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Tax Breaks For College Students and a Giveaway

Catch my latest guest post at TurboTax. This week Tax Breaks For College Students and Their Parents offers an overview of the various tax deductions and credits that higher education can offer you. In some cases you don’t even need to itemize, so this article is worth the reading time, you might find tax savings you weren’t aware of.

Now, for the giveaway – last week was winter break in my state and we were away. I was pleased to find a envelope from my friends at TurboTax with three codes for the TurboTax Premier Online Edition for me to give to three lucky readers. To enter, add a comment and share what you would do to change our current tax code if you had that power. The winners will be based on originality, feasibility, and fiscal responsibility. So “eliminate the income tax,” with no other way to replace that revenue is not going to win. With the tax deadline fast approaching, I’ll start choosing winners as early as this coming Monday. Good luck!

  • duong March 2, 2011, 1:20 pm

    I wish we can do away with income tax and instead tax on usage. This way, savers aren’t penalize for saving. And the rich will definitely be tax more since they spend so much more.

  • Erika March 2, 2011, 1:30 pm

    I would eliminate social security taxes on self employed. Or at least make them smaller.

  • Janet March 2, 2011, 5:46 pm

    I’d get rid of all tax loopholes. No overseas tax shelters or anything like that. You make money, you pay tax.

  • Henria O. March 3, 2011, 3:21 pm

    I would make simplify the tax code by instituting a 10% for everyone on all taxable possesions combined and that’s all the taxes anyone (rich or poor) would pay…EVER!

  • Elle March 3, 2011, 3:29 pm

    On the grounds that something relatively simple to fix and easy to grasp could make a huge difference right away: Delete the “Presidential Election Campaign >> Check here if you… want $3 to go to this fund” line.

    The instructions say checking the box does not affect one’s taxes. But as many critics have observed, down the road of course it does. That $3 has to come from somewhere. I do not like how, right from the start, the instructions represent the worst kind of obfuscation. What is perpetrated is a flat-out lie. It makes me not trust government. How do all the VITA workers explain this without feeling compromised or like they are hand waving (which they are, if they use the instructions’ explanation)? They above all have to have the trust of their clients.

    Fund Presidential campaigns as is appropriate and from a source that is publicized to all, rather than using this random approach that rests on a lie.

  • Bill Woessner March 4, 2011, 3:07 pm

    I would love to see a flat tax with a very large exemption. The current exemption is way too low. For a family of 4, the standard deduction plus personal exemptions comes to $23,300. But a living wage for that family is more like $53k. So let’s fix that first – stop taxing people in and into poverty. After that, get rid of all the exemptions and deductions. In other words, stop social engineering through the tax code.

    I’d also do away with payroll taxes, excise taxes and corporate income taxes. Why do we need all these other taxes when we already have a progressive tax code? The worst is the corporate income tax. Some people say it’s just a pass-through. But the corporate income tax is actually WORSE than a pass-through. Levying taxes on corporations enables the them to divvy up those taxes any way they like. Does anyone really believe they’re going to divvy up their taxes in a progressive fashion? Let’s see… take the tax liability out of the CEO’s pay or pass it on to rank-and-file employees… Tough decision.

  • JOE March 4, 2011, 3:51 pm

    Excellent comment, Bill thanks! Remember, though, the child care credits wipe out the rest of the tax for your family of 4. It’s inspiration for a full article.

  • Brian March 5, 2011, 5:13 am

    Eliminate all deductions and credits from the personal income tax. The lowest tax bracket can be 1%, but no personal exemptions, no standard deduction. Everyone pays something for general government functions (not just SS and Medicare). If you want to subsidize low wage employment or child rearing, do it through an actual payment, recorded as an expenditure, not a “tax reduction”

    Have a rate structure for all the major Federal Government functions, and don’t allow any co-mingling of funds. So we would have a tax structure specifically for Defense , HHS, etc. You can run a deficit, but it will be tagged to a specific function. Congress wants to tax you 400b for defense, and spend 600b, let the Pentagon borrow 200b.

    Politically I would expect the rate structure to become much more progressive, but with the elimination of the exemptions, deductions and credits, maybe the burden will not change much by income class, but things will be more transparent. If you want to soak the rich, you do it explicitly. No dividends or capital gains special rates.

  • msf March 5, 2011, 11:52 am

    1. Move back toward Reagan’s 1986 Tax Reform Act concept of treating all income the same – no favoritism for capital gains. This would have a side benefit of getting rid of the issue of how to deal with “carried interest” (the loophole by which hedge fund managers pay 15% tax on their compensation).
    2. Gradually phase out the mortgage deduction – it has already been capped, removal of the deduction would reduce distortions in the real estate market, and other countries do fine without it.
    3. Simplify pass throughs of expenses and exemptions of mutual funds
    a) in some states, your bond fund has to have over 50% in treasuries to get pro-rated state tax exemption. Make this consistent – all states pro-rate.
    b) foreign tax passthrough. Just get rid of it, and have the funds deduct the taxes themselves. This is what global funds must do (if funds don’t meet a certain threshold, they are not allowed to pass through the taxes, but deduct them directly), and will have no impact on funds held in tax sheltered accounts. This simplifies matters, since the funds then treat taxes paid the same way they treat any other cost – as a reduction of income.
    4. Restructure the AMT form – the AMT is nearly a flat tax – how much did you make, multiply by 26% (or 28%), and compare with your ordinary income tax. Pay the higher. By restructuring the form, it will be clearer that these are two parallel systems (not an AMT “surcharge”), and it will be clearer that the taxpayer’s goal is to minimize taxes (keep the amount owed in both systems low), not to eliminate AMT (even at the expense of paying higher taxes). It will also help show what a flat tax could look like in practice.

  • HW "Skip" Weldon March 5, 2011, 5:09 pm

    Gosh, if my imagination ran amuck I would envision a drastically simplified system. Like this:

    Business Income (Corporation, Partnership, Sole Proprietor): After deducting legitimate business expenses at 100%, net business income would be subject to flat tax of 10%.

    Individual income: After an individual tax exemption of $10,000, a flat tax of 15% applies. No other deductions.

    Retirement Plans: Participant contributions post-tax without limit. Employer contributions and gains tax deferred until withdrawal. Withdrawals allowed after 60 and subject to individual rules in year of withdrawal.

    Non-qualified Investments: Interest, dividends and capital gains taxed as individual income.

    I have no idea how much revenue this would produce, but federal government would adjust spending accordingly.

  • Elliott March 6, 2011, 11:43 am

    Include a provision in the tax code that all fixed dollar amounts are automatically indexed to inflation unless otherwise adjusted by Congress. This wouldn’t only help with AMT uncertainty, but also deductions, exemptions, credits, etc.

  • Augustine March 6, 2011, 12:57 pm

    Flat, 15% rate with no deductions. It’s been done in other countries, including Russia after it ditched Marx’s progressive income tax, and its revenues increased. I’d even add it to the constitution, along with a mandate for a balanced federal budget, so that government would be bound by the same rules as every American: unless you live within your means, you go bankrupt.

    PS: no way I’ll win this. 🙁

  • Bill Woessner March 7, 2011, 3:41 pm

    Joe, I’ve got to disagree with you on the child tax credit. For a family of 4 making of $53k, the child tax credit almost wipes out their federal income tax. But the income tax is the least of their worries. Before their wages even hit their paychecks, their employer pays 6.2% FUTA (on the first $7K) and 7.65% FICA. Then they pay another 7.65% FICA. And I figure their federal income tax liability at $727. All told, I figure their actual overall federal tax rate is 17%.

  • JOE March 8, 2011, 2:30 pm

    Bill, you’re suggesting a taxable income of $7270 producing the $727 net tax, I don’t see where you get that from. I agree there’s still the payroll tax, this discussion was just focusing on the federal portion. Thanks for visiting.

  • Bill Woessner March 8, 2011, 3:04 pm

    This is from 2008:
    Start with an AGI of $48,427 (the remaining $4,573 go to FUTA and employer FICA)
    Subtract $10,900 for standard deduction and $14,000 for personal exemptions.
    You get a taxable income of $23,527.
    The income tax on that is $1,605 + 15% * ($23,527 – $16,050) = $2,727.
    Subtract $2000 for child tax credits.
    You end up with $727.

    Omitting payroll taxes from a discussion on tax reform is like omitting entitlements from a discussion on cutting spending. The federal government gets over 1/3 of its revenue from payroll taxes. About 75% of households pay more in payroll taxes than income taxes. As long as we’re fantasizing about fixing the income tax, we might as well talk about other federal taxes, as well.

  • JOE March 8, 2011, 3:37 pm

    Bill – you should check out Fairmark for the latest tax rate schedules, this article was using the 2011 numbers, sorry if I didn’t make that clear. As the article shows, standard deduction for married filing joint at $11,600 and exemptions at $3,700 each. Employer FICA is transparent to the employee, and the employee FICA doesn’t avoid federal tax, so I ignore it.
    This comment is loaded to my giveaway post, but the “zero tax” post makes no reference to reform, it was just an observation that the average family with 2 kids avoids federal tax right past the median income level. I do agree that payroll tax is an issue, especially for the fact that this group of earners pay no federal tax at all.

  • Bill Woessner March 9, 2011, 2:16 pm

    You can also work the problem backwards. For a family of four, figure out what taxable income results in a $2k tax (which is wiped out by the child tax credit). Using the 2011 tax brackets, It turns out that’s $19k. Add in the standard deduction ($11,600) and 4 personal exemptions ($3,700 each) and you get an AGI of $45,400. Interestingly, even though this mythical family of four has no tax liability, they’re in the 15% bracket, not the 10% bracket. Weird how that works.

    That $45,400 is a far cry from a the median income for a family of four (~$72k). It’s also pretty far short of the living wage for a family of four (~$55k).

  • JOE March 9, 2011, 2:32 pm

    Thanks, Bill, I think we have agreement here. To the AGI, you can add whatever spending accounts you will, up to $5000 each for FSA and DCA, as well as any Pre-Tax retirement plans (although I point out, pretaxing at 10% should be avoided except to grab match.)

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