Adjusted for Inflation

[Corduroy Frog]

Many elements are not adjusted for inflation.  Which is the worst, i.e. needs adjustment more than any other?

My vote is for Child Care Credit.  The $3000 and $6000 limit has been around forever.  The increased percentage??  Forget about it - if the couple gets more than 20% they can't afford to pay babysitting nowadays.

To make matters worse, employers have gone absolutely ga-ga over a new benefit - up to $10,000 tax deferral for babysitting.  Some employees are going after this like a pig after slop.  But it only works if it negates the Child Care Credit in its entirety.  And if the spouse doesn't work or have earned income, ALL of it is taxable.  My clients find out about it too late, and drop it after one year of misery.

Yes, my vote is for the Child Care Credit - dubious benefit, and nowhere NEAR the hyper-inflated cost of paying a babysitting service.

[Lion EA]

$3,000 net capital loss allowable per year. I have clients who won't live long enough to use all their capital losses! 

[Corduroy Frog]

Good one Lion.  Another is the dreaded Obamacare tax, especially the 3.8% NIT on investments.  The problem with taxing investments affects the sale of real estate, which depresses jobs for those who work but do not earn enough to pay the tax.  This has been a point of contention with capital gains for decades.

[joanmcq]

Frog, how does someone who works but doesn't earn enough be affected by the NIIT?

[Jim Oh Bkkr]

Almost every client I have, has "some" Social Security included in taxable income.  When I started in this business, only the "pretty well-off" did.

[BrewOne]

yes, just had a client with modest income who took $15k out of her IRA with 20% withholding--she still owed because of the additional Social Security income being taxed.  It's been $25,000 and $32,000 since...the 90's?

[Jim Oh Bkkr]

8 minutes ago, BrewOne said:

...since...the 90's?

I started in '88.  It was 25/32 then.

[mcbreck]

1 hour ago, Jim Oh Bkkr said:

Almost every client I have, has "some" Social Security included in taxable income.  When I started in this business, only the "pretty well-off" did.

Intentionally lowering benefits without having to actually vote on lower benefits. Making up a new CPI index to determine your COLA increase also cut your lifetime benefit by about 15%.

 

[mcbreck]

The 25/32 income figures go back to the 1983 change to make 50% of social security possibly taxable.

[mcb39]

9 hours ago, Lion EA said:

$3,000 net capital loss allowable per year. I have clients who won't live long enough to use all their capital losses! 

Up until this year, WI has only allowed $500.  This year they increased it to $3000.  Will save a lot of calculating on the WI WD form.

[Corduroy Frog]

8 hours ago, joanmcq said:

Frog, how does someone who works but doesn't earn enough be affected by the NIIT?

Good question Joan.  Obviously, they cannot be DIRECTLY affected by the NIIT on their tax return.

Where they get affected is in the slowdown of real estate movement because taxes are too high.  In my career, I've been through two political movements to do away with capital gains because only the wealthy could benefit.  Once they did away with LTCG altogether.  Before the year was out, they brought LTCG back to rescue a sick real estate market.

The current rates for LTCG are 15%, plus another 5% for the big income people, plus 3.8% NIIT.  Total 23.8%.  I do have a few landowners who ask me to calculate tax on sale of their farmland.  Farmers are not used to paying these bodacious taxes, and most of them simply tell me they will just hold on until someone meets a price sufficient to pay taxes.

[Abby Normal]

5 hours ago, mcbreck said:

The 25/32 income figures go back to the 1983 change to make 50% of social security possibly taxable.

The 50% figure came from the fact that the employer paid in 50%, except for the self-employed. The 85% came about because someone calculated that, with earnings, the part employees pay in, amounts to 15% of the benefits paid out. Not sure if they factored in inflation, or not.

 

[Abby Normal]

47 minutes ago, Corduroy Frog said:

Good question Joan.  Obviously, they cannot be DIRECTLY affected by the NIIT on their tax return.

Where they get affected is in the slowdown of real estate movement because taxes are too high.  In my career, I've been through two political movements to do away with capital gains because only the wealthy could benefit.  Once they did away with LTCG altogether.  Before the year was out, they brought LTCG back to rescue a sick real estate market.

The current rates for LTCG are 15%, plus another 5% for the big income people, plus 3.8% NIIT.  Total 23.8%.  I do have a few landowners who ask me to calculate tax on sale of their farmland.  Farmers are not used to paying these bodacious taxes, and most of them simply tell me they will just hold on until someone meets a price sufficient to pay taxes.

Sound like trickle down voodoo economics to me.

[kathyc2]

1 hour ago, Corduroy Frog said:

The current rates for LTCG are 15%, plus another 5% for the big income people, plus 3.8% NIIT.  Total 23.8%.

Well, cry me a river.  To be at the 20% LTCG rate, their marginal rate is at a minimum 35%.  So, they get a discount of 15%.  Those at 12% marginal rate have 0 for LTCG rates or a 12% discount.  Middle income people at 22% marginal rate and 15% get a 7% discount.  

[Corduroy Frog]

1 hour ago, kathyc2 said:

Well, cry me a river.  To be at the 20% LTCG rate, their marginal rate is at a minimum 35%.  So, they get a discount of 15%.  Those at 12% marginal rate have 0 for LTCG rates or a 12% discount.  Middle income people at 22% marginal rate and 15% get a 7% discount.  

Cry me a Wabash?  All of your statements are true, but missing the point.  Anything slowing down real estate hurts those in much lower tax brackets, slows down construction jobs, slows down the economy.

[kathyc2]

2 hours ago, Corduroy Frog said:

Anything slowing down real estate hurts those in much lower tax brackets, slows down construction jobs, slows down the economy.

I'm old enough to remember a major recession caused in large part to people buying McMansions they couldn't afford. 

[Medlin Software, Dennis]

Real estate on the coasts, vacation areas, and other high demand markets, bears no relationship to reality. Multiplied by real estate in areas which limit growth. Exponentially if said area is desirable. Then multiply again if politics are involved (such as CA Prop 13).

Many of us boomers who scrimped and ramen'ed our way to home ownership are equity (and for those who were wise) interest rate locked into our homes.

Home ownership, post pandemic, is likely going to drift to something none of us have seen before, with the remote work aspect reaching many who cannot afford to air commute.

There is a reason small towns are having a tough time, and the ability of affordable homes and a lower cost of living has zip to do with it.

[Slippery Pencil]

Personally I think the dependent care credit, and most other credits, should be eliminated and tax rates lowered, but adjusted for inflation, the items mentioned above are:

• $3000 dependent care credit initiated 1976.  Adjusted for inflation, $16,551
• $3000 capital loss limit initiated 1978.  Adjusted for inflation, $14,723
• 25K/32K social security thresholds initiated 1984.   Adjusted for inflation, $75,256 / $96,328

I'm sure there's a ton more, but the few other items I can think of that haven't been adjusted for inflation:

• $25 Gift limit initiated 1962.  Adjusted for inflation, $255
• $25K passive loss limit initiated 1987.  Adjusted for inflation, $68,962
• $150K passive income threshold initiated 1987.  Adjusted for inflation, $413,776
• $10K SALT deduction limit initiated 2018.  Adjusted for inflation, $12,375
• $10K FBAR threshold initiated 1970.  Adjusted for inflation, $82,096

 

[Corduroy Frog]

Great Post Mr. Pencil. and very much on the topic.

[joanmcq]

Frog, how can you say that the real estate market is 'slowed' down???  I am a very lucky person and I tend to buy real estate right before it goes boom.  Sacramento; bought in 2000, 2001, 2003.  Real estate market went gangbusters, collapsed in 2008-2012.  I bought a house for $75000 in 2008!  Decided to sell my main house (bought for 215,000 in 2000-worth $125,000 in 2008) for $750,000 in 2016.  Bought current house in Reno (and what a glorious house it is!) for $330,000.  Worth $600,000? or so now.  In Reno you can't get a house now for under $400,000.  Where I live double-wides on an acre go for $350-400,000.

Like I said, I'm lucky.  But first time buyers aren't where I was, able to buy a starter home for $75,000 in Sacramento in the 1990s.  People can't find a place to rent for under $1500/month. 

[mcbreck]

In my locality, home real estate activity has collapsed. Residential real estate prices have not dropped at all and are very unlikely to do so. Commercial and apartment complexes are very different scenarios from individual residential. A year ago I saw multiple apartment complexes pitched as having a 5% return on equity - you can get that from a treasury bond - why buy an apartment complex? Think about the price drop required to go from a 5% return on cash flow to 7-9%.

[TexTaxToo]

I think the "collapse" in housing has little to do with taxes and everything to do with interest rates.  No one wants to give up a 3-4% mortgage unless they have to.  On the other hand, those complaining about 7% rates must not remember the 80's when rates were 13% or more.

As for tax items not adjusted for inflation, we have the $300/$600 election for the foreign tax credit.

[schirallicpa]

Maybe we can just tax income and remove all the BS credits and political gimmicks.  If we taxed wages straight forward and only took what was required,  we could cut tons of tax prep.  And if we removed all the credits, look at the scams we would avoid.  Leave welfare assistance for the welfare offices to deal with.  Then only those that have businesses or rentals or farms, etc would have to create a tax return each year.  

 

[Lee B]

Just think of all of the unemployed attorneys and accountants

[Medlin Software, Dennis]

3 hours ago, Lee B said:

Just think of all of the unemployed attorneys and accountants

And their lobbyists and those who have a featherbed position (such as overseeing a local tax), etc. Thus the (un)common sense rule tax simplification will NEVER happen.

We face this all the time, and no one wants it - simplification. CA passed a rule for utilities to be more fair, which essentially means an access fee, then rates (lower) per usage. I suspect anti solar (the utilities themselves) were in on this as lowering the usage rates helps kill solar adoption.  Fair?, likely, assuming all were to play nice and really come up with a realistic access fee. BUT, the rule was also tasked with paying for discounts, not increasing cost for certain groups, etc. So even what could have been a straigt access/usage plan got "played" with, and now, most of the people subject to this new rule want it to be revisited - the old dance with what you know because of fear you will be the one skewered by that nasty old "change".