Tax "Loopholes"

[Bob B.]

What is a Tax Loophole?

With the discussions going on in DC, what I think I'm hearing is that the Dems want to raise the two highest income tax rates, and the Republicans want to close tax loopholes.

Are loopholes things like:

The standard deduction?
Exemptions?
Things that taxpayers can include in an itemized deduction (home interest, charitable giving)?
The child tax credit?
Energy credits?
Adoption credits?

Or things that don't apply as much to the average tax payer, and apply more to small business? Like:

Section 179 expensing?
Bonus depreciation?
The rate of mileage you can deduct?

Or are they other thing that I have no understanding of?

All of the above?

It just seems like politicians throw around terms like "tax loopholes", and the average tax payer thinks things like "tax loop holes only pertain to the rich". And the average tax payer does not think that they are rich. But my sense is for the closing of tax loopholes to make any difference in avoiding this fiscal cliff, they will have to pertain to most of us.

[MakeAStash]

I've begun tuning out the tax discussion details because they obscure the history of governments spending not only what they take in, but also more. If the rest of us do that we get into trouble.

[kaleida]

I think tax loopholes are rules that allow high-income earners to pay a much lower effective tax rate compared to middle- or low-income earners.

I don't make enough money to know what these rules are...

[UnknownXV]

There aren't as many loopholes as people seem to think. The whole thing with Warren buffet having a lower effective tax rate than his secretary is because most of his earnings are via stocks. Tax on Interest earned in investments is 15%.

Beyond that, there are corporate loopholes, so people who own their own companies might be able to squeeze by..

But really, it's just people targeting the rich because they are easy to hate.

[snafu]

The tax 'loopholes' seem to come from how individuals get income. If your income comes from the *profit* you got by selling investments it is taxed at a lower rate than if it were salary. Top ranking executives receive company shares as bonuses. These wealthy stockholders *loan* shares to a financial institution and receive cash in advance in $250K segments having promised to turn over the shares *later.* There is no tax on profit since there was no completed *sale*

Someone earning between $40K - $70K could get $523. mortgage interest tax deduction [loophole]
Someone earning $250K could get $5,459. mortgage interest tax deduction.

Candidate Romney 2010 earned $21.7 million; taxed @ 13.9 %; what rate did you pay?
famous Buffet 2010 paid 17.5% because his income was from selling investments

[LuckyRobin]

I remember reading something about the estate taxes will be going back to whatever they used to be, so when someone dies with a big estate the heirs will be taxed more heavily on what they inherit. The amount you could inherit without being taxed had been raised quite a lot, but it'll be going back to what it previously was.

I also read something about the marriage penalty tax coming back, where a married couple with two incomes filing jointly will have to pay more in taxes than two singles. Although I don't think it applies when there is only one income between the married couple.

And I think something about the child credit going from $1000 back down to $500 per kid. And the one for tuition won't be as much. That's all I've read so far.

[GrimJack]

A tax loophole is an exploitation of a tax law which can reduce or eliminate the tax liabilities of the filer. A tax loophole is usually considered a murky legal maneuver for example using the wording of a tax break to use it differently from its intended purpose.

Comparing how the federal government handles its finances to how a family handles its finances is disingenuous at best. Families do not have the infrastructure of a nation to take care of - though I suppose that a mortgage can kind of/sort of almost related to how a government goes into debt.

The marriage 'penalty' is often used as an example of a tax loophole in that if the couple were to get divorced on the last day of the year, they can file as 2 individuals then get married again the next day/year. This issue was eliminated in the tax code not in the Bush tax cuts.

[UnknownXV]

A mortgage is not a good idea though. So associating it with the governments financial plan isn't a good defense. But it's not really like that anyways, since homes are investments (financial). The government doesn't invest in much. The infrastructure of the country, as well as basic services it should provide, are an extremely small fraction of the main budget. The primary source of our deficit is via welfare programs (social security, medicare, prescription drugs, etc..) which are all unfunded in the long-term, by tens of trillions of dollars. It's mad how terrible that is.

The defense budget is pretty poor too. I think most people at least agree we shouldn't be policing the world and building an empire.

[josetann]

My definition of a tax loophole is using a credit/deduction for something that was not originally intended when that part of the tax code was written.

I remember several years ago or so, there was a big tax credit if you bought an alternative fuel vehicle, something like $6,000 or more. Well, a company came out that sold electric golf carts that were road legal. The tax credit would cover most/all of the golf cart's cost. This is not what was originally intended when the tax law was written, but (far as I know) was completely legal.

[GrimJack]

A mortgage is not a good idea though. So associating it with the governments financial plan isn't a good defense. But it's not really like that anyways, since homes are investments (financial). The government doesn't invest in much. The infrastructure of the country, as well as basic services it should provide, are an extremely small fraction of the main budget. The primary source of our deficit is via welfare programs (social security, medicare, prescription drugs, etc..) which are all unfunded in the long-term, by tens of trillions of dollars. It's mad how terrible that is.

The defense budget is pretty poor too. I think most people at least agree we shouldn't be policing the world and building an empire.

Can you explain how a mortgage is not a good idea (I was not using a mortgage to defend the budget, I was making an analogy)? You are going of in all sorts of directions but I would like to point out that the military is a necessity not a luxury. If we are going to talk about the deficit, we need to talk about the discretionary spending - here I have to agree with you, we do not need to spend over 50% of it on defense; most industrial countries spend about 1% on defense. Both medicare and Social Security are trust funds so they are not the source of our deficit.

[UnknownXV]

Can you explain how a mortgage is not a good idea (I was not using a mortgage to defend the budget, I was making an analogy)? You are going of in all sorts of directions but I would like to point out that the military is a necessity not a luxury. If we are going to talk about the deficit, we need to talk about the discretionary spending - here I have to agree with you, we do not need to spend over 50% of it on defense; most industrial countries spend about 1% on defense. Both medicare and Social Security are trust funds so they are not the source of our deficit.

Going into any debt is a bad idea. Now, usually your luck will be good when buying a house via the mortgage loan. Even without a down payment, the value of the home matches the amount of your mortgage (usually). With a down payment, you're already ahead.

The problem, as seen with the subprime housing crash, is when too many people try to invest in this way, buying homes not to live, but to make lots of money. That doesn't work for too many people. It can't. It can only work conservatively. It escalated so fast with people rushing over each other to try and get these loans to cash in on free money. That was an obvious bubble, and it burst.

The real danger is if this can happen in a more conservative loaning world. I'm not sure, but I'm not willing to risk it. But that's my opinion, I could be wrong. I just see it as risk, and I don't like the idea of leveraging in general. I invest my money, not someone else's. I feel leveraging is simply a sign of how we live in the modern world. Impatience. Excess. No one is willing to wait.

Things might take longer if we did, but it would be a hell of a lot more stable in the long run.

For the military, of course it's necessary. I wasn't saying we should get rid of it, that would be nuts. I was just saying that we shouldn't be out waging wars in third world countries, nor should we have almost a thousand bases around the world. We have bases in freaking China. Lets come home. Stop spending so much on building thousands of planes, tanks, boats, etc.. we have a damn strong military already. Maintain it, and come home.

For social security and medicare, more money goes out than comes in. Not only this, but more people are retiring than starting to work. It's not sustainable. Besides, retirement should be the individuals responsibility, not the governments. Even if you were to argue that we'd end up taking care of these people who don't save in one way or another, the simple truth is the government is not very efficient. I'd rather take the money and invest it myself.

Right now, if I work, I am forced to pay into a retirement fund that will not exist when I reach the retirement age.

Social security wasn't meant to be a full retirement fund anyways. It was meant to provide a minor supplement to it.

The truly scary thing to me is, even if we cut the entirety of social security out, we'd still have a deficit of almost 500 billion left.

How the hell things are this bad, and why people are not panicking more. I don't think anyone realizes how much money we are talking about here. A deficit of 1.2 TRILLION dollars... it baffles comprehension. This is not sustainable. Not even remotely. And all the talks about the fiscal cliff.. it's nothing. We have a fiscal impass at hands here. What we need to cut to balance the books, it's more than anyone will ever accept. People would rather ride the gravy train until it crashes than get off now.

[josetann]

How the hell things are this bad, and why people are not panicking more. I don't think anyone realizes how much money we are talking about here. A deficit of 1.2 TRILLION dollars... it baffles comprehension. This is not sustainable. Not even remotely. And all the talks about the fiscal cliff.. it's nothing. We have a fiscal impass at hands here. What we need to cut to balance the books, it's more than anyone will ever accept. People would rather ride the gravy train until it crashes than get off now.

Don't worry, I panicked. Decided we needed a Plan B. Hello, Australia!

[elessar78]

A mortgage is not a good idea though. So associating it with the governments financial plan isn't a good defense. But it's not really like that anyways, since homes are investments (financial). The government doesn't invest in much. The infrastructure of the country, as well as basic services it should provide, are an extremely small fraction of the main budget. The primary source of our deficit is via welfare programs (social security, medicare, prescription drugs, etc..) which are all unfunded in the long-term, by tens of trillions of dollars. It's mad how terrible that is.

The defense budget is pretty poor too. I think most people at least agree we shouldn't be policing the world and building an empire.

One could make a strong argument that it's in the government's best interest to discourage home ownership in order to create a more transient workforce, i.e. make it easier for people to move to where jobs are.

I'm currently reading the 2011 Berkshire Hathaway annual report and Buffet mentions how recovery in the building sector is lagging because there's a glut of inventory but that's slowly being corrected. People are getting married, people are getting tired of living with their parents and eventually it will catch up.

But you're spot on about social security and other welfare programs.

A lot of people love to defend the military and deem it sacrosanct, but ever talk with a soldier? They'll tell you how inefficient the military actually is. I'm glad for these people's sacrifice but let's be honest, the military is run about as well as any other gov't program. Like anywhere else, all that money doesn't actually go to the men and women putting their lives on the life. It goes to the Lockheed Martins of the world.

As many of us trying to get out of debt know, there's no painless way to do it. It's true for people and it's true for nations. It will involve sacrifice on many fronts. People (read:voters) talk a big game but are they willing to live through what actually is needed?

Sure, our leaders can do what is necessary: increase revenue and reduce spending. More taxes and less services.

[UnknownXV]

Increasing taxes doesn't necessarily increase revenue though. More tax means a less productive economy. It's not always a linear line but I don't think it's the ideal way to fix this. Maybe a reform on the tax system itself (fair tax anyone?).

No, the only genuine way to fix our fiscal problem is by massive cuts. But again, no one will ever accept the type of cuts that would be necessary (talking of just balancing the books not even trying to pay down the debt itself), so I've stopped to really try to put effort into it. No one with the power to do anything will listen (besides Ron Paul)

It really is curious. Here I am, a 22 year old, looking at the world and thinking to myself, what the hell is going on? How is it this messed up? The only conclusion I can reach is that people are impatient, and want to eat their cake and have it too. They think they can, they think they got away with it; until the cake explodes. Unfortunately I will be in the blast radius of that explosion even though I had no hand in its establishment. Suffering the delayed consequences of actions committed before I was born.

There isn't a nation on the planet besides momentarily Zimbabwe that is or was debt free. There are no words to describe this. Imagine if everyone in the us carried credit card debt.

Oh wait....

[elessar78]

Increasing taxes doesn't necessarily increase revenue though. More tax means a less productive economy.

Really? Up until 1951, give or take, the highest tax rate was 91%. Right before Reagan it was in the 70% range. I'm pretty sure we had a lot of good years before Reagan.

Massive cuts? Sure the military is bloated. Social Security needs to raise the age requirement since people are living longer now, medicare and medicaid are tricky. You can't just cut without hurting people that actually need it. Overall, our healthcare system is a waste of money, we need to make it to actually make people healthy when they are sick, to have a predictable cost structure, and to drastically reduce the fraud that is taking place.

Increasing taxes is exactly what creating more revenue is. 94% of gov't revenue is some form of taxes (payroll, indiv. income tax, excise, corporate).

The one theory out there is to cut the hell out of taxes and that will spur investment and job creation thereby increasing overall tax receipts by the gov't. I just haven't seen that work in practice.