The Tax Man Bloggeth

I could literally spend all of my time pointing out errors in how the media report tax and financial stories, like the numerous mistakes made in reporting the "big news" about the IRS allowing overweight people to deduct diet costs.

I was listening to a radio newscast and the airhead newsreader actually went through the entire story calling the IRS the "International Revenue Service."  I kept waiting for her or anyone else to catch her mistake, but no such luck.

The story on Foxnews.com was quite accurate, but the headline, Slim Down, Fatten Wallets (which is all that most people will read as they browse stories), was completely misleading.

It implies that you can actually earn money by spending money on diet programs. This is so wrong, on at least two counts.

First, no tax deduction of any kind actually makes anyone money. A deduction only reduces taxes by the person's tax rate. For example, a normal $1,000 deduction for someone in the 30 percent tax bracket will reduce that person's income tax by $300. That means he or she will still be out of pocket $700.

However, medical deductions are not normal and in fact aren't even available to most people. For decades, our rulers in D.C. have rigged the tax code so that very few people qualify to deduct any medical costs. In order to claim any medical costs on an individual income tax return, a person must itemize on Schedule A. Even then, only the medical expenses that exceed 7.5 percent of Adjusted Gross Income are counted. As I tell my clients who moan about not being able to receive any actual medical expense deduction:  "you really don't want to be that sick."

Can't Afford to Be Fair

There are literally dozens of issues in the U.S. tax system that are completely indefensible when viewed through the prism of fairness. The Marriage Penalty is one of the worst. Following closely behind is the Alternative Minimum Tax. As always when our rulers tinker with the tax system, they end up hurting people other than their intended targets.

While you may a have false sense of security that this is a tax on "other people," such an attitude is short-sighted. The AMT is designed so ineptly — for example, it has no inflation adjustment — that millions more innocent people become subject to it each year. Soon it may be eating up your life savings and forcing you into bankruptcy if you don't start exerting some pressure on our rulers in Washington to fix it.

Whenever the politicians are asked about fixing monstrosities such as this, or at least modifying them to more closely resemble fairness, they fall back on the logic that "they wish they could, but the federal government just can't afford it." Money for Washington is more important than anything else, especially the antiquated concept of fairness.

This short summary of the current AMT fiasco from Fox News fails to mention ReformAMT, the most active organization that I am aware of that is fighting to correct this totally screwed-up tax.

Helping Seniors

Supposedly, the GOP is trying to think of ways to make itself more popular with senior citizens. I have had the answer to that problem for a very long time.

One giant step forward for the GOP would be to honor the original agreement with Social Security participants. It was originally set up that all benefits would be free of income tax. This was supposed to balance out the fact that payments in to the Social Security system are not deductible, resulting in a double taxation.

Currently, because our masters in D.C. have no qualms about breaking promises, many people have to pay taxes on 85 percent of their benefits if they are considered to be "evil rich." For this issue, evil rich has been defined as AGI over $25,000 for a single person, or $32,000 for a married couple. This was an outright fraudulent violation of the public trust and we have long been waiting for someone in D.C. to have the guts to repeal the tax on Social Security benefits.

Let the Squabbling Begin

People think I am exaggerating when I tell them some of the horror stories of poor estate planning I have seen. But even Hollywood, with all of its imagination and stereotypes, has yet to adequately capture the greed and hatred that comes out when heirs and wannabe heirs fight over an estate. It is truly vicious.

Some people hope to avoid any bickering over their estates by leaving everything to charity. That's probably what Vermont resident Edna Louise Holt thought when she was anticipating her demise, which came in 1998. She left her entire $25 million estate to her hometown of Grafton, Vt. And, as could be expected, there has been nonstop fighting among the 600 residents over how to use that money ever since. It may be trite, but it is true that money brings out the worst in people.

It really is impossible to anticipate everything that could go wrong. I wish I had the magic formula for how to avoid this kind of thing. But when you are planning, at least think long and hard about the possible consequences of your estate decisions. Of course, there may be those who would relish the idea of everyone fighting over their things, sort of like tossing a stink bomb into a party.

Meanwhile, it seems that a large number of people are facing a different problem than squabbling heirs: non-human dependents. Estate planning for pets is a little trickier than the standard "leave everything to the kids" scenario that parents of human offspring have available. According to this informative article from the Wall Street Journal on how to structure things for the benefit of pets who outlive their owners, there are already 17 states with laws that specifically allow people to create trusts for their pets. You can always tell a growing trend by the areas in which attorneys specialize — and more of them are concentrating on pet estate planning, for $200 to $300 per hour.

Big Surprise — Not

Is it news to anyone that Sen. Hillary Clinton, D-N.Y., sets new records for high taxes and support of bigger government? Thanks again to the voters of New York for allowing her to have this opportunity. Please remember this as she continues her run for a third term in the White House.

Kerry M. Kerstetter, CPA (christened as The Tax Guru by other CPAs) has been helping capitalists, investors and small business owners win the tax game for more than 26 years. He also dispenses free advice at his web log.

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