$2500 Employee Expense Deductions

There is a national tax chain claiming that they are finding taxpayers an average of $2,500 in employee expense deductions. That number seems high to me so I went to search for more information. I can't find a claim like that from the company in writing so I am lead to believe one of three things:

1. The claim is bogus.

2. The claim is made with certain exceptions to be understood or is meant to apply only to certain types of taxpayer which makes it bogus.

3. The claim includes returns with clearly falsified information.

The third scenario is interesting because this company makes most of its money from non-tax related services. Tax returns are just a vehicle to get people in the door to sell them a mortgage or insurance or some other product. Also, this company pays out millions of dollars in legal settlements and tax related penalties each year. About 6 years ago the company recieved a scathing letter from the president of the American Institute of CPAs questioning some of its practices and professionalism.

Maybe I'll have an answer shortly about the company's claim that I can discuss further. But about those people who are deducting more the $2,500 in employee expenses what kind of documentation are they able to provide? This is what comes to my mind.

Mandatory Withholding – A Historical Primer

Each year millions of Americans race for the nearest tax office to claim their refund immediately after receiving their W-2. This zero percent interest savings plan is created by two things: many people’s ignorance and the mandate that employers withhold the taxes from paychecks.

It hasn’t always been this way. The mandatory withholding provision in the tax code has been around for 65 years. In 1943, in the midst of World War II, the federal government needed a way to raise more money and to raise it quickly. It was suggested by a department store executive to break up people’s tax burden into smaller incremental payments. The executive came up with the suggestion after noticing that his customers liked paying for merchandise in installments even when the total payments were much larger than the item was worth.

When Congress enacted the mandatory withholding law most people believed it was only intended to last as long as war funds were needed. A funny thing happened on the way to pork barrel spending. Like any other organization, Congress recognizes the need for self preservation when it sees it. It recognized that taxes could be increased easier because taxpayers didn’t feel the pinch as much as if there were a large balance due in a lump sum payment.

Even today there is evidence that the federal government uses the public’s ignorance to its advantage when enacting tax law. I have posted earlier that many of the deductions available to most taxpayers really aren’t that advantageous. In regards to the total tax bill, most Americans have no idea how much they are paying in income taxes.

For most two income homes the total income tax liability is around $30,000. That’s a number that would be sure to cause anger among workers. However, if it’s withheld on a weekly basis from two spouses’ checks the $250 or so each payday isn’t noticed as much. And that is were the frustration lies. Are taxpayers gladly paying taxes because they feel the money is being used wisely in Congress and the feel comfortable with the level of taxation? Or are taxpayers so unaware of what they are actually paying in taxes that they feel no need to protest?

Obviously there is a need for taxes in order for our government to function. But Congress should not be able to hide behind its smoke and mirrors method of assessing taxes in order to raise revenues in stealth manner.

The GREAT Plan

Seems kind of odd that anything associated with tax reform would receive GREAT as its acronym, but here we are. GREAT originally stood for Georgia’s Repeal of Every Ad Valorem Tax but now only includes a repeal of Education Ad Valorem taxes. I’m not sure if school property taxes are the only taxes being repealed for practical reasons or because House Speaker Glenn Richardson liked the acronym so well he didn’t want to change.

The plan which originally proposed all property taxes to be repealed now only calls for the elimination of school property taxes. In order to recover the lost revenue needed to run local school systems, consumers would have to pay sales tax on groceries and services (both currently exempt). As Richardson explains, this would not result in a tax increase but a tax shift. Even if this is true, why would lawmakers want to impose this change?

Historically speaking property taxes are the most hated taxes of all (even income taxes). However, the reason for the hatred often has nothing to with the tax itself.

The first is that for years taxpayers have been subject to a ‘backdoor’ tax. That is that while tax or millage rates remain stable, the tax is increased because of inflation or higher appraised property values. This concern was addressed in Georgia in 1999 by the passage of Act 431. However, taxpayers either still feel ‘pinched’ by indirect tax increases or old habits are hard to break and once you develop hatred for a tax you always harbor resentment for that tax.

The second complaint is largely psychological. Many people who are subject to property taxes must pay the full amount due at one time in lump sum. Certainly, some homeowners have their taxes escrowed along with the mortgage payment. But this still leaves a larger number of people making large property tax payments than people who are required to pay income taxes in lump sum. And everyone knows when you actually sit down to write that check you know exactly how much you are paying in taxes and you don’t like. However, if every time you bought groceries, you were charged a sales tax in lieu of the property tax, over the course of a year you may not even know how much you paid. In fact paying an extra $20 per week instead of writing one $1,000 check annually may not even be noticed by many consumers.

This is one of the reservations I have about the GREAT Plan. Anytime taxes are broken down into such incremental amounts that they aren’t noticed, taxes tend to creep upward. I hope to blog fully on this subject in the future but mandatory withholding of income taxes were never intended to be permanent but Congress recognized that revenues were up in periods of mandatory withholding. It’s like buying that junk from late night infomercials: $120 is a rip-off but 4 payments of $29.99 for the same piece of trash that probably won’t work is very palatable.

It’s for this that I’m not sold on Richardson’s plan and all its GREATness.