Aug 25
I must admit, this only recently came to my attention. The fair tax (not to be confused with the “flat tax”) is a system that does away with income taxes completely, instead it taxes consumption at a 30% rate. Lower income households are “pre-bated” their projected sales taxes, so in effect, they would pay no tax at all.
Many questions occur to me as I ponder such a system. I’ve saved mostly in a pre-tax 401(k). Seems this system with let me access that money at retirement with no further taxes due until it’s spent, same as others would pay with money they’ve already paid taxes on. And therein lies the rub. How are these two sources of funds (one’s savings already taxed vs money in pretax accounts) differentiated? I feel sorry for the retiree who spent the last few years converting all his retirement money from a pre-tax IRA to a Roth IRA, now to only find a 30% sales tax waiting at the other end.
On the other hand, there’s a certain appeal to knowing that those in the underground economy, who are paying no taxes at all, will be drawn in to the system if only when they go to their local grocery store. I’m not sold either way, a lot more discussion is needed on this topic.
Joe
written by JOE
\\ tags: 401(k), fair tax, income, income tax, IRA, money, Retirement, roth ira, saving, Savings, Taxes
Apr 02
I recently read someone suggesting this, and it seemed like an interesting idea. Borrowing at a low tax-deductible rate on one’s equity line of credit, to invest in tax free municipal bonds or bond funds, which, after tax, would offer a higher return. One problem, the tax code doesn’t permit this.
From IRS Pub 936, page 4:
Mortgage proceeds invested in tax-exempt securities. You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income.
So, an interesting idea, but not one permitted by the IRS.
Joe
written by JOE
\\ tags: Bond, Business, Finance, income tax, Investing, Municipal bond, tax, Tax deduction, Taxation
Oct 09
Today I caught a bit of CNBC, in which there was a brief discussion of the AMT. The AMT (Alternative Minimum Tax) was put in place to be sure that the wealthy were not able to gather so many deductions and tax loopholes that they could avoid paying taxes on all their income. Good idea in theory, but in practice the AMT amount was never adjusted for inflation and is now hitting people it was never intended to. People who live in a state with high taxes are now finding that their Real Estate taxes and/or State Income Tax are no longer deductible, but wiped out by the AMT.
written by JOE
\\ tags: AMT, income tax, irs, tax, unintended consequences
