Viewing entries tagged
income taxes

Fool me once, shame on you, fool me twice....

At the outset let's state for the record this is a politically agnostic post. 

I'm not so much concerned about who's offering (or not offering, or sorta offering, etc.) a course of action as I am with the ramifications of going for something with less than the full details.


Back in the late 1980's we passed the Tax Reform Act (TRA '86) which was passed under the guise of tax relief. And it did reduce rates, with the top rate dropping from around 50% to about 28% at the highest marginal rate.

Of course, not noted so much in the effort to pass the bill was the elimination of a fair amount of itemized deductions (consumer interest to name one) and, that we had gone from about 15 tax brackets to 4. (That little "sidebar"  of 4 v. 14 was the real killer.) And yes, the argument was foisted that 4 brackets would make things simpler than 14.

First off, let's go back a bit. The reduction in brackets/taxes were almost entirely offset by the elimination of deductions. I'd venture to say that most tax payers under TRA '86 actually wound up (tell me if this sounds familiar) paying a lower rate on more income which resulted in actually paying more taxes. Hmmmmm.....history repeating itself?

But the biggest problem may not have been the rates then as much as the rates would wind up being/staying moving forward. You see, when there were 14 tax brackets the odds were pretty damn good that you'd be in one tax bracket while you were working then another, lower bracket when you retired. Your income didn't have to move up/down that much to move your bracket. That's critical because it's not just the taxes now, but the taxes then!  When is then you ask?

Then is when you retire. Folks, it make a lot more sense to put money away when your tax bracket was let's say 30% and you were working and then retire and get it back when your bracket was going to be 14%. But now, with those same TRA brackets in place more or less; you're putting away money at the 33% bracket to get it back in the 33% bracket. Where's the benefit in that to a country that can't figure out how to retire to begin with? (Note: Any financial types out there want to calculate the additional tax liability on at about 14% additional taxes per year every year, on all IRA and related pension income from let's say age 65 to age 85 go ahead. I'm summarily concluding it's a boat load of money!!)

So let's not forget two things:

1. You must know all the sides of the issue because what might seem to be good for you today is highly likely to be less than desirable for you tomorrow, and;

2. Overpaying is cumulative, not singular. As tax bills undercut your post retirement wealth it'll be harder for you to live the life you want to live in retirement. 

In closing, it is seldom either as easy or rosy as anyone makes it sound. But without the details, you can't possibly know that.