice before you take any of mine. 🙂
If my father were to find out that I hadn’t filed taxes for four years, I would never hear the end of it. He would basically tell me I’m a horrible, disorganized person who is so irresponsible. I hear his voice now, sighing my name in judgement-filled disappointment. And that judgement would kick me straight in the stomach yet again, because I’d believe that there is something truly wrong with me, and that I’ll never be able to resolve my deep-rooted mess of a self.
But when it’s my own father who hasn’t filed the taxes, well, then the world is out to get him. He is being kind of enough to co-sign a loan for my divorced aunt who is attempting to purchase a house, and in order to do this they’ve asked for two years worth of back taxes documentation. Well, he doesn’t have that because while he’s paid what he believes he owes, he’s never actually filed for 2011-2013.
The reality of the situation is that both of my parents could be in very big trouble for not filing taxes. It sounds like he has actually paid the amount owed, but he can’t know for sure because he hasn’t actually filed and filled out the paperwork. My mother is concerned about this, of course, but whenever she brings it up with him he will go off on her and call her a jerk. He really likes to call her a jerk.
It’s so unfortunate for her to be in this spot where she has absolutely no control over the finances. If they were to be audited they could both be thrown in jail. Now, you could say that she should be more pro-active in ensuring her own taxes are filed on time, but my father keeps all of the financial information in boxes that even he isn’t able to find easily. He’s been procrastinating on filing taxes because everything is a giant mess. I wonder where I get this being a mess thing from, hmm.
To be “fair” to my father, he does have terminal prostate cancer, and I’m sure he doesn’t want to spend his remaining days doing taxes. Maybe in his mind, since the doctors told him he would die five years ago, he was putting it off so that he’d never actually have to deal with it. Who knows. It’s hard to task a dying man with filing paperwork to the IRS, but he’s lived much longer than the doctors have thought and he typically spends his days not schlepping up to Sloan Kettering in NYC watching television or napping.
I’m concerned about my parents, but there really isn’t anything I can do. My dad is so ridiculously stubborn and he won’t change that. He spent a good ten minutes yelling (over the phone) at my aunt’s loan officer because he thought that he only had to show two years of taxes for 2013 and 2014, and in fact they need 2012 and 2013. Well, he just loves to yell. He’s just so angry and I don’t know if I’ve ever met a person with more anger in his heart – no empathy at all for other people just trying to do their job – no concern for his own wife who he could be setting up for jail time. No, he’ll just spend all his time screaming at everyone else, because the whole world is against him, clearly.
What is a grown adult daughter to do in these situations? My mother is dealing with her own mother’s finances and taxes, which is quite ironic given she doesn’t have a handle on her own. My mother doesn’t get sad, ever – as the daughter of a narcissist herself she was not allowed to have emotions – but she is clearly frustrated by my father’s failure to just pay the taxes. She laughs it off with her nervous laugh, because her only emotion as far as I can tell is “anxious.” There is nothing I can do, but it upsets me that my father, even after all of these years, even after he has been diagnosed with a terminal illness, even after his children have grown up and removed that stress from him, is still as bitter, selfish, and full of rage as he ever was. I’d like for there to be a day when he finally realizes that the world isn’t out to get him, that criticism can be constructive, that people deserve to be treated with respect. But that will never happen. I only get to hope that my parents do not end up in jail and my dad finally files the taxes.
One of my readers, Jake, posted a thoughtful response to my post 10 Tax Breaks Only the Rich Enjoy noting that my explanations were factually inaccurate. I thought he had some really good points, so I wanted to address each below. I also want to clarify that I do not necessarily have anything against rich individuals who worked their way up to obtain wealth. The problem is that once a family has money they can maintain that money within their family for generations, with many “trust-fund babies” not having to earn their wealth. Also, I have a problem with tax loopholes that are designed to only benefit the wealthy yet that are useless to the middle class.
(Side note: I think that federal and state income tax should be adjusted for cost of living per county. It is obscene that a San Francisco household should have to pay the same effective tax rate to someone in Fresno where cost of living is much lower. $300k in AGI for a married couple is a lot in many regions of the country and in others it is squarely in the middle class. Thus, income tax brackets should be adjusted for cost of living. I’m not sure if this could work, but it would make a lot more sense then the current tax system.)
Jake wrote: “Sorry, but most of this applies to the 0.01% of income earners, not the 1%. Additionally, a lot of what you outline is misleading. I’ll address each section.”
While many of these tax breaks are most beneficial for the .01%, the .05% and yes even the 1% get more out of many of these tax breaks than people with middle class incomes. The super, super rich get the best tax breaks of all.
RE: The Rich paying 0% on Capital Gains Tax
Jake: I don’t know how you got 0% capital gains tax. Not only do the rich have to pay capital gains tax, but they pay it at a higher rate because of their income.
The really rich do not pay capital gains tax at a higher rate. How can this be? Most people who aren’t extremely wealthy have to work and work for pay. When we work, we generate income. This income is what defines our capital gains tax rate. The top capital gains rate for the wealthy is 20%. So how are some getting away with not paying any capital gains tax?
The super rich do not need to generate income. If an investor is in the 10% and 15% tax bracket for income, then s/he pays 0% in capital gains tax. This means that if someone has enough money to sustain them via investment growth and dividends, s/he never has to earn income and can stay in the lowest income tax bracket, thus withdrawing any dividends and gains on investments at a 0% capital gains tax rate.
Thus, my point is that capital gains tax rate should be the same for everyone, not based on income levels, so that way no one can cheat the system.
RE: Mitt Romney paid just 15% federal income taxes despite making way more money than someone in the top brackets
Jake: Yes, Mitt Romney paid 15% in federal income taxes, but most Americans making 50-75k paid 7.8%. Someone that makes 100-200 paid 12.1%. The kicker? The bottom 50% of income earners paid 0% in income taxes. It puts Romney’s 15% in context. These are facts.
This isn’t about the bottom 50%. Yes, in our society people who make money pay tax to support services for people who are unable to make enough money to live, true. But the actual problem here is not about the bottom 50%. It’s the fact that the middle class is disappearing due to loopholes like this only available to the super rich. If you make $100,000 a year (single filer) you will pay 21.18% of all of your income to federal tax. If you make $200k, you’ll pay 24.93% of your income to federal tax. At $300k a year, that’s 27.62% to federal taxes. But if you’re super rich and in one of these jobs where the loopholes are available, you can pay much less while earning much more.
RE: Home deduction tax benefit is much better for the rich than the middle class
Jake: “Yes, the rich enjoy the home interest deduction along with 67% of America. The rest of Americans can also deduct the full amount, while the PEASE limitation reduces the amount that the rich can deduct.”
True. However, the way taxes work, the wealthy are getting a much bigger benefit to purchase property over the middle class. If the wealthy haven’t taken advantage of the former loopholes, basic math tells us that the deduction for the rich is going to be greater than that for the middle class. “One of the unfortunate and largely unintended effects of structuring tax benefits as deductions or exclusions is that they tend to provide much bigger tax benefits to those in the highest tax brackets. For a wealthy taxpayer in the highest tax bracket—now 39.6 percent—a $10,000 itemized deduction, such as one for mortgage interest, results in $3,960 in tax savings. For a taxpayer in the 15 percent bracket, however, that same deduction is worth only $1,500.” (source) Yes, the PEASE limitation is helping this a bit, but the mortgage interest deduction still percentage-wise much greater benefits the wealthy over the average middle class person.
RE: Giving to charity to preserve family wealth
Jake: “This just doesn’t make sense. How can you knock giving to charity?”
Answer: Because “giving to charity” is not always actually giving to charity. For example, the Walton family, heirs and heiresses to the Walmart fortune, are using this loophole very smartly to preserve their wealth over generations. With a fortune worth $115.7B, the family is set for at least a few generations, and tax laws help them ensure this.
How is this possible? The Waltons and many other super rich families use a charitable trust that allows the donor to pass money on to heirs after an extended period of time without having to pay estate tax! If a donor locks up assets in charity trusts (CLATs) for a long period of time an amount set by the donor is giving away each year but whatever is left goes to a beneficiary TAX FREE. Just one of the charitable trusts would result in $2.2B for Walton heirs, without owing any tax on it. (source). While most people won’t have to pay estate tax anyway (your estate needs to be worth more than $1M before estate taxes begin to be levied), it is the super rich that the estate tax is designed for – to ensure that people aren’t just living off their family’s wealth and never paying a cent to support the government or working a day in their lives.
RE: Deduction for private jets
Jake: ‘Not many 1%’ers own private jets. That’s for corporate CEOs, professional atheletes and entertainers….many of the 0.01%”
True. This is probably relevant only to the top elite only. Nonetheless, it’s still a tax break the super rich enjoy.
RE: Fake-Out Agricultural Tax Credits
Jake: Anyone who owns a home can do this (67% of America), not just the 1%
Each state has its own rules on how individuals who own property can take tax credits for agricultural use. The point is not whether anyone who owns a home can take these credits, but how the credits are much more valuable for people who own expensive homes and properties. Another example of this – in NJ, fake farmers are costing the state millions of dollars. The Farmland Assessment Act of 1964, intended to preserve agriculture in NJ, is being used by millionaires, developers and anyone with at least five acres of land to slash their farmland tax bills by 98% — all they need to do is produce $500 in goods per year to qualify for tax breaks. For instance, one person used a cow to eat the home’s front lawn for a few months and then sold the animal, enabling the individual to take the tax break on their five acres. Even Bruce Springsteen takes this tax credit. While he pays $138k a year in taxes on his own home, he owns an additional 200 acres which he has a farmer come and grow a few tomatoes so he doesn’t have to pay a lot of tax on this land (only $4639 per year.) (source)
Thus this tax loophole doesn’t benefit 67% of America who own property, but only the super wealthy who own more than five acres of property (rules vary per state but generally this is designed to help the super rich fake farmers only.)
RE: Rental Property Tax Benefits
Jake: Anyone with a rental property can do this type of exchange, not just 1 percenters.
Again, you’re spot on Jake. Anyone can take advantage of the tax loophole which enables them to purchase rental property and do a like kind exchange to trade it for property worth the same or more without paying taxes. Now, only the rich can afford to do this enough for it to make a big difference. For example, as someone with $300,000 networth, I invest in real estate via REITs. When I sell a REIT I must pay capital gains tax on this REIT, even if I want to purchase another REIT. I cannot just trade this without paying any tax. Also, I could own rental property and do a like kind exchange, but with $300,000 total in networth I’m not going to be able to purchase enough property for this to really help. Since wealthy real estate investors can do this over and over again (there is no limit for how many times they can trade property without paying tax and taking deductions for depreciation of their owned properties on sale) in the long run they will only pay capital gains rates on the property sold last.
But if you’re really rich, you never have to sell this property when you’re alive! You can pass this on to your children tax free. The basis which your children will pay tax on upon sale of the asset is determined not by how much you paid for the property in the first place, but instead how much it was worth on the day you die. Assuming you were a very smart investor and used like-kind trades throughout your life, you could have significantly grown your real estate value over time, enjoyed depreciation deductions, and then pass on the property tax free to heirs who can sell it for the amount it’s worth on the day of your passing. Most people cannot afford to keep so much of their networth locked up in investment property, but the super rich can.
So, Jake, as you see, much of my points have to do with how these tax benefits mostly help the super rich. This may not be the 1% but at 1% you start to experience some of these benefits. Once you have a certain amount of money in your family, though, you can maintain it for many, many generations through these loopholes.