Tax Time . . .

Last updated on: February 21, 2014 at 11:33 am by Jane the Actuary

Tax Time . . . 2014-02-21T11:33:00-06:00 Jane the Actuary

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[Don’t worry, I’ll keep working on the “USA Retirement Fund” bill summary and commentary later!]

I hesitate to gripe about taxes too much, because I know it’s a problem that most people would like to have. I’m also afraid to do the math on the marginal rate we’re paying right now on my income, when you factor in the AMT as well as the FICA tax, state taxes, etc. (though the numbers were much more unpleasant in the days when I’d figure my income on both an after-tax and after-daycare basis). But it’s not a surpise to you that a two-actuary family is well-paid, even if one of those actuaries works part-time, right?

But here’s what I’m learning:

What with the housing market having dropped so significantly, we (my husband and I) learned that given the right sort of investment, and with a fair amount of patience and a reasonable amount of capital, it’s possible to do well with real estate investments. This was something we looked into pre-crash and learned that investors basically relied on appreciation to make a profit, but that’s no longer the case; you can actually make a profit off the rental income, especially if you have the patience for a short sale or the capital for the renovation of a foreclosure. Mind you, we’re doing this on a very small scale, and in the low-effort manner of a condo rather than a house, but we wanted some alternative to the stock market, some way of having diversified investments.

But this is our second year of doing taxes with rental income included. And it really gives one pause: why are capital gains privileged as a form of income with reduced taxes? In the case of both our stock investments and our real estate investment, we had to do the research on what to buy, track the investment over time, we receive income from the investment (in the case of dividend-paying stocks), and will ultimately sell it. But in the case of real estate, we pay taxes at the rate of ordinary income.

The argument for why it’s just to pay a lower rate on capital gains is that these investments are made with income that’s already been taxed once. But the same thing is true of many sorts of investments — from starting your own business (whether it’s buying the starter-package for Pampered Chef parties or a full-blown small business) to going back to school to improve your skills and your pay.

And yes, it’s nice to see the tax rate for the stock we sell during the year (not that we’re big traders but you can’t always buy-and-hold) coming in at a lower rate than the income tax, but if this distinction had never existed then, in principle, in a “fair” world (though I recognize this doesn’t exist) that would mean that the rates for ordinary income would have been lower in the first place.

On the other hand — one way in which such taxes are unfair, and would be unfair at any rate, is when taxes on interest income or appreciation of an asset ignore the impact of inflation. If I have savings in a bank account, at today’s low rates, I actually lose money in real terms — yet the interest earned is taxed. If an asset grows in value at exactly the same pace as inflation, I’ve earned nothing when I sell it, yet I’m charged tax on the difference between the purchase and sale price. Given that only in the simplest situations is it possible to do one’s taxes manually any longer, it should be an easy fix to rectify this: interest income is only taxable to the extent that the rate exceeds inflation, and asset appreciation only above inflation during the period of ownership (incorporated into the “cost basis” calculation that’s required anyway).

So that’s my 2 cents on taxes for the day.

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