Post by 4aapl on Apr 15, 2024 12:51:32 GMT -8
Ahhh, the fun things you learn at tax time.
This year our taxes were relatively simple. Dividends, a little interest and short term gains, and a small amount of long term gains. I thought we were even going to use the standard deduction this year.
But it turns out that since some of those things are taxed the way they are, the interest, short term gains, and some non-qualified dividends, that since we have some investment interest expenses they wanted to use them against each other. And that's generally good, but then meant that we weren't using the standard deduction, and so I had to put all of those little write-offs in like vehicle taxes and putting in values for item donations. So things took longer.
But then I tend to get curious, looking at why Turbo Tax did something, like why it asked me different things about our different kids. Sometimes it is doing things right (one thing that looked odd was due to one kid being at least 17), but other times it isn't. Either way, it's often a "fun learning adventure" of diving through multiple levels of forms, and getting to appreciate how complex the IRS method can make a fairly easy calculation (see the additional forms page of Schedule D, that really is only trying to calculate taxes on LTCG, to see what is at 0%, what is at 15%, and what is taxed at 20%. This manages to take 47 lines).
And on to the "net investment income tax", that 3.8% tax added to investment income above the $250k AGI level (for married filing jointly). And that's the key, that they use AGI, which is after certain business deductions (say rental costs from rental income, or small business costs from small business income), but is not before most individual deductions. And that included being before "investment interest expenses".
So how does that work and what does that mean? Well, the simple example is that if you had total income at $250k (assuming MFJ), and you had an additional $20k of short term capital gains, but also $20k of investment interest expenses (ie margin costs), and assuming your other deductions matched the standard deduction (so this year $10k of SALT, and 17.7k of other deductions), you might expect that your short term gains and your interest expenses would cancel out. And they do, for income taxes. But for the net investment income tax, it's calculated based on your level at the MAGI spot, and that is before most of the individual deductions. So even though they balanced out and you pay no additional federal income tax on that $20k gain, you still pay 3.8% for the net investment income tax.
In this example that is only $760, but it just seems pretty odd that it is done this way. But it is what it is.
In the end there's just huge differences between business (including rental) taxation and individual taxation. A business generally wouldn't have this problem, since generally you first figure out the net income, after taking out all expenses, and then tax it. But it is some of these differences that bring up potential loopholes or just seem unfair, like being about to take depreciation. And then there are really odd special cases, like being able to continuously take depletion credits (7.5%?) on something like oil profits, even if the well has been pumping for a century and those net deductions exceed the initial cost (unlike the limits on depreciation).
Fun times. Even with having to enter all deductions this year, our taxes were relatively easy. But it's interesting to run into some of these things that seem odd, like the cliff edge that the Obamacare credits used to have (they have now fixed that). Combined, I'd still like a much simpler tax system with fewer deductions but then lower rates, even if it meant that we ended up paying a little more. But I'm glad that many people out there have much simpler taxes, and I'd glad that this year we only had to file about 20 pages, instead of about 50 pages a few years ago.
This year our taxes were relatively simple. Dividends, a little interest and short term gains, and a small amount of long term gains. I thought we were even going to use the standard deduction this year.
But it turns out that since some of those things are taxed the way they are, the interest, short term gains, and some non-qualified dividends, that since we have some investment interest expenses they wanted to use them against each other. And that's generally good, but then meant that we weren't using the standard deduction, and so I had to put all of those little write-offs in like vehicle taxes and putting in values for item donations. So things took longer.
But then I tend to get curious, looking at why Turbo Tax did something, like why it asked me different things about our different kids. Sometimes it is doing things right (one thing that looked odd was due to one kid being at least 17), but other times it isn't. Either way, it's often a "fun learning adventure" of diving through multiple levels of forms, and getting to appreciate how complex the IRS method can make a fairly easy calculation (see the additional forms page of Schedule D, that really is only trying to calculate taxes on LTCG, to see what is at 0%, what is at 15%, and what is taxed at 20%. This manages to take 47 lines).
And on to the "net investment income tax", that 3.8% tax added to investment income above the $250k AGI level (for married filing jointly). And that's the key, that they use AGI, which is after certain business deductions (say rental costs from rental income, or small business costs from small business income), but is not before most individual deductions. And that included being before "investment interest expenses".
So how does that work and what does that mean? Well, the simple example is that if you had total income at $250k (assuming MFJ), and you had an additional $20k of short term capital gains, but also $20k of investment interest expenses (ie margin costs), and assuming your other deductions matched the standard deduction (so this year $10k of SALT, and 17.7k of other deductions), you might expect that your short term gains and your interest expenses would cancel out. And they do, for income taxes. But for the net investment income tax, it's calculated based on your level at the MAGI spot, and that is before most of the individual deductions. So even though they balanced out and you pay no additional federal income tax on that $20k gain, you still pay 3.8% for the net investment income tax.
In this example that is only $760, but it just seems pretty odd that it is done this way. But it is what it is.
In the end there's just huge differences between business (including rental) taxation and individual taxation. A business generally wouldn't have this problem, since generally you first figure out the net income, after taking out all expenses, and then tax it. But it is some of these differences that bring up potential loopholes or just seem unfair, like being about to take depreciation. And then there are really odd special cases, like being able to continuously take depletion credits (7.5%?) on something like oil profits, even if the well has been pumping for a century and those net deductions exceed the initial cost (unlike the limits on depreciation).
Fun times. Even with having to enter all deductions this year, our taxes were relatively easy. But it's interesting to run into some of these things that seem odd, like the cliff edge that the Obamacare credits used to have (they have now fixed that). Combined, I'd still like a much simpler tax system with fewer deductions but then lower rates, even if it meant that we ended up paying a little more. But I'm glad that many people out there have much simpler taxes, and I'd glad that this year we only had to file about 20 pages, instead of about 50 pages a few years ago.