Wednesday, March 21, 2012

a taxing event

Taxes.  If there is something more annoying in life, I haven’t experienced it.

Well, yes.  I have.  Even more annoying than paying taxes is planning badly for them.

Three years ago I retired one-third of the way into into the tax year.  Somehow, I managed to underestimate my tax withholding on my retirement pay.  Partly due to the combination of having earned income and retirement pay in the same year.

And it was a big underpayment.  Enough to spend close to a month in one of those San Francisco hotels where the staff speaks with phony French accents.

To avoid a reprise the next year, I upped the amount withheld on my pensions.  But that was also the same year I returned to Oregon to train my replacement.  Once again, two sources of income.

When tax time rolled around, I was short.  And off to Washington went another month-stay at a five star hotel.

Last year, I was certain I had it nailed.  My sole income was from my retirement, and I knew I had finally reached a nice equilibrium.  When I filled out my 1040 in January, it informed me a refund would be on my way.  A small refund.  But, a refund, nonetheless.

That is until I noticed I had skipped a line.  The only change in income I had last year was my Social Security.  And I had no idea why I was asked to include that amount on my tax return.  After all, I thought, Social Security is a non-taxable event.  Or so I had been told.

When I added my Social Security payments to the rest of my income, once again, I owed another stay at a chi-chi hotel.

It turns out that my Social Security payments did two things.  85% of the payments are taxable as income.  And that 85% bounced me into a higher tax bracket.

In the recesses of my mind, I remember that mandarin of Congress, Dan Rostenkowski, being trapped in his limousine by angry placard-wielding seniors.  He had been a prime driver for taxing Social Security benefits for “wealthier” seniors.

At the time, I thought it was a good idea.  The revenue would help balance what was then a burgeoning deficit.

Well, we all know what happened.  Congress spent the revenue -- just as it does with every tax increase.  We now have even a bigger deficit.  And I am one of those placard-wielding seniors.

I had planned on filling my taxes in January.  To get that big refund, mind you.

Now, I will wait until I am about to sail away from New Orleans. 

Maybe the government can use my payment to ransom me if I am kidnapped in Egypt.

Note -- By the way, several of you have asked through e-mail if I had any damage from yesterday’s earthquake.  I didn’t even feel it.  And surprisingly, as large as it was, there seems to have been very little loss in Mexico.


Don Cuevas said...

Aout the earthquake: I read that over 800 homes near the epicenter in the State of Guerrero were destroyed.

Saludos,Don Cuevas 

Steve Cotton said...

You are correct.  Even so, 800 houses for an earthquake of that magnitude is not a lot of loss -- of course, expect for the residents.  This is the size of quake that brings down major buildings -- along with a lot of lives.

tancho said...

And they will keep going up, since there is no hope of them actually cutting any spending other than fluff to appease a few angry voters....
A flat tax is what they need, just think of all the IRS jobs that would go away....maybe that's why it will never happen.

Steve Cotton said...

 A flat tax of say 15% (with a personal exemption and no deductions, requiring all taxpayers -- including millionaires -- to pay their "fair share" on all income at the same tax rate) would make a lot of fiscal and economic sense.  But that would also require big cuts in the budget.  Let's see.  Will politicians do the wise thing or the expedient thing?

Laurie Matherne said...

What's with the New Orleans reference? I don't always understand your references in your posts. But I do know that I hate this time of year when I have finish my taxes. 

Steve Cotton said...

 New Orleans is my embarkation port for a Transatlantic cruise.

norm said...

20% might do the job if it went against all income. There is something in the Bible about one bottle out of five as a tax percentage that was in place at the time of Christ

. As to budget cuts: Will it be guns or butter?  

Kim G said...

 Flat tax is a complete canard. While if your sole income is a salary, the brackets may seem complex, the fact of the matter is that for tax purposes, income is calculated in a very different way than it is for GAAP purposes (Generally Accepted Accounting Principles).  It is that calculation of income that leads to complexity in the tax code, not the progressivity of the tax rates.

The flat tax is another example of how politicians cleverly direct peoples' attentions away from what is important  and get them to focus on the irrelevant.

Sad, really.

Kim G
Boston, MA
Where the biggest cheques we ever write are to the U.S. Treasury.

Charles said...

Steve...I just finished mine as well...same thing in my first year of retirement...3 months of work...9 months retired...and I also discovered while doing them that SS is indeed taxable...I guess the European trip will have to wait another year...

Steve Cotton said...

Of course, I would far prefer 5%, but that is not very likely. 15% is my preferred level to treat earned income and investment income at the same level. "Guns or butter?" is the wrong question. The answer is guns and butter. And a lot of both will need to be cut.

Steve Cotton said...

 I jumped on the flat tax band wagon back in the 80s with Jack Kemp.  We need to sit down and talk.  It would not be the first delusion I have promoted.

Steve Cotton said...

 In my case, I am going to take the European -- or, rather, Middle East -- trip.  I hope that next year, I can at least draw even with my luck in the Tax Lottery.

John Calypso said...

Perhaps you can write-off all these trips you take as information gathering for your Blog?  What do you think ;-)

Steve Cotton said...

 I think I need to be able to point to some hope of remuneration.  But I can hope for a lot of things.

Kim G said...

 If by "flat tax" you mean something like a national sales tax, then yes, that would be wildly simple.  And the best gift the body politic has ever given to the top 1%.  And the bloodiest shooting in the foot that they've ever done to themselves.

But again, it is the calculation of income that's the complex part. The brackets are a breeze.

The real fiscal problem of our government isn't taxation, but the fact that spending is truly out of control and set to get much worse as the population ages.

Everyone has voted themselves benefits from the public treasury, and the borrowing gig will be up shortly.

Kim G
Boston, MA

Steve Cotton said...

Funny you should say that.  I was just muttering at Mexico's VAT when I purchased my telephone yesterday. 

From an economic standpoint, taxing consumption rather than revenue would make sense.  But it would also drastically alter the governmental policy of encouraging consumption instead of savings -- a Keynesian philosophy that is deeply embedded. 

I come from a non- sales tax state.  As a result, my bias is intrinsically anti-VAT.  But trading the income tax for a VAT would make great sense.

And I could not agree more with you where the cause of our fiscal problem lies.  Our problem is too much spending.