The way it was

The Tax Foundation (a nonpartisan tax research group based in Washington, DC) has posted a list of all income tax rates and brackets since the beginning of the modern income tax in 1913. The lowest tax bracket in 1913 covered taxable income from zero to $20,000. The top tax bracket of 7% covered all income above $500,000. Adjusted for inflation, that 1% bracket would cover taxable income from zero to $453,292 in 2012 dollars. The top tax bracket of 7% would cover all income above $11,332,304 (in 2012 dollars). There was no differentiation between married, single, head of household, etc. There was only one set of rates and brackets. By 1918 the top rate had skyrocketed to 77% for income above $1,000,000 ($14,859,578 adjusted for inflation). The lowest rate had jumped from 1% to 6%, and it was good only up to $4,000 of taxable income ($59,438 in 2012 dollars). Above $4,000 the rate doubled to 12%. No doubt World War One was to blame for the big jump in taxes. The rates went down in the 1920's, but back up beginning in 1932. (Higher taxes probably did not help the economy recover from the Depression.) By 1936 the top rate was up to 79%, but the lowest rate of 4% covered a bracket that, adjusted for inflation, went up to $64,570. Taxes went sky-high in World War Two, with a top bracket of 94% and a low bracket of 23% that went from zero to only $2,000 (which would be $24,931 today). Tax rates declined only slightly in the 1950s, and then a little more in the 1960s. However in 1964 the top of the bottom bracket went down to only $1,000 ($7,238 in 2012 dollars). The other brackets also became similarly squashed in ensuing years. The rates themselves stayed about the same through the 1970's. Tax rates began declining in the early 1980's.

Phew

Tax season is over. Finally! I'm sure everyone missed me and has been wondering why I have not been blogging for a while. Hopefully in the coming weeks and months we will take a look at the tax picture for 2012 and maybe a little bit beyond that. We know pretty much what the tax picture is for 2012, because it has been officially established (for the most part). It will be basically the same as 2011. Beyond 2012, no one really knows. A lot will depend of the election in November. So... Vote! If popular demand demands it, we may take a look at some general theories of taxation. Like, what the heck is Congress thinking when it passes certain tax laws? And why? Also maybe some of the "intellectual foundations" if any such exist. Be sure to make known your comments, suggestions and questions. Thank you.

Gift tax crackdown, Part 2

As we posted on 5/31/11, the IRS wants to crack down on people who transfer assets to family members with little or no consideration without filing a gift tax return. At that time a court had decided that the state of California was not required to give the IRS the names of such people, because the records existed at the county, not the state level. Now the court has changed its mind and told California to give the information to the IRS. The IRS is seeking such information from several other states as well.

IRA--Deceased Spouse

If one member of a married couple dies and leaves an IRA to the other, there is a potential pitfall to avoid if the surviving spouse is under 59 1/2 years old. If the surviving spouse takes distributions from the IRA, there are no penalties for early distribution, because death is an exception. However, if the surviving spouse rolls it over into his or her own IRA or into a new IRA, then the death exception no longer applies, and penalties will be assessed on distributions. The only thing the surviving spouse can do in that situation to avoid penalties is to wait until he or she becomes 59 1/2, or until a situation arises in which some other exception applies.

Some of the other exceptions are:
Disability
Medical (subject to severe limits)
Distributions to unemployed individuals for health insurance premiums
Higher education expenses
First home buyer (up to $10,000)
Distributions to reservists while on active duty for at least 180 days.

Qualified Charitable Distribution

Many people are familiar with or have used the Qualified Charitable Distribution (QCD). It enables a person over 70 1/2 years old to make a direct payment to a charity from his or her IRA with no tax consequences. Without the QCD feature, if you take money out of an IRA and donate it to a charity, you have to pay tax on the withdrawal, but you are not guaranteed to get a deduction for the full amount of the donation. This is especially true for someone who does not usually itemize deductions. Various other factors can enter in to raise your tax despite the fact that all the money went directly to a charity. With the QCD, if the money is paid directly out to the charity by the IRA and never touches the taxpayer's hands, there is no effect on income tax.

The QCD has been in effect for a few years, but it is scheduled to expire at the end of this year. It was supposed to expire last year, but Congress renewed it at the last minute, and gave people till the end of January, 2011, to do a QCD for 2010. No one knows (probably not even Congress at the moment) if it will be renewed again.

IRS Budget Cuts

Kiplinger reports that the IRS's budget will be cut back for 2012. The only question is by how much. So far, Congress has deep cuts in mind, but that could change by the time the budget is finalized. It could mean even longer waits on hold when we try to call them. It could possibly mean that the IRS has less resources for collections. The last we heard about that, the plan had been to put more resources into collection, but apparently budget realities could interfere with that. From the government's point of view, putting more resources into collections would be cost-effective, as it would bring in more money than than was spent on it. But don't tell them that. (Sssshhhh!)

Social Security

Social Security recipients will get a 3.6% raise in 2012. They went a couple of years without a raise, because there supposedly was no inflation during those years.

A frequent question is, what happens if I retire before the full retirement age? People can retire at age 62 if they want, but their monthly checks will be less, and they will have limits on the amount of income they can earn before their benefits are reduced. After full retirement age (which is 66 for people retiring in 2012), you can earn as much as you want without any limitations on your SS benefits.

The earnings limits for people under 66 apply only to "earned" income, not things like rents received, interest, dividends, etc.

In 2012, the amount a person under 66 can earn without benefit cuts will be $14,640.