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by Glenn Franxman, Django Developer / Stunt Programmer.

Gambling with my Income

posted: 2007-09-08 15:56:41 perma-link, RSS comments feed

When did our government decide that it wants civilians to gamble?

The tax code has always been a source of uncertainty that has encouraged a certain segment of the population to take risks with their interpretation or adherence to the letter of the law, but in the last few decades it seems that gambling has actually been written into the system.

Place your bets:

For me, it started when the company I work for began offering 'flexible spending accounts' for its employees. The way it works is this: You contribute a predefined amount of your pre-tax income into a fund held by the employer. I don't believe the fund earns any interest. If it does, I'm guessing the company gets to keep it as a way to pay for the program. Then throughout the calendar year of participation, you can deduct funds to pay for covered medical expenses. And then there's the catch -- any funds not spent by the end of the year are forfeited. Gone. Forever.

So what's going on here? Essentially, by reserving pre-tax funds for medical expenses, they are saying that the covered medial expenses are tax deductible. This is fine. And they are saying that your ability to enjoy this tax deductible status on these expenses you just have guess how much you are going to need a year in advance. Set too little aside and when you're child breaks their arm, you'll pay full price ( minus the effects of insurance ). Set aside too much, and you just flushed your money down the toilet. It's a lot like deciding when to hit or stay pat in a game of black jack.

What's worse, this tax break is only available to employees of companies with such programs. If medical expenses are deductible for one person, shouldn't they be for everyone?

Now I'm seeing this pattern applied again. This time it's 529 plans for saving for higher education expenses. This is a similar deal, but generally with no upper bound on the amount you can bet.

This is how it seems to work with the 529's: You contribute money into a tax sheltered account, generally administered by a state ( why? ). Contributions grow tax-deferred until they are withdrawn for educational expenses tax free. That's terrific. But again, there's a catch. Any funds not withdrawn for educational expenses are taxed. That sounds fair. And subject to an additional 10% penalty. What-what-what?!?

Pretty much every parent sees their child as ivy league material, but with 18 years for your money to be invested and grow, and your child to mature, and tuition to continue increasing, by the time college enrollment time rolls around your account could be hundreds of thousands of dollars off in either direction from their actual tuition needs. This puts you either in the club of those you don't get a tax break on education expenses or in the club who are just going to throw tens of thousands of dollars away as tax and penalties to get access to their own money. There's no realistic way to predict the market's performance, my child's future or future higher education tuition levels.

Why would they do this? Does it make me a socialist to believe that food, education, medical and charitable expenses should all just be tax deductible to everyone regardless of their ability to predict the future? Imagine if donations toKatrina survivors had been contingent on your ability to predict if they'd need your help a year in advance. WTF?



Jay B commented, on September 9, 2007 at 12:30 p.m.:

Cape - Peace, Friendship, Solidarity

NO FASCISM. (nyet-fashizmu)

As for socialism, yes, but I think that in capitalism (and republican administrations) we try to keep everything on the "private industry, free market" system, to avoid fascism or state abuse. To me though, the state keeping your money because you don't have a crystal ball just seems like cryptofascism.


Rob commented, on September 13, 2007 at 9:35 a.m.:

I think the 529 money can be converted to 401K money, or used for any conceivable educational purpose, including job training programs. And I think it can be transferred from child to child or even used personally.

I'm fuzzy on the details, since the sheer volume of children in my house (and residence in Washington State) have eliminated my income tax altogether these last five years or so...


Glenn Franxman commented, on September 13, 2007 at 11:22 p.m.:

I think cryptofascism hits the nail on the head -- go word-power -- plus it just sounds cool.

Rob: I can't imagine having enough kids to to eliminate income tax. Or rather, I can and it frightens me. ;-)


Rob commented, on October 19, 2007 at 4:41 p.m.:

After the third one, the amount of additional work increases in small increments, and then decreases once the oldest child turns 11 or so, because then the oldest can help.

The diversity among my five is mind-boggling, and the fifth one, at age two, is already reading phonetically. It's evidence that the whole is greater than the sum of the parts. I should send you a picture of them sometime. </brag>


Edineide commented, on August 22, 2012 at 11:57 p.m.:

Home improvements are not debitcudle if the home is your primary residence, and you do not have a home office. People will claim the improvements on their tax returns if it is a rental property. If you have a home office (self employed or for benefit of your employer) you can depreciate a percentage of the cost of the improvements. Sorry, but your preparer was correct.


Hamid commented, on September 21, 2012 at 4:24 p.m.:

Your tax preparer is creroct. Home improvement is a personal expense and is not deductible.If you take out a home equity loan to pay for the home improvements, the interest may be deductible.If you own investment properties, costs of improvements may be either deductible (such as minor repairs) or can be depreciated as capital investments.You should still keep track of home improvement expenditures as they may have tax implications when you sell. Major renovations can be used to increase the cost basis of your home when determining if there is any taxible gain on sale. This is a wash for most people due to the $ 250,000.00 exclusion ($ 500,000.00 if married filing jointly) of gain on sale of a primary residence but some areas of the country are seeing home prices skyrocketing to the extent that it may be an issue.


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