How you can resist funding the government → about the IRS and U.S. tax law/policy → how is tax law/policy/administration changing? → Alternative Minimum Tax

What is ahead for U.S. tax policy?^* The Dubya Squad are well-known for their bold, angels-fear-to-tread moves, and yet I think that when it comes right down to it, a tax revolution along the lines of the “Fair Tax” Act is just too weak of a limb for a sufficient number of legislators to go out on.

More likely by far will be a move to make permanent the various cuts that were enacted with expiration dates in Dubya’s first term, along with AMT relief. This, with any luck, will result in 3.3 trillion fewer dollars going in to the U.S. treasury. “The net budget loss (including higher debt service payments due to increases in federal debt) would be almost $4.5 trillion.”

It appears that Dubya and Osama are united in wanting to plunge the U.S. government into bankruptcy. I hope that we, as a nation, can unite in support of this bold plan.

The current momentum of tax policy has been on the whole very good for tax resisters like myself. It’s become increasingly easy to live a life of comfort and financial security without either paying income tax or stirring up the hornets at the IRS.

Expansions of personal savings accounts (of various flavors) are being floated as second-term possibilities, which would help us shield yet more income from the tax collector. A yet-to-be-fleshed-out idea of “privatizing” social security is also being floated — and whatever its other merits or lack thereof, such a plan might become a way of keeping even more of our money out of the hands of the Republicans in power by creating an “out” within the stubbornly difficult-to-dodge FICA payroll tax.

^* — You could ask Dubya, I suppose, but then you’d get an answer like this:

I was anticipating this question; that, what is the first thing you’re going to do? When it comes it legislation, it just doesn’t work that way, particularly when you’ve laid out a comprehensive agenda. And part of that comprehensive agenda is tax simplification. The — first of all, a principle would be revenue neutral. If I’m going to — if there was a need to raise taxes, I’d say, let’s have a tax bill that raises taxes, as opposed to let’s simply the tax code and sneak a tax increase on the people. It’s just not my style. I don’t believe we need to raise taxes. I’ve said that to the American people. And so the simplification would be the goal. Now, secondly, that obviously, that it rewards risk and doesn’t — it doesn’t have unnecessary penalties in it. But the main thing is that it would be viewed as fair, that it would be a fair system, that it wouldn’t be complicated, that there’s a — kind of that loopholes wouldn’t be there for special interests, that the code itself be viewed and deemed as a very fair way to encourage people to invest and save and achieve certain fiscal objectives in our country, as well. One of the interesting debates will be, of course, in the course of simplification, will there be incentives in the code: charitable giving, of course, and mortgage deductions are very important. As governor of Texas, when I — some time I think I was asked about simplification, I always noted how important it was for certain incentives to be built into the tax code, and that will be an interesting part of the debate. Certain issues come quicker than others in the course of a legislative session, and that depends upon whether or not those issues have been debated. I think of, for example, the legal issue — the legal reform issues, they have been — medical liability reform had been debated and got thwarted a couple of times in one body in particular on Capitol Hill. And so the groundwork has been laid for some legislation that I’ve been talking about. On an issue like tax reform it’s going to — tax simplification, it’s going to take a lot of legwork to get something ready for a legislative package. I fully understand that. And Social Security reform will require some additional legwork, although the Moynihan Commission has laid the groundwork for what I think is a very good place to start the debate.

Over at the tax law blog Start Making Sense, Daniel Shaviro shares the inside scoop from one of his informants:

[T]he Bush “tax reform” plan is likely to have three main elements: (1) make the tax cuts permanent, (2) fix the alternative minimum tax problem, and (3) enact enlarged (say, $7,500 per person per year) Roth IRA style tax-free savings accounts, including large incentives to convert from existing IRAs, 401(k) plans, and the like that were deductible up front.

The first one is no big surprise, and neither is the second one. Number three isn’t too new either, except for that “large incentives to convert” twist.

With traditional IRAs and 401(k) plans, you can deposit untaxed money that is taxed when you withdraw it later in life. With Roth IRAs, you deposit money that has already been taxed, and then when you withdraw it later, it’s tax-free.

So there’s this pool of money out there in traditional IRAs and 401(k) accounts that is due to be taxed sometime but hasn’t been taxed yet. If the Dubya Squad can come up with some way to convince people to let him tax it now instead of later, he can have more of our money to play with today without having to actually raise taxes. This follows the Dubya Squad modus operandi of spending freely today and sticking tomorrow with the bill.

Pretty sneaky, eh? How are they going to do this? Carrot or stick. Probably carrot — they might give a discount on the tax people pay when they transfer funds from a traditional IRA or 401(k) to a Roth or Roth-like IRA.

Here’s an example of how someone might be convinced to transfer their money from a tax-deferred account to a taxed account — I did it last year: In 2004, I earned about $18,000. I ran the numbers and determined that I could have earned as much as $25,000 and still be under the federal income tax line. So I transferred $6,500 from my traditional IRA to a Roth IRA. That $6,500 is considered part of my income for 2004 (I left some wiggle room: $18,000 + $6,500 = $24,500).

This sort of transfer is legal, and there’s no penalty (as there would be if I just withdrew the money from the traditional IRA rather than transferring it to a Roth IRA) — but I do have to pay the tax on that $6,500 now instead of later. However, I pay that tax at my current rate of taxation, which, because my total income is so low, is 0%. So that $6,500 went from being money that I was due to be taxed on eventually to being money that was never taxed and never will be. (Although if the people who want to replace the federal income tax with a federal sales tax get their way, all that careful planning on my part will be wasted.)

This sort of transfer is sensible not only for those of us with a little space in our 0% zone, but for anyone who thinks that they’ll be in a higher income tax bracket when they retire than they are today. Of course, this is just guesswork, but in a case like mine where today’s rate is 0%, it’s a no-risk no-brainer. Depending on the incentives that the Dubya Squad tax reform plan offers in the future, though, this option may come to make more sense to even more tax resisters.

Congress is wrapping up its tax legislation. Here is some of what I’ve learned about it — particularly those parts that might be important to people trying to eliminate their income tax as I do, by keeping our incomes low:

This is expected to be costly to the U.S. Government. It is projected to lead to the government collecting $1 trillion dollars fewer in taxes over the next decade. This will likely show up as increased government debt, as the Republicans had a hard enough time doing the easy part (lowering taxes) and are unlikely to be able to muster enough courage to do the hard part (reducing spending). Republican optimists hope that by keeping this $1 trillion out of government hands and in the private sector, the economy will boom, leading to higher tax receipts after all, and so things will all balance out in the end. People who know how to run the numbers, though, don’t seem to be taking that scenario seriously.
Early projections based on the House version of the legislation suggest that the number of “lucky duckies” who pay no federal income tax at all will rise somewhat.
The bill reduces both corporate and individual tax rates. But for a lot of people, what really controls how much they’ll pay is not their rate, but how much of their income is subject to the income tax and how much is safely deducted out of harm’s reach. In any case, the lowest of the rates (10%) remains the same as before and covers just about the same amount of taxable income, so from the point of view of a low-income tax resister like myself, nothing much has changed here.
Next year, the standard deduction had been scheduled to go up to $6,500, and the personal exemption to $4,150 — shielding $10,650 of a single person’s income from income tax. The new legislation eliminates the personal exemption, but boosts the standard deduction to $12,000 — thereby adding $1,350 to the amount that’s shielded in this way (people filing as married-joint, married-separate, or head-of-household also see rises to their standard deductions). Modifications to the child tax credit and credits for non-child dependents are meant to make up for the absent personal exemption for people with dependents.
The bill eliminates some itemized deductions, but also eliminates the limitation on how much of such deductions you can take if you’re well-off. You will also be able to take a slightly higher proportion of your Adjusted Gross Income (60%, up from 50%) as a deduction for charitable contributions, and the law will become somewhat more generous about allowing you to take a deduction for medical expenses. I haven’t looked into this very closely, but it’s possible that this holds out some hope to high-rollers that they might eliminate their federal income tax through zealously pursuing itemized deductions.
The bill would allow you to use tax-advantaged education savings accounts to pay for a child’s tuition at a private elementary/secondary school (in the past, these accounts could only be used for post-secondary education). This could be a useful tax shelter for people who would prefer not to inflict government-run schooling on their children.
It’s surprising to me just how little actual change there is from the status quo. Everybody complains about the complexity of filing their income taxes, and politicians get lots of mileage about promising to let people file on the back of a postcard and the like. But after all of the wrangling, this new bill keeps the individual Alternative Minimum Tax and doesn’t even reduce the number of tax brackets — the cheapest trick in the “simplification” bag. It even introduces a lot of new complexity by means of its new method of taxing “pass-through” income — something that may cause some new headaches (or, may we hope, offer new tax-saving opportunities) to those of us with Schedule C income from sole proprietorships, gig economy work, or small businesses.
I was also a little surprised to see neither the House nor Senate try to boost Health Savings Accounts. These are a more Republican-identified health care policy reform measure, and I would have thought that as they try to sabotage Obamacare that they would have put some effort into bolstering some of their own alternative ideas. No such luck. It makes me wonder if maybe Health Savings Accounts are a craze that has come and gone and that we might expect the program to atrophy at some point.