I just completed my 2012 tax return. 2012 was my first year of retirement. My tax situation for 2012 was as follows: Pension withdrawal: $25,000. Taxable Social Security: $25,000. Gain from the sale of some stock that I bought in 1982: $50,000. Standard deduction with one over-65 extra deduction. Two exemptions. So my AGI was $100,000 and my taxable income (line 43) was $79,350.
And then I get to line 11 of the "Qualified Dividends and Capital Gain Tax Worksheet" on page 41 of the instructions.
"Subtract line 10 from line 9. This amount is taxed at 0% . . .$41,350"
Well, I must have made a mistake. Here I have $100k in income and they're going to let $41k go tax free. I thought I had found a bug in the tax forms, but surely someone else would have noticed it by now. Well, it's no mistake. 85% of my $50,000 capital gain is not taxed.
The net effect is that some of my pension withdrawal was taxed at 30%. If I had taken out $5,000 less from my pension fund, I would have saved 30% ($1500) in taxes (15% tax on the $5000, and the tax-free portion of my capital gain would have grown by $5000, saving me another 15%.)
Then discovered that if my sole source of income had been $91,000 in capital gains, I would have paid no tax at all.
And the deficit keeps growing, just like the nose on PinocchiObama's face.
Apparently it is. They've had plenty of time to change it if it wasn't what they intended. They have extended it twice when it was about to expire.
The law that originally established the 0% tax rate on capital gains was passed by a Republican-controlled Congress and signed by President George W. Bush.
You begin by asking about Congressional intent; you end by making a completely unsupported charge of lying against the President. And along the way, you present a distorted example of your tax situation to try to make some vague point.
It's misleading to keep on saying "my" when clearly this is a joint return, you should be saying "our". You are also benefiting from a special tax break for older people, and partially untaxed social security, yet you don't seem bothered by those tax breaks, only the one on capital gains.
....but only $79,350 in taxable income.
You are spreading income over two taxpayers on a joint return, so to make an apples to apples comparison, all your numbers should be cut in half. To say that two people each got $20K tax-free capital gains, of course, doesn't sound as dramatic as your distorted version.
Well, yes, the less your taxable income, the less your tax. Are you saying there is something unreasonable about that?
Again, you are distorting the situation by using MFJ results and yet talking about them as if it was your individual tax situation.
Gratuitous political comments should be directed to the unmoderated group.
I should not have made the political comment, especially (as someone else pointed out) it was incorrect. By calling it "lying", you are making your own, un-called for, political statement.
As for "distorted examples", I did simplify and round. For example, some of my capital gains were really qualified dividends (no tax consequence there) and I did round all numbers to a multiple of $5000 for simplicity. My actual tax-free amount of capital gain was $40,322, not $41,350. I wouldn't really call that distorted. If I had mentioned all the insignificant items on my tax return, you would have fallen asleep.
Is this is a nit-pick from the grammar police??? Only $8 of income was attached to my wife's SSN. So excuse me for calling it "my" tax return. The over-65 exemption was not part of my argument. I mention it so that it doesn't "distort" my tax situation. I carry that extra deduction through all of my comparisons. It amounts to, at most, $173 in taxes.
If I had worked for $100,000 in wages, my taxable income would still have been $79,350. The point you apparently missed is that someone who had $79,350 in taxable wage income would have paid $11,904 in taxes, $7,070 more than my "distorted" example.
While I firmly believe (for example) that qualified dividends should have a low tax because the dividends have already been taxed at the corporate level, I don't think that they should get a free ride depending on other sources of income. I always had thought that the maximum rate on CapGain & QualDiv was at the maximum of 15%. I never realized that a portion was taxed at zero depending on factors unrelated to CapGain. I disagree with the way the law is written.
If that same $100,000 were wages, it would be spread over two persons as well. However, I would have paid $7,070 more in taxes.
Saving 15% because I withdraw $5000 less is expected. What is unreasonable is that an additional $5000 of capital gain goes untaxed. Why should the tax on a capital gain depend on a withdrawal from an IRA?
How is this a distortion? If that $91,000 had been earned income, I would have paid $9,686 in taxes. All else (including MFJ and one over-65 deduction) being equal ...
$91,000 in wages = $9,686 in taxes. $91,000 in qualified dividends = zero taxes.
I think you missed the point.
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So ...
I'd be a fool not to take advantage of this, so I'm going to do a bit of manipulation. ==> I've already been to Fidelity and reversed a recent $18,000 IRA withdrawal. I wish I could reverse the withdrawals I made 2011, 2012, and March of this year. ==> In December, I plan to sell some stock at a long-term profit and pre-pay real estate taxes through the end of the town's fiscal year. ==> In December, I plan to over pay my 2013 state income taxes by $5000 (or so) ==> Rather than give my children $5,000 each for Christmas, I will pay (and pre-pay) their real-estate taxes for fiscal 2014. I get more of a tax benefit than they do. ==> I plan to make no more withdrawals from my IRA until (A) I have to, or (B) this whacko law expires.
With all this, I can reduce my ordinary income to near-zero giving me almost $70,000 worth of tax-free qualified dividends and capital gain.
And you, an enrolled tax expert, think this is fair????
You cannot deduct real estate taxes unless you are an owner of the property. The general rule is that you can deduct only taxes that are imposed on you. The real-estate tax on a house that your child owns is imposed on your child, not on you.
Qualified dividends and capital gains are not the same thing even if they are taxed at the same rate. Improper classification of these income items can result in erroneous computation of tax liability.
Filing as an unmarried taxpayer and as married taxpayers filing jointly are not the same thing. Use of the wrong tax filing status can result in erroneous computation of tax liability.
attached to my wife's SSN. So excuse me for calling it "my" tax return.
You don't seem to understand the concept of a MFJ return. You are allocating half of your income (for most purposes) to another taxpayer, namely your spouse. This is reflected in the 10% and 15% tax bracket rates, where MFJ rates a double those of single rates. Even in the higher brackets, there is significant income allocation going on between spouses with unequal incomes.
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capital gains, I would have paid no tax at all.
would have paid $9,686 in taxes. All else (including MFJ and one over-65 deduction) being equal ...
OK, let's try again: instead of cutting all your numbers in half, as I suggested above, how about dividing them by two? Then you can talk realistically about maximum tax-free capital gains that a taxpayer can have under the current BushTax low-income capital gains rates.
I'm skeptical that you really care about what I think is fair. However as a tax professional, I do know that tax law is unfair in many, many circumstances, even if we all accept a common definition of "fair".
You can't just look at the Code and assume you are done. The Federal Regulations for Sec. 164 as well as court interpretations of the code and regs make it quite clear that you only get a deduction if the taxes are imposed on you as an owner. There have been cases (I know of at least one) that have carved out a piece for taxpayers who from the date of acquisition had occupied the home and made all payments for the mortgage, taxes, repairs, maintenance and improvements. The Tax Court held that the taxpayers (married couple) were the equitable and beneficial owners of the property and were entitled to the mortgage interest and property tax deductions. Even in this case, no deductions would have been allowed unless they were the owner.
Huh? By saying that the "equitable and beneficial owners" were allowed to deduct the expenses, implies that that they were not the actual owners. That pretty much affirms my argument that one need not be the owner to deduct the property taxes.
So my son spends a lot of time in my vacation property. He is going to inherit it when I die. He is, therefore, a beneficial owner. As a quid-pro-quo, he pays and deducts the real estate taxes. Which is fine by me as I am subject to AMT and can't deduct those taxes anyway.
No, he's not a beneficial owner unless he has some legal ground to sue if he isn't allowed to use the property. Presently he has no legal ground to do that.
Why don't you just give him a 1% interest in the property now. Then he'll be a current owner. Or you could retain a life estate and give him the remainder interest. That would give him an ownership interest.
But just the fact that you allow him to use it sometimes and that he may inherit it when you die is not enough to give him an ownership interest as far as the IRS is concerned.
" ..you only get a deduction if the taxes are imposed on you as an owner." If you don;t own it, you don't get the deduction. I only mentioned one case that I was aware of where the court decided that based on a "specific set of facts", declared the taxpayer to be the beneficial owners of the property
In the hierarchical order of U.S. tax law, the statutes are senior to everything except the Constitution. The statutes make no reference to the authorization of legislative regulations. Ergo, I can just look at the Code and assume that I am done.
As for interpretive regulations, What regulations are you reading? I read,
"(b) Real property taxes. The term ?real property taxes? means taxes imposed on interests in real property and levied for the general public welfare, but it does not include taxes assessed against local benefits. See § 1.164-4."
Nowhere does it say that the taxes must be imposed on the owner. So, I've eliminated the statutes and the regulations. Could you please cite one or more of the court cases of which you spoke?
Based on my brief look at the Code, there are more than 100 statutes that authorize the treasury department to issue regulations. Among them is section 7805 which says,
"Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue."
The words "this title" mean Title 26, otherwise known as the Internal Revenue Code.
Well, section 1.164-1 says,among other things,
"In general, taxes are deductible only by the person upon whom they are imposed."
Since when have real estate taxes been imposed on someone who is not an owner? I haven't seen it. But you're right, if they are imposed on someone else, whoever they are imposed on, and who pays them, can get the deduction.
Well... Stuart answered your question. Property taxes are imposed by the county on the recorded owners. Therefore, it is the recorded owner who gets the deduction if the taxes are paid. As I stated earlier, the courts have expanded the definition of owner to include those who have an equitable and beneficial ownership interest,
If you want read a bunch of court cases on equitable and beneficial ownership, just perform an internet search on that term and add the words property tax deduction. Read the cases and they tell you that it is the owner that gets the deduction.
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