April 5, 2007

Towards A Quantum Theory of Taxation

Posted in Uncategorized at 9:39 am by Ian

I did my taxes this week.

I know: cutting it kind of close.

But, actually, I did them months ago, as soon as I got my W2, I dutifully went to my various banks’ websites and downloaded my 1099-INTs, figured my student loan deduction, and filled out all the paperwork. The thing is, I owed almost $500 to the Feds, so I decided to wait a little longer to pay it off. Free loan, right?

It turns out to be a good thing that I waited, since I got another 1099 in the mail a bit later. A 1099-DIV from an investment account that I had started near the beginning of the year at the same time I started a retirement account, and promptly sort of forgotten about. I hadn’t totally forgotten about it; I just didn’t do anything with it on a day to day basis. It turns out that ETFs pay dividends (presumably if the securities they hold pay them) So I had to fill all the paperwork out again, adding in the meager income from my market position. And this is when I discovered that it is possible to actually have less after taxes by earning more.

I always thought that this wasn’t possible. The Federal Income Tax rates are progressive, of course, so you pay more taxes per dollar of income when you earn more, but the increase is only at the margin. Earning the next dollar in a higher tax bracket only makes you pay the higher rate on the last dollar. And that’s true if you look at the general shape of the curve. But up close, it’s actually a step function, and the steps are $50 wide. There are big tables in the back of the instructions listing taxes for ranges of income (Which is absurd, when you think about it: Of all the nonsensical calculations required for paying taxes, this is the one they think people can’t do without a list of values? They even offer to calculate it for you.). Prior to the dividends, my taxable income ended in $99. It was right on the upper edge of one of the steps. The dividend pushed me over into the next.

So, my investment earned me $9 last year, and increased my taxes by $12.

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9 Comments »

  1. Liza said,

    After nearly a month of nothing we get this?? Taxes? Come on!

  2. Ian said,

    Hey, you gotta restart somewhere.

  3. Dad said,

    So, I’m glad I looked at the 1040 Instructions before popping off.

    Used to be you could always compute your tax to nearest dollar, but now, you can only do that with more than 100k income. So first, make more than 100k, then issue goes away.

    Just trying to be helpful

  4. Ian said,

    Stupid IRS. If anything, it’s we poor folk who are hurt the most by their shoddy overestimated tax tables.

    I mean: to people making $100K of taxable income, what’s $12 here or there? To me, that’s lunch!

  5. Dad said,

    Ah, but you are presuming the tax is computed for the amount at the top of the bracket. If you look at the actual tax rate tables at http://www.irs.gov/formspubs/article/0,,id=150856,00.html

    and look at for example Single taxpayers making $74200 you see tax is 15107.50

    tax on 74249 would be 15107.50 + .28 * 49 = 15121.22

    But looking in the tax table at 14200 – 74250 tax is 15115.

    So table computes tax at middle of the range. (And rounds to nearest dollar)

    This means that when your income was $xxx99, you were actually UNDERPAYING by (your marginal tax rate) * 24.

    Now don’t you feel guilty!

    Helo, I’m from the IRS, and I’m here to help you.

  6. Dad said,

    > Helo, I’m from the IRS, and I’m here to help you.

    We eschew double letters as a waste of precious domestic pixels

  7. Ian said,

    I shall revise my statement:

    “Stupid IRS. If anything, it’s we poor folk with incomes ending in $00-24 who are hurt the most by their shoddy, overly-graduted tax tables.”

  8. Dad said,

    Now there’s something to get righteously indignant about.

    And don’t forget those with incomes ending in $50-74. Their plight is equally severe.

    But then there’s the other half the people, basking in governmental largess. Spending their ill-gotten gains frivolously no doubt.

    I can hardly wait to get my tax return back from my accountant so I can see whether I need to eat cat food or get to make that spa reservation.

  9. Chris said,

    $12 is lunch? What do you eat, gold bars? All I get for lunch is hardtack.


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