Working for Nothing

[Nashville]

Incremental Effect

Aside from the obvious work ethic connotations which attach to the subject, we have been trained to think in terms of "tax brackets" for tax planning.

Our conventional approach is to consider the effect of a deduction, conversion of income to capital gains, earned income effect, and similar approaches. We can, with reasonable ease and accuracy, tell someone in a 25% tax bracket, 5% state bracket, and 7.65% incremental FICA, that they can only bring home $623.50 of the last $1000 they earn.

This "tax bracket" approach is breaking down on us for situations of low income and new refundable credits. Fortunately, not many low income earners are interested in tax planning. We think in terms of incremental rates as being the tax on small, bite-sized measurements of progressive income. The total tax effect on income, including refundable credits, now range over a very broad swath of income.

And it doesn't even stop when EIC phases out. Phaseouts continue up the income ladder, perhaps beginning with EIC and Retirement Savers' Credit, ranging upward to phaseout of personal exemptions. The cause of this can be traced to the origin of these bold new tax breaks in congress, who must phase them out at higher incomes to salvage revenue and not offer these to the "evil rich" who don't constitute a large voting bloc.

The conclusion to this perhaps circalocution is as follows: Our conventional ideas about incremental tax rates rising more precipitously at high incomes is history. In today's world of refundable credits, the incremental tax bite between $15K and $35K is GREATER than the tax bite between $100K and $120K. This defies logic and common sense.

And yes, I believe national work ethic is sacrificed. Much to do with the way we raise our children, because people seem to have this work ethic or they don't. Those who have it continue to pursue their work irrespective of losing these tax giveaways.

[RitaB]

BHoffman, I remember a joke

A client told me this years ago:

Jesus came to town one day, and everyone was flocking around Him, excited and anxious to get near Him. That is, everyone except one guy who, when Jesus came close to him, backed up and said, "Don't touch me! I'm on disability."



Edit: Didn't mean to ignore posters after BHoffman, but a client was in here yakking, and it held up my post.

[BP.]

and sometimes blood (papercuts)

Slept with tiny bandaids affixed to some digits last night.

[BHoffman]

I'm old enough to be looking down the barrel of retirement, but young enough that there sure isn't going to be any Soc. Sec. or Medicare funds in my retirement future Tail end of the Baby Boomer generation.

[BP.]

government cheese

OMG that's my catch phrase too. Some (younger I guess?) people don't get the allusion. They used to line up across the street from my office at the time.

[BHoffman]

Agree with Bert. Choosing to live on government cheese might seem like such a good idea, as though a "free" nickle is worth more than an "earned" dollar. I also think there are generations who feel that jumping through all of the hoops to get on social assistance and stay there is their "job". Find some way to be in some group that is unemployable. That is sad. It's also sad that people become so dependent on government assistance that they are afraid to even try to move away from it for fear of losing benefits and subsidies. That is like enslavement more than entitlement.

[Bert73]

Don't get me started on this topic - Seriously...
Who said the one earing $37k should be putting some money away? Am I missing something? How could he/she? With 2-3 kids - That's be impossible.

I have a client - He is on SSDI but I am convinced he's working some where - He has to be! The wife bartends and claims what she makes - No W2 - No 1099 - They usually end up with EIC. Public assistance for the kids health benefits. Braces, whatever they need - Free & on me! They have a nice home - He bought a Harley - They've been to Vegas and Bahamas...

Me? Work like a dog - No Harley - No Vegas - No Bahamas. Burns my arse..... it does...
Oh.. He has a nice corvette too... What am I doing wrong?

I am convinced the more I make the less I have -- IF I stop working I should be well off!
This client is the perfect example... Am I jealous... Of course I am.... Sometimes I want to follow some of my suspect clients around to see what they are doing and turn them in!!!!

Venting over.. Waiting for them to come this year with the tighter EIC due dillegence... Great!

I dont think I ever said that the guy with 2 children and with 15,000 income could sock any money away. I think you are confusing the two scenerios.
For years my anger with the uneager wage earners snowballed and I have taken a new perspective on this issue, I will do what is best for me and my family. Thats it. No apologies or excuses. We earn our six figure income with sweat, tears and sometimes blood (papercuts)

[PIGLEE]

The kids of today, are learning how to live off the system, not how to do it on their own. I had a single mom, years ago, trying to get by, and trying to be self supporting. She thought she had found a job, doing nursery work at a church, making 100.00 a month. She came to me crying not knowing what to do. She wanted to take the job, but by taking the job, it would put her over the limit for free child care, which she would have to pay over 400.00 a month. She asked me, don't they want me to be self supporting?

By the way did you know that if you are in the 15% tax bracket, 5% state, and self employed, you would have to earn, after expenses, at least 12,400.00 to have 8,000 spendable cash.

There is something wrong with our system, I say let welfare be welfare.

[jimmcg]

Client, married, two kids. Rents. W-2 for $15,000. Doesn't work half the time.

Next client, married, two kids. Rents. W-2 for $37,000. Works every chance he gets.

Is it just me, or is the second guy working for nothing considering the amount of taxes and refundable credits involved??

Redistribution of income is a wonderful thing. Don't you feel better now?

[thomtax]

Sometimes I want to follow some of my suspect clients around to see what they are doing and turn them in!!!!

Venting over.. Waiting for them to come this year with the tighter EIC due dillegence... Great!

I hate to throw cold water on your vent, but I don't think the IRS cares. If you turned them in they would not want to take time to do anything about it. :-(

LT

[David1980]

I just remembered a parent who was just beside herself last year because she didn't get EIC. She drew unemployment and then sat around eating Cheetos. (Well, OK, I'm not sure she likes Cheetos.) She actually said, "Wow, I wish you had told me. I would have worked some."

Excuse me?!

Edit: Wait, that's a bad example. In her case, EIC would encourage working, if the "taxpayer" understood what the "E" stands for...

I like cheetos.

At any rate, encouraging people to not work could help unemployment. I mean if that guy who choose not to work in order to maximize his EIC could have worked more but didn't, it means someone else will have to do that work instead. Perhaps Obama expanded EIC as a way to reduce unemployment?

(My real opinion is that EIC and ACTC need to die horrible deaths. Not only because they reward "bad" (irresponsible child bearing) behavior but also because they are so open to fraud. The scenario in the OP might as well have had the taxpayer with no kids, but with 3 "borrowed" social security numbers from family to claim as nephews/nieces and lie about where they live, because that's probably closer to EIC reality.)

[RitaB]

But wait, there's more

I just remembered a parent who was just beside herself last year because she didn't get EIC. She drew unemployment and then sat around eating Cheetos. (Well, OK, I'm not sure she likes Cheetos.) She actually said, "Wow, I wish you had told me. I would have worked some."

Excuse me?!

Edit: Wait, that's a bad example. In her case, EIC would encourage working, if the "taxpayer" understood what the "E" stands for...

[RitaB]

Good points

I have two thoughts for you to consider.

First let's look at that $8,400. School is in session 3/4 of the year at best and without incurring child care expenses she could only work school days and school hours. What would her rate of pay have to be to replace the $8,400 and what are her odds of getting a job with that rate of pay? The truth is that I don't think most two parent families come out economically ahead by having two incomes.

Second let's compare what that family has versus what we on this board have. The man in that family is more likely than not never going to increase his paycheck above the rate of inflation and when he retires he's unlikely to have much more than Social Security to live on. Most of us on this board have or will eventually have good retirement plans and higher rates of pay than this guy.

I agree with everything you said.

There's no incentive for her to work. They would not be better off. Even without the credits, there is a cost to go to work every day. You know, clothes, gasoline, taxes, etc.

And, really, I am all for mom getting to stay home, but I am a little resentful that my tax dollars are subsidizing that choice. If they can make that choice without ME footing the bill, it's way easier for me personally to be happy about it.

And yes, we will have more than they when we retire, but we DID work awfully hard for it.

Hope I don't sound terrible. I am all for helping people that NEED help. Please don't anybody get offended at me, but I think our government needs to back off with the credits that encourage mediocrity (or less). If people are happy with mediocrity, that's fine. I just don't want to be an enabler.

Peace and blessings! Love you guys like a fat kid loves cake! Are we good?

[MAJ]

Not Working and getting everything...

Don't get me started on this topic - Seriously...
Who said the one earing $37k should be putting some money away? Am I missing something? How could he/she? With 2-3 kids - That's be impossible.

I have a client - He is on SSDI but I am convinced he's working some where - He has to be! The wife bartends and claims what she makes - No W2 - No 1099 - They usually end up with EIC. Public assistance for the kids health benefits. Braces, whatever they need - Free & on me! They have a nice home - He bought a Harley - They've been to Vegas and Bahamas...

Me? Work like a dog - No Harley - No Vegas - No Bahamas. Burns my arse..... it does...
Oh.. He has a nice corvette too... What am I doing wrong?

I am convinced the more I make the less I have -- IF I stop working I should be well off!
This client is the perfect example... Am I jealous... Of course I am.... Sometimes I want to follow some of my suspect clients around to see what they are doing and turn them in!!!!

Venting over.. Waiting for them to come this year with the tighter EIC due dillegence... Great!

[David1980]

Client, married, two kids. Rents. W-2 for $15,000. Doesn't work half the time.

Next client, married, two kids. Rents. W-2 for $37,000. Works every chance he gets.

Is it just me, or is the second guy working for nothing considering the amount of taxes and refundable credits involved??

Looks like a $6,200 difference on their fed return (assumed EIC/HOH). Given the choice, I'd rather earn $22,000 more and pay $6,200 more in taxes.

Even if you add a state to the mix, I think the higher income individual is ahead.