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Over the next 10 weeks I want to share some basic tax tips that can be used for year end planning or thinking about your taxes for next year.

Review All Articles in This Series: 10 Tax Tips

The tax laws have become like a medieval torture chamber. First they tie you up. That was back in 1984 when they changed the amount you can deduct for depreciation from an accelerated method which is what President Regan used to get the country out of a recession to a modified method which slows down how much you can offset against taxes. Next, they punch you in the stomach which is when they disallowed how much passive losses you could deduct from real estate against your other income like compensation and the like. Next, they stretch the ropes tight until arm and leg ligaments start to tear by limiting how much mortgage interest you could deduct and limiting the total amount of itemized deductions are permissible. Then you receive a bit of a break when the capital gains and income tax rates were lowered stimulating investment.

All the while the government deficit continues to increase, the financial collapse and the Great Recession hits. Government needs more money. It is the addict needing a fix and the only way to get it is by taxing more.

The ropes tighten further and a large mallet would swing against ribs breaking them. Tax rates increased to those making over $400,000. If that isn’t enough they put you in an iron maiden where steel spikes puncture organs ever so slightly until you bleed to death. The alternative minimum tax. It’s exactly as it sounds. It’s an alternate tax to be compared with the regular tax and whichever is higher is the one you pay. You bleed to death with taxes. The alternative minimum tax kicks in for incomes over $150,000 and doesn’t stop until you make over about $450,000. In this range it basically makes sure that you pay about a 26-28% tax.

The victim, the taxpayers, cry out in pain. Stop, Stop, the pain is unbearable. The punishment severe. Limited deductions, phase-out of itemized deductions, personal exemptions, inability to offset real economic losses against other real income, tax the money, feel the pain of the loss, pay alternative taxes, pay higher rates.

The best is saved for last. Flaying. Like taking a fish and cutting down the entire length of its body and opening it up. This is the Obamatax. An additional tax just because there is nothing left to tax. They might as well take your wallet and then decide how much you get. Oh wait. This is exactly what is happening with our government telling us what we can and cannot do.

The Obamatax. 3.8% on net investment income. What is net investment income? Net investment income are rents, dividends, interest and money from annuities. All the passive types of income. When tax rates came down people could buy and sell stocks and not pay much tax. That stimulates investment. No point in making dividends or interest or rents so to speak because that tax rate is higher. But then they raise the capital gains rate 5% back to 20%. Raise tax rates and behavior changes. That is a fundamental principle in tax law. Tax law is used to change behavior as much as it is to raise taxes. If you don’t want to buy and sell stocks because of taxation, then holding and not selling while making income is a strategy and an alternative. The Obamatax is a 3.8% tax on that money. Holding onto stocks doesn’t put money in your pocket. Earning dividends, interest, rents and the like does. But now if your income exceeds $200,000 you pay a 3.8% tax on the net investment income or the amount your income exceeds $200,000 whichever is less. If you make $50,000 in net investment income and your income is $300,000, you will pay a 3.8% tax on the $50,000 which is about $2,000. The final cut. Taxpayers flayed open. Nothing left to give as the body gives out.

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