December 8, 2010

Tax Hax Axe Lax Pax

Hatched by Dafydd

All right, I admit I don't really understand the urgency about extending the Bush tax rates before they expire. I certainly favor (kind of) extending the tax cuts; I'm much more in favor of further reductions in the rate, simplification to a single tax rate for everyone (and everything, including corporations), and the complete elimination of the death tax.

But why the rush? Come January 3rd, we'll have a much stronger hand, with more Republicans to vote for economically sound taxing and spending policy and fewer Democrats to filibuster it. And no matter how loudly the Left screams and threatens a primary challenge, Barack H. Obama must realize that if he is seen as obstructing the very people who just gave him a "shellacking," then next election, they may give him a tar-and-feathering.

If the deal does collapse, which I expect it will, it will mostly be because of Democrats, not Republicans; and that part is out of our control. When it does, we can hammer the heck out of congressional Democrats, crowing that they're so obsessed with a new tax increase that they even went against the deal put together by their own president.

In any event, what bad thing will happen if the year expires without a deal to extend the Bush tax rates? Michael Medved just said on his radio show that, "Everyone in the country will get an immediate tax increase on January First." And indeed, the scheduled rates will rise by about 5% across the board (that's how much was cut ten years ago), plus the loss of the $500/child tax credit and some other things.

But does that translate into an immediate tax increase? Well, no, not really; it means the tax rates will leap up for calendar year 2011. (Even for those businesses that use fiscal years, the months before January 1st, 2011, are taxed at the current rate, not the higher rate; to apply the tax increase retroactively would be an ex-post facto law, hence unconstitutional.)

But nobody pays 100% of his income tax on the first day of the year. We pay later by various schemes and systems -- and there is time and means to adjust your payment before sending it in.

Vital Note: I am not a lawyer. Bear that in mind. If you follow my advice and get in trouble, don't bother suing me; you will be laughed out of court. Not a lawyer, get it?

Most of us pay taxes via some combination of these three ways:

  • Income-tax withholding by our employers.
  • Quarterly income-tax payments for income not subject to withholding (rents, royalties, investment income, Schedule C income, etc).
  • A final catch-up payment accompanying the filing of a Form 1040 on April 15th of the following year, 2012 in this case. (You're still supposed to pay by this date even if you file for an automatic extension to file the 1040 itself.)

Let's take them in reverse order:

Tax day: The deadline-payment is due fifteen and a half months after the tax rates rise, not immediately upon January 1st, 2011. So don't worry about it; by this date in 2012, you will obviously know what the tax rates were for 2011.

Quarterlies: The first quarterly payment at 2011's rate is not due until April 15th of that year, three and a half months after New Year's Day. But even if the tax rate isn't settled by then, bear in mind that, because you're estimating your income, the amount you pay is pretty much up to you. You just have to be able to justify it later.

In the end, on April 15th, 2012 (or later if you file an extension), the IRS will decide whether you paid enough on each quarterly payment. I doubt it would be very much of a financial hit if you paid the quarterlies at the current (pre-increase) rate until it became clear which way the wind was blowing; then if a tax-rate extension is rejected by Congress at some point during the year, you can adjust your remaining quarterlies to make up the difference.

Withholding: Again, you, the wage-earner, can largely set your own withholding rate. How do you do that? When you fill out your Form W-4 for you employer, look closely at the Deductions and Adjustments Worksheet on page 2. Here are two questions the IRS asks that allow you to reduce your income-tax withholding:

  • Enter an estimate of your 2010 itemized deductions.
  • Enter an estimate of your 2010 adjustments to income and any additional standard deduction.

If it looks like Congress is going to extend the current tax rates, but they're still wrangling about it after January 1st, I think it's quite reasonable to adjust the W-4 withholding to maintain withholding at the current tax rate.

Then if Democrats dig in their heels and allow a middle-income tax hike, then I believe you can file an amended W-4 to increase your withholding not only to reflect the higher rate but to make up the shortfall for past withholding.

(Or else just readjust the W-4 to the higher rate, then send the difference between what you withheld and what you should have withheld as a quarterly estimate at the next quarter; and you're all caught up.)

Remember, my understanding of the law -- as a lay person and not any kind of a lawyer -- is that you have no legal obligation to overpay your taxes. Likewise, you have no legal obligation to estimate your taxes precisely; how could you, when you don't actually know until it arrives? You could get a raise, or lose your job, or incur a big medical expense that's deductable, or even have a baby. A precise estimate isn't an estimate, it's a prophecy!

You are obliged, as I understand it, to make a good-faith estimate of your taxes and make sure they get paid on the appropriate schedule. If I think I might sell a book late next year, I'm certainly not going to make any quarterly income-tax payments on the basis of that hope. But if I really do sell a book, then I'll consider it.

It's all a bit of a pain, and we'd rather not have to make quarterly payments or monkey around with withholding. But my point is that it's simply not true that we'll get an "instant" tax increase on New Year's Day. In fact, we'll have months to work on this before the increased rates begin to bite us significantly... ample time for the new Republican House and the somewhat less Democratic Senate to bite the bullet and cut a deal that's a darn site better for Republicans than this one, even if it isn't everything we want.

Hatched by Dafydd on this day, December 8, 2010, at the time of 4:55 PM

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The following hissed in response by: MikeR

Dafydd, I'm usually a big fan of your titles, though literary references aren't one of my knax. But this one I need explained, to the max. Thems the fax! Don't be a stubborn Zax - let's hear your yax.

The above hissed in response by: MikeR [TypeKey Profile Page] at December 8, 2010 5:44 PM

The following hissed in response by: Dafydd ab Hugh


Huh, I thought it was pretty clever:

  • Tax - obvious.
  • Hax - hacks, people who slave away on some project... in this case, tax hacks.
  • Axe - destroy, cancel.
  • Lax - sloppy, not good enough.
  • Pax - peace, in this case used in the sense of a pact that was supposed to produce peace in our time, as in "Pax Romana."

Tax hax axe lax pax -- tax-policy junkies are ripping apart the tax deal because it doesn't go far enough.



The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at December 8, 2010 11:56 PM

The following hissed in response by: MikeR


The above hissed in response by: MikeR [TypeKey Profile Page] at December 9, 2010 7:25 AM

The following hissed in response by: snochasr

It was my understanding that, without some of the "extraordinary" steps which you outline, that EVERYBODY'S withholding rates are set to go up on January 1, REGARDLESS of what Congress does at this late date, and for about 3 months while everybody reprograms their computers for the old rates. If that is true, then the best course for the GOP is to not help the Dems out of their self-made dilemma and let everybody see a tax INCREASE on Jan. 1, just as promised. THEN the GOP can swoop to the rescue and make the tax "cuts" permanent with their new majority.

Besides, I don't think a two-year extension is going to help the economy; the uncertainty would still be hanging over us. And keeping the current rates certainly isn't going to boost the economy, just not cripple it further. If we don't get spending under control we're doomed. Just that simple, and it won't matter what tax rates are. Right now, we would need a 100% tax rate, no exceptions, for the next 8 years, to pay off total unfunded debt obligations.

The above hissed in response by: snochasr [TypeKey Profile Page] at December 9, 2010 7:29 AM

The following hissed in response by: Texas Jack

You are forgetting businesses who pay weekly. They must calculate withholding tax at the current rate each week, so if the rates go up on the first (Saturday), paychecks on the seventh (following Friday) will show withholding at the higher rate, as will all following checks until the rates again go down.
By the way, (pet peeve) this is NOT a "tax cut" for anyone. It is a continuing of the current tax rates. No, you didn't call it a cut, but many of the lesser writers have, and it irritates.

The above hissed in response by: Texas Jack [TypeKey Profile Page] at December 9, 2010 8:43 AM

The following hissed in response by: Dafydd ab Hugh

Texas Jack:

Whether a business pays weekly, biweekly, or monthly, you can change your W-4 to reduce withholding to the same level as tax-year 2010 (or lower, if you believe you'll be paying lower taxes... say, you took advantage of lower interest rates and bought a house this year, allowing you to deduct mortgage interest and lower your income taxes).


Be advised (by a non-lawyer): If you lower your withholding too much, you will have a big tax bill on April 15th, including interest... and you might even get socked with penalties. So be intelligent; only reduce your withholding to your best estimate of your total 2011 taxes.

The object is not to give yourself "extra money" in your take-home -- it's not extra, it's borrowed, and from America's most vicious loan-shark! -- but to prevent a momentary increase in tax rates that ends up being retroactively reduced from turning you into an involuntary lender.

Remember, if you get a big refund when you file your taxes, then what really happened is that you just lent hundreds or thousands of dollars to Uncle Sugar. And while the IRS demands interest if you underpay, it pays not even a fraction of one percent interest if you overpay.

Which means you leant all that money to the feds for zero interest, Homer!


The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at December 9, 2010 10:57 AM

The following hissed in response by: wtanksleyjr

Dafydd, the problem is in "tax planning" -- you can spend or account for spending/earning/losses/gains at the end of this year or at the beginning of next year. But whatever you do, the IRS will NOT allow you to redate things; you only get one chance.

I don't think it's a BIG deal; it's not going to undermine the economy. But it does matter in one important way: it's the job of the Law to provide a stable living environment, AKA civilization. If the law is unstable, it is failing at its main task. Thus, for congress to leave people in doubt about how to effectively comply with the law is to undermine one of the main measures of the goodness of law -- like a fast food place selling day-old burgers. No, civilization won't collapse; but it does leave a bad mark on the resume of the legislators involved.

And this group of legislators don't need any more bad marks.


The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at December 9, 2010 3:41 PM

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