How Rich is "Rich" at the IRS?

  “Will there be a nasty surprise in your tax return?” asked the article from Pinnacle Advisory Group, a private wealth manager.
“Tax Day could bring tax surprises for higher-income taxpayers,” chimed in H&R Block.
This was a year ago. Indeed, many taxpayers were surprised by changes Congress and the White House pushed through even earlier… when they pulled back from the “fiscal cliff” at year-end 2012. (They shouldn’t have been surprised if they were reading The 5; we documented the changes in real-time…) Worse, some people who thought they were aware overlooked a few critical details.
But that’s ancient history, right? Except if you had a good year in 2014… you might be sucked in without realizing it. Let’s explore…
  The one thing “everyone knows” about the new tax landscape is that the “Bush tax cuts” remain in effect as long as you and your spouse make under $450,000 a year (single $400,000). Beyond that, you jump from the 35% bracket to the top Clinton-era rate of 39.6%.
Actually, that was last year’s figure. It’s been adjusted for inflation, ever so slightly. This year, the threshold is $457,600 for couples ($406,750 single).
Lots of people who thought they were paying attention figured they were home free as long as their income was under this threshold. Not so…
  In their quest to punish “the rich,” Congress and the White House defined “rich” at a much lower figure than $450,000.

The “fiscal cliff” reforms also include a phaseout of itemized deductions and the personal exemption. That is, your deductions are limited as your income grows.
For tax year 2014, the phaseout starts at $309,900 for couples (single $258,250). Bad news if you’re paying a lot of mortgage interest or you’re subject to high state income taxes.
But even if you’re below these thresholds, you’re not in the clear…
  Don’t forget about the 3.8% Medicare tax on investment income. This one was not part of the “fiscal cliff” legislation but instead came into effect with Obamacare.
The tax applies to “unearned” income — capital gains, dividends, interest, rental income and so on.
The “rich” threshold here is lower still: The tax kicks in on couples’ taxable incomes above $250,000 (single $200,000).
In addition, the same thresholds also mean an extra 0.9% Medicare tax is applied to your wage and/or business income.
  So there you go: The feds consider you “rich” if you make $250,000 — not $450,000.
It comes back to the point many wags have made in recent years: There just aren’t enough really rich people to keep the federal government funded in the style to which it’s become accustomed. By one estimate, the feds could seize every penny of income above $250,000 and it would fund the government for less than five months.
That means two things:
1. The threshold for “rich” will keep getting defined down until it snares you.
2. It pays to take every step you can — right now — to limit the IRS’ take. Unless you think tax rates are likely to stay stable or fall from levels that are still near post-WWII lows.
It’s with No. 2 in mind especially that the Laissez Faire Club has prepared its all-new special report, Vanishing Point: How to Disappear From the IRS This Tax Season and Save a Boatload of Money in the Process.
You’ll learn more than 97 tips from IRS insiders — well, former IRS insiders — like…

  • A valuable way to deduct thousands of dollars without a single receipt. No longer will you let missing receipts keep you from taking deductions you’re entitled to
  • The juiciest tax shelter? Hint: It has to do with your family. A $10,000 investment saves you $9,000 in taxes… year after year after year
  • The “Intimate Co-worker” that allows you to potentially double, even triple the amount of money you put toward retirement. The only question is do you qualify for this weird-sounding program? About HALF of Americans do.

Don’t file your taxes until you’ve seen this report. Heck, if you have filed, get the report anyway and file an amended return. It could be worth thousands of dollars. We’re sure you have better uses for it than Uncle Sam. Learn how to get a free copy at this link.
  Traders have pushed the Dow and the S&P 500 into record territory as they listen to Fed chair Janet Yellen drone on before Congress this morning.

Really, she didn’t say anything interesting or surprising. The Fed will stay “patient,” and it is “unlikely” the fed funds rate will be jacked up from record-low levels for at least another four months.

But the mere repetition of the obvious is enough to propel the Dow to nearly 18,200 and the S&P to 2,114.
The commodity complex remains moribund — gold a hair below $1,200, crude a hair below $50.
  “The housing recovery is faltering,” declares David Blitzer — the man in charge of the widely followed Case-Shiller home price index.
The headline number rang in far better than expected — up 0.9% in December after all the “seasonal adjustments.” But clearly, prices are leveling off, unable to reach even the levels of 10 years ago…

Blitzer’s frustration is evident: “While prices and sales of existing homes are close to normal,
construction and new home sales remain weak… The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence.”
The part about “Whaaaaah!” was merely implied.
  But don’t worry, the millennials will rescue housing… Right?

Or so we’re told by Jonathan Smoke, who was appointed last year as the first-ever chief economist at
Pardon us for a brief aside: As you might know, is run by the National Association of Realtors. The NAR has had its own chief economist for years, a fellow named Lawrence Yun, who’s carried on the noble tradition of his predecessor David Lereah in carrying his employer’s water. As a refresher, here’s the metamorphosis of a book Lereah wrote 10 years ago…

Anyway, it’s not enough for the NAR to have a chief economist anymore. Now its main retail website has to have one too, and that’s the aforementioned Jonathan Smoke. (Now there’s a Dickensian name for you…)
Yesterday, Fortune’s website granted him the bandwidth to say this: “Unemployment among mid-20 and 30-somethings — who make up the bulk of first-time buyers — has fallen considerably, positioning them to finally buy that starter home.”
  Yes — this is the year, we’re promised, when young people will buy homes in a proportion resembling previous generations. “The share of first-time buyers has been stuck near 30%, when it has historically been 40- 50%,” Smoke writes.
“Part of what is needed to support that growth is already happening — namely, improvements in access to mortgage credit and new affordable low down payment alternatives. The rest is on the back of the older cohort of millennials, and the evidence suggests they will not disappoint.”
We scoured his article for “evidence” and found only wishes: “For instance, approximately 3% of 25-34-year-olds were able to purchase a home in 2014, compared with 5% in 1980. With the larger number of 25-34-year-olds today, a 5% purchase rate last year would have increased home sales by more than 15%, and would have represented a share of 40% of all home sales…
“I am not expecting to see the market get all the way there in 2015, but we should see substantial progress this year where America’s millennials would be driving the recovery.”
Ummm, Mr. Smoke? The average 25-34-year-old in 1980 wasn’t saddled with student loan debt equal to a (respectable) down payment on a (modest) first home. How can that be overcome even if the millennials have jobs?
  “For your reader looking for the IRS Form 4868,” reads the first item in today’s mailbag, “methinks you cry too much.
“The forms are available at your nearest IRS office. But why not go the IRS website and print yourself one?”
Another reader suggested the same thing: “No sign-in or account setup is needed,” he writes, “but be sure you use, as there are a ton of false IRS websites out there that would love the unsuspecting to give them their full names and Social Security numbers.
“Most importantly, he doesn’t have to file online. His suspicions are probably valid about the security of their websites — for that matter, all government websites. I do question his anonymity that he is trying for, though, especially if he is requesting mail-ordered forms direct to his home address.
“Just a thought on that one… They (the IRS) already know who and where you are, sadly.”
  “Back in the day when U.S. companies made everything,” a reader writes, “they could bargain on the price of commodities or semifinished products from other nations.
“Then they saw the chance to actually have products made for them in low-cost nations such as China and they shut down American factories in favor of the new scheme. They laid off higher-wage American workers and saved money, resulting in greater profits, rising stock prices and prosperity for the owners and bosses. American incomes, relative to inflation, began to deteriorate.
“Now the Chinese and other nations’ companies increasingly have the bargaining power, and this country is becoming more and more a source of commodities and semifinished goods, rather than finished products. They also have pricing power. Most Americans, especially the middle class, with reduced income when compared against inflation, are finding a growing reduction in their own buying power. Increasingly, they find they need to resort to credit or put off purchases they want to make.
“There is even a whole mob of baby boomers reaching retirement age and what is more or less ‘fixed income.’ Effectively, we are living poorer every year. And the ‘markets’ are looking to the Fed for higher interest rates? LMAO! That is NOT a formula for prosperity in America! Learn Chinese!”
The 5: Funny you should mention that: “Once upon a time,” writes the economic historian Robert Higgs, “the Chinese were the enemies of private property rights and free markets, and the Americans were the enemies of the Chinese and purported to cherish the institutions that the Chinese hated. Today, no such clear-cut difference exists.”
As evidence, Higgs points to a recent Wall Street Journal interview with Zhang Weiying, the director of Peking University’s Center for Market and Network Economy. Zhang said he recently wrote an article praising the Austrian School firebrand Murray Rothbard… and the article won praise from the Communist Party secretary of Shanghai.
“I ask you,” writes Higgs: “Has anyone high in the U.S. government ever praised any writing that lauds Rothbard’s views, not to mention Rothbard’s writings themselves? To me, it is inconceivable that any such figure would do so.”
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Congratulations to readers of Jim Rickards’ Currency Wars Alert. Today, Jim’s lead analyst, Dan Amoss, recommended taking profits on a falling-yen play — good for 77% gains in seven weeks.
At the moment, Jim Rickards’ Currency Wars Alert is still in “beta-test” mode, available only to Agora Financial Reserve members. But we’re approaching launch soon. Watch this space for further details…

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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