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accelerated capital goods depreciation
At The Leiter Reports they’re discussing right-wing tax-bashing powerhouse Grover Norquist’s proposal to cut capital goods depreciation time down to one year.
Essentially that means: invest in stuff for your business, deduct the whole cost right away.
If I look at this proposal from the perspective of a tax resister, it seems like a fantastic way for folks like me to zero out our taxes.
The commentators at The Leiter Reports, though, worry about it having a weirdly distorting effect on the economy: People and businesses with lots of income and capital will be motivated to purchase and develop things that are not economically sensible or profitable because even if they end up losing money on their investment, they end up ahead of where they would have been if they had been taxed on the money they spent.
The authors imagine a wilderness of abandoned strip malls that were never designed to be successful but only to be developed and sold at a loss for tax reasons.
I wonder if this is not a bug but a feature.
It reminds me of the old Keynesian saw about the government being able to stimulate the economy by paying one set of people to dig ditches and another set of people to fill in the ditches the first people dug.
Perhaps today’s economists imagine that such a boondoggle would be even better if it were privatized.
(On the other hand, by encouraging businesses to invest in capital goods rather than to hire new employees, a tax policy like this might actually exacerbate unemployment.)
As you may have noticed, Congress has decided to play double-or-nothing with our money in an attempt to get the economy reinflated in time for the next election.
Their recent legislation is a combination of reckless spending of other people’s money and increased tax code complexity, the combination of which, along with eye of newt and toe of bat, will stimulate the economy, or at least so said the Impresss Your Economey With 5t!mu1is emails that have been going around lately.
Some of these tax provisions may be of interest to folks who are using the DON Method of income tax resistance:
For tax years , the bill provides a refundable tax credit of up to $400 for individuals and $800 for families.
This credit is equal to 6.2% of earned income, but phases out for taxpayers with adjusted gross incomes over $75,000 ($150,000 for married couples filing jointly).
This effectively offsets a portion of the payroll tax (or self-employment tax).
If you’re employed, your employer may begin withholding less FICA from your paychecks.
If you’re self-employed, you’ll end up owing less self-employment tax.
Also, if you’re self-employed and you file quarterly estimated tax payments, in the past you’ve had to try to hit the lesser of two target marks: either 90% of whatever you will owe this year, or 100%–110% of whatever you owed last year (depending on your adjusted gross income).
In , things will be a little different: either 90% of what you will owe this year, or 90% of whatever you owed last year.
If you don’t hit the target, you can get hit with a penalty.
If you have three or more qualifying children in your family or if you file jointly, you may find that you receive a larger-than-usual tax credit via the EITC.
Also, the refundable child tax credit will increase for tax years .
There’s already the Hope and the Lifetime Learning credits, at least I don’t remember those going away, but now there’s yet another education tax credit: The “American Opportunity” Education Tax Credit.
This can reduce your tax bill by up to $2,500 for money you spend on college tuition, books, and fees.
Unlike the other credits I mentioned, 40% of this credit is refundable, so the government will reimburse you for some of your college expenses even if you don’t pay any income tax.
Last year, Congress decided to try to reinflate the housing bubble by providing a “credit” to first-time home buyers.
I put “credit” in quotes because it was really an interest-free loan that the home-buyer would have to pay back in installments.
The new bill makes this credit a real credit that the buyer doesn’t have to pay back.
If you buy your first home , Congress might hand you $8,000 of other people’s money in the form of a refundable tax credit to help you out.
You can deduct the state sales tax you pay when you buy a new motor vehicle.
I’m not sure where this deduction applies, but presumably it’s not just an itemized deduction.
The feds won’t tax the first $2,400 of your unemployment benefits .
Expensing and depreciation rules, particularly for small businesses, are liberalized (and some too).
Also, small businesses that lost money can redistribute these losses to offset gains during .
I think this means that you can refile your tax returns for those years and declare additional businesses losses that can offset business gains in those years and thus lower your taxes, enabling you to file for refunds of taxes you paid long ago.
Under current law, businesses can take a tax credit for the expense of purchasing and installing wind energy generators, and individuals can take a similar tax credit for solar water heating, wind energy generating, geothermal heat pump stuff.
The credits are equal to 30% of the expense, but there used to be a ceiling above which the credit couldn’t go.
The new bill eliminates the ceiling, so your credit is only limited by how much tax you owe and how much you spend on this stuff.
The bill also increases the credit percentage and the credit cut-off ceiling for credits for energy-efficiency improvements by homeowners.
The bill also increases the tax credit for the purchase of electric motor vehicles
Your employer can give you a tax-free public transit or parking fee reimbursement of up to $230 per month.
Congress just passed another bill, which the President is expected to sign
into law. It has a number of tax provisions, some of which may affect those
of us who are using The
DON Method of
tax resistance.
Most exciting to me is that the bill permits sole proprietors to deduct their
health insurance premiums as a business expense. Formerly such folks could
take a deduction, but only after calculating business profits. The
significance of this is that now the deduction reduces our
profitability/income and therefore both our income tax and our
SECA (social security & medicare) tax.
The old way, it could reduce our income tax but we still were charged
SECA on the income.
This makes sole proprietors more like employees whose employers provide health
benefits. Those benefits don’t typically count as income and so neither the
employer nor the employee gets charged taxes on them.
Unfortunately, Congress being Congress, it was only willing to enact this new
provision temporarily. It officially applies only to the
tax year. But now that the precedent has
been established, it will probably get rolled into one of the yearly extenders
packages.
Other provisions of the new bill:
Raises the §179 depreciation limit from $250,000 to $500,000 and extends
the 50% bonus depreciation option for another year.
Allows new businesses to deduct $10,000 in start-up costs (that otherwise
would have to be depreciated); the limit had been $5,000.
Expands the favored tax treatment of C corporation capital gains.
Allows some small business taxpayers to shift certain tax credits back
into the five previous years and to use them even if the Alternative
Minimum Tax would otherwise apply.
Expands the new “if you pay $600 or more to anyone you have to file a
1099-MISC with the government about it” policy
so that it applies to landlords.
Even my not-at-all-magical crystal ball is clear enough that I could look into it last week and see the future: the liberal wing of House Democrats would whine a lot about the tax package Obama negotiated with the Republicans but in the end they’d just give in like they always do.
Not that this is a bad thing in this case.
The Obama-Republican version of the bill means much less for the Treasury than the liberal alternative — and is even (hide your eyes, liberals!)
a better deal for the poor, particularly with its temporary payroll tax cut.
Indeed the payroll tax cut means even my tax rate will be going down next year, and I haven’t paid federal income tax since .
But, to be on the safe side, I refrained from blogging about this tax plan until it got through Congress and to the President’s desk.
But now I’ll highlight some of the features that may be of interest to tax resisters:
The bill allows for something called “bonus depreciation” of assets that businesses purchase between , at 100%.
What this means is that for assets that qualify, a business can write-off the whole cost of the asset as a business expense rather than portioning out the expense over a particular span of time.
Tax resisters who have a business or who are self-employed can use this feature to lower their taxable income this year or next year if they are in danger of rising to a taxable income level.
The bill also raises the limit for “Section 179” depreciation, which I believe applies to a larger class of business assets.
The bill temporarily reduces the “employee portion” of the payroll tax by two percentage points (for only).
The employee portion is what you see on your paycheck stub (your employer pays what used to be an equivalent amount that you don’t see on your paycheck stub).
Self-employed people will just see their self-employment tax rate drop by two percentage points (the income tax deduction self-employed people take based on the amount they’re charged for self-employment tax, however, will not change, which will make this calculation a little more complex).
You may wonder: “isn’t Social Security and Medicare running low on cash?
What is going to happen when their trust funds are taking in so much less payroll tax?”
Well, as I’ve tried to patiently explain before, these trust funds are just accounting fictions, and the government takes money from wherever it wants and puts it wherever it wants without much regard for trust funds or particularly-earmarked taxes.
In this case, the new bill explicitly says that the General Fund (where your income tax money goes) will pay into these trust funds any money they would have received from the payroll tax rate if it had not been lowered by the bill.
A number of tax credits and deductions that Congress perpetually extends “just one more year” have been extended for one more year yet again.
Also extended is the provision that allows people who have reached retirement age to exclude from income amounts they donate to charity directly from their 401ks and IRAs.
