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Tax Bracket Racing

Tax Bracket Racing

Ok world. In case you didn't notice, the tax code might actually be *gasp* changing sometime and the government could be the one implementing it. I say could because the government will absolutely drag their feet on pretty much anything they are going to try and make a huge deal out of it and then in the end they might not do anything anyways. This process is even applicable to simplification of an existing system, like the tax code.

So I dragged my butt out of bed today after playing a show last night with the ole band. One of the first things I see is the new 'proposed tax code' being pushed. I think, fantastic! Exactly how much is this going to bone the average citizen? The answer of course is: It depends. 

The government released statements to the effect of:

New tax rates are going to be:

  • 12%
  • 25%
  • 35%
  • optional 4th bracket for Bill Gates

Which is, as usual, tits-on-a-bull useless to a financial man. They also implied that the standard deduction will be 12,000$ whereas currently it is:

from taxfoundation.org

from taxfoundation.org

Cool story. On the surface it looks like the taxes are going to be reduced for everybody because of the higher deduction and the fact that almost all the new brackets are lower than the old brackets right!? I'm not holding my breath. The best and worst case for brackets only consideration looks something like this:

Tax brackets, the possibilities aren't looking that good

Tax brackets, the possibilities aren't looking that good

Where of course everybody getting a lower bracket would be considered "good" or "best case." Notice I estimated the best and worse case upper bracket limits for each tax level. And they are not very close together. Just at this basic level we still cannot say for certain that our tax liability will be worse. But I am almost certain that it will be. Here are my reasons:

  • "Deductions" are largely being eliminated in this new plan. They are very ambiguous when using this verbage because they know this is the gotcha everybody is expecting
  • There is no way they will make up for the deductions they axe with the tax bracket income levels they select. The effect of this is that people looking to get ahead will not invest where the deductions have been eliminated. Less investing is good apparently.
  • They are even talking about not letting us deduct state taxes any more. So you will get double taxed. How is this helping again? I guess it is simpler on their end because they don't need to use lube? I'm a little weak on how this is good for anybody. 
  • They will allow us to keep our home mortgage deduction. How grateful of our overlords. Will Dobby be given clothes next if he is an extra subservient slave dog for the rest of his life!?

So to make a long story short, as a financially savvy individual who leverages deductions to get ahead, you may very well take a bath on this one. Your response will be of course 

"Well if I don't get to deduct certain expenses then I will not be spending as much money in those areas any more. " - A sane person

I am wondering what the effect of this will be. Certainly they anticipate that this could change the way smart, middle class people will invest their efforts and money. I can guarantee that since they have proposed no holding tax or anything of the sort that this will not harm the mega rich. Oh wait I almost forgot, the mega rich use a ton of deductions to shield them from tax liability, so they get rid of the deductions for the middle class to fix it. Cool makes sense right??? Somehow I bet this change will affect the quality of life for somebody who busts his ass 50 hours a week a little more than it will for somebody with a very high net worth who desn't necessarily "work" all that often. I will point out again here that they proposed no net worth or holding based tax, and they never will. Even if you put the cap as something piddly like .2% of your holdings over 100$million they would still be getting quite a windfall. But let's not talk about that because it would put a spotlight on the actual issue which is higher net worth individuals in lower tax brackets. 

Let's go through a simple example: Assume the government decided to eliminate the rental property depreciation deduction. Remember they explicitly did not state what they were eliminating. I would almost certainly urge our readers to evaluate their rental holdings immediately and most of the intelligent ones would be looking to get out sooner than they had originally planned. Sounds good right? If you are a fool it might sound awesome! Devaluation due to inventory and lowered incentives in the housing market is just what the USA needs. What would be really sweet is if this triggered large investors to liquidate their holdings then you could really upgrade the bath that you are taking to one that includes a whirlpool effect for maximum stimulation. And yes in reality this may not happen, but with the way they handle these negotiations who knows? A congressman is in touch with the average american middle class worker about as much as the Aborigine tribes are in contact with the space station. 

So really what is happening right now is that a huge pile of sweltering turds on capitol hill are rummaging through something that is complicated that none of them understand for little or no purpose that anybody can decipher. This in itself does not trouble me because it is expected to some degree. What does bother me is that they could pull the trigger on something unnecessary which will result in many people restructuring their assets and investments to avoid getting the hammer dropped on them in 2020. At the very least restructuring assets can be a pain in the butt. Keep in mind this is the best case scenario here is that they cause you problems in the short term with noticeable financial side effects.

This process in the short term will suck. In the long term it will not make a difference one bit (except you likely will have more tax liability.) As long as our country decides to run a budget deficit every year, what difference does it make if they collect 3-5% more or less tax? The end result is on the bottom rung by orders of magnitude of the debt level they accrue every year anyways, no matter what they take in.

Honey, the annoying stupid government dog is barking up the wrong tree again. Get the bb gun I don't want him in my yard anymore. 

Politics 101

Politics 101

How much does it cost to get shredded? (pt 2)

How much does it cost to get shredded? (pt 2)

Setting the Stage for a Real Estate Buy

Setting the Stage for a Real Estate Buy