AMT 101: Because Every Middle Class Citizen Should Know

Here is a very nicely explained article on the Alternative Minimum Tax, a potential tax crisis that's affecting millions more each year. Congress is currently working to fix this potential nightmare with a "one year patch" which as of two days ago, still needs to make it through the Senate. The main discrepancy exists over where the offset in revenue will take place. The current bill proposes sharp increases in tax fees for management of private equity fund portfolios. In my opinion, a revenue "off-set" is not what we really need, but rather a revenue reduction across the board. The current plan is better than nothing, however...

Bogus Argumentation, Fluffy Principles, and Fodder for Debate

I attest that a good source of "comedic amusement" is to reflect on lawyer arguments, especially in Supreme Court debates. A recent article I read on a "subtle nuance" (hehe...is that redundant?) in tax law concerns a case currently up for debate and is one which illustrates my amusement quite well. It's also very relevant to individual taxation (corps, trusts, and partnership variations are also a fun-filled circus in themselves, but I won't get into that just yet).

Specifically I refer to this: Department of Revenue of Kentucky v. Davis, No. 06-666.

That sounds sexy already, doesn't it? If I also threw out the random fact we are dealing with a 2.5 trillion tax dollar market, and this revenue concerns 38 states in question, does that help the mental shift (read: kind of important) at all?

In tax law, there is a general rulestating that interest on municipal bonds (i.e., "bonds" just being long-term debt issued by a state, city or other local government) from a state will be exempt from income taxation within its own state of issuance. If an investor wishes to invest in bonds outside of one's residence state, the interest on these non-resident bonds will be taxable within that investor's resident state. Muni-bonds are also tax-free for Federal purposes, but that element is not the issue in question. Instead, the interstate impact of this rule is the focus.

Amid the captivating display given last week on Nov. 5th, I must sarcastically admit our resources were once again well spent to serve the greater good. That is, for the sole purpose of achieving justice, and setting straight the constitutional clarity of our times. In all seriousness, these reasons are precisely why the Supreme Court felt it necessary to saunter through a muck of nearly 50 years of "unclearly dictated conclusions" in precedent law only to find that the most relevant case rulings for the general bond rule above are a discussion over the essence of "garbage" versus "milk."

....huh?

Let me clarify how this kind of makes sense:

a) "Garbage," is an extensively pliable product (by-product?) to states in terms of its consideration for preferential tax treatment. States would like to say that non-resident bond interest can be taxed on the state level, since the commerce clause doesn't govern activities engaged in solely "on behalf of its people."

b) "Milk," however, is a commodity product of the dairy market, which in turn is a part of agriculture, an industry which has historically been protected by states through heavy Federal subsidization. Individual state treatment has been to exempt the dairy market from protectionism between states, also citing the commerce clause.

Here comes the fun part:

If munis are like "garbage," the rule should remain as it currently stands. Simply because the state has the ability to discriminate in favor of itself. This is the current position of 49 states, regardless of whether or not they actually have a state income tax. Why do states favor this decision on how to treat muni-bonds? It's not counter-intuitive. Discriminating in favor of oneself will most likely have the best outcome for oneself, at least in the short term. Here is where the annual $2.5 trillion comes into play. It's also useful to know that the current treatment of muni bonds is based on a particular garbage case where "rates charged by a state created monopoly in New York to dispose of trash were higher than those charged by private-sector competitors, but the state chose instead to use the public-monopoly." The states serve to gain from their actions by increased revenue, but will lose dearly as continual increases from inefficiencies decrease the useful value of this already enormous amount of income.

On the flip side (and the one to which I agree), if munis are like "milk," they shouldn't be given preferential treatment, since "preferential" means either they are taxed or exempted based on the outline to the general rule. According to state policy, munis cannot have protectionist barriers, similar to the treatment of agriculture. If bond interest is not protected by certain states through inter-state transactions then the only viable options under this assumption are to either tax all muni bond interest at the state level, including resident bonds, or exempt all muni interest altogether from any form of state-level taxation.

Is individual exploitation of labor a necessary wedge between determining the public good and the public's tax dollars? Obviously it shouldn't be, but the latter creates this exploitation. That is why I argue that all muni bonds should be exempted from taxation at the state level. It is, simply put, the only feasible way to eliminate the barriers existing between inter-state commerce. If state monopolies were not allowed to exist in the first place, they wouldn't have the option of choosing in favor of itself (whatever the elusive conglomerate of "state" is we speak of, anyway) even though it's not the best for all, as in the New York garbage case. There is way more to write here, but I'm sooooo sleepy.

Ugh, and this has easily turned into sounding like a written a paper or something. Why does that always happen when I least expect it?

For more on this, see here and here.

Ah, the sweet solace of sleep will shortly be upon me. I'm so there…….

Who Owns Your Tax Advice?

The Patent & Trademark Office (PTO) passed recent legislation in Sept. 2007 allowing patents for "tax strategies." It's been argued by John R. Thomas, of CRS's Resources Science and Industry Division, that tax advice constitutes a creative product eligible for protection. His position is based mainly on grounds that because "biotechnologies, business methods and other innovations" have been allowed for several years and not caused harm to the "U.S. innovation environment" under patenting laws, the growth of intellectual property should naturally encompass the area of tax advice.

But!!!

….for "patents in general," is a temporary halt on competition really conducive to better competition (i.e., a better product) in the long run? For this case, does this even consider how much value are we really losing by the time the restriction to our innovative freedom is lifted? Seems like a risk too volatile to want to undertake.

On the idea of "Tax Strategy," if the tax code is complicated enough to need trained professionals to complete the work already, why create a monopoly on already regulated ways to complete that work? The issue seems like it's not whether a creative product exists, but whether it hurts the public's innovative freedom as a whole to protect something which shouldn't be protected. Seems like a clever way to reduce controversy over tax shelters to gain revenue for Big Four companies still agonizing over SEC probes, or to further promote Private Letter Rulings (which I personally don't have a problem with for other reasons), and lastly, and most problematic --another way to create government profit.

Next time you have an idea or need advice about taxes, maybe it's time to look up whether the PTO already has it on file.

Mark Your Calendars: Tax Freedom Day Is Coming Up!

Check this out:

April 30 is the day that Americans can stop working to pay the taxman and start working for themselves, according to the Tax Foundation's annual estimate dubbed "Tax freedom day."

Tax freedom day is theoretical because it assumes we've been working 7 days a week since the start of the year, and that we don't spend anything we make. The 120 days from Jan. 1 through April 30 represents the time it will take the nation as a whole to earn enough to pay off all of the taxes that will be levied against us this year.

Breaking that 120 days down, the Tax Foundation estimates it will take:

• 43 days of work to pay off federal, state and local income taxes
• 30 days to pay off payroll taxes (for Social Security and Medicare)
• 16 days to pay off sales and excise taxes
• 14 days to pay off corporate income taxes (This assumes that a tax on a business is passed on to its customers, employees and shareholders in terms of higher prices, lower paychecks and less shareholder value.)
• 12 days to pay off property taxes
• 4 days to pay off other taxes (e.g., customs duties)
• 1 day to pay off estate and gift taxes

Based on an 8-hour workday, the research group estimates that Americans as a whole work:

• 1 hour 43 minutes to pay all federal taxes (income, sales, etc.)
• 1 hour 22 minutes to pay for housing and household operations
• 1 hour 8 minutes to pay for health and medical care
• 52 minutes to pay all state and local taxes (income, sales, etc.)
• 51 minutes to pay "other" taxes
• 40 minutes to pay for food
• 39 minutes to pay for transportation
• 28 minutes to pay for recreation
• 17 minutes to pay for clothing

Way to go Tax Foundation, filling our heads with POSITIVE info for our work ethic. Get the whole article here (although I pretty much just quoted it all, word-for-word ;-)

State of Nature

Assume humans in a “state of nature” naturally commit bad acts because this would be the worst case scenario (i.e., violence runs rampant, forceful action, sexual violence, and theft are common). We then emerge from this “state of nature” with the knowledge that we have a right to self-ownership, and ownership of our labor or property (assume this is as we are today, although these values have become somewhat convoluted). And the “state” was eventually created in order to keep us from anarchy. However, in a “perfect libertarian” society, the state does not exist at all.

If the government or the “state” is problematic (even in the limited sense), how are we to prevent another state of anarchy? Shouldn’t we assume the worst case scenario that it’s possible this could happen? And, wouldn’t this also be awful if it happened? That is, how do we “know” that in a “perfect libertarian society” that human nature will assume a rational/cooperative stance (i.e., adhere to the axiom implied with non-aggression, and a rational belief in natural rights)?

CPA ..er.. pains

I seriously NEED this book right now. Or any book rather that emphasizes hard-core motivation for the skeptic at heart. Becker CPA review is just not enough. From the book's intro it says (and most accurately) :

"Each year, over 120,000 CPA exam candidates continue to attempt to pass the CPA exam. It is a stressful event in the life of an accountant, and the stress goes beyond just the knowledge and the exam itself because of the high percentage (85%), of first time students who fail. "

I currently feel similar to this person's review of the book:

"The first six weeks of studying for the CPA I felt burned out and unmotivated. When I logged on to Amazon I was hoping for a miracle. I was hoping to find something the will help me overcome the fatigue. I wanted to get the CPA out of the way on the first try, and to never have to look at the CPA books again. Between this book and the CD, I regained my motivation."

Before I was married and egh.. extremely happy and fulfilled I was a militant test-taking Nazi without any other pressing responsibilities to care about. Now, I could drone on and on about my theory of the odds-are-against-me-attitude because the-state-wants-my-money kind-of-thing & my skepticism of institutional education. Hell, I just want to master the subject; not play mind games to appease merely for a piece of paper. But I know that would be absolutely counter-productive in a system which I've committed to playing against (or with?). So how should I deal with these daunting statistics for a profession I've thrown myself into willingly? I guess I need more optimism in my head if I want to pass on the first try instead of constantly feeding on my growing dissaproval over standardized exams. I wish Dane Cook could give me an analogy to pinpoint exactly what I'm feeling right now. I guess either way it's a good thing I'm incredibly stubborn about achieving life's goals. Either that or I'm simply delusional. Let's just hope I can get to the end-point in mind sooner rather than later. ;-) Mleh. It's just one of those days.

What's all the Wiki-Fuss !?

Apparently, Wikipedia - the online encyclopedia which allows open editing by anyone, has been recently in the spotlight by the U.S. Patent & Trademark office as a knowledge source equivalent to "toilet paper" in legal discourse.

Proponents of this argument state that Wikipedia had been used (within a database of other information sources) to validate patents (which confer exclusive rights to a product for their creators for up to twenty years). However, the ability for these "patent validity examiners" to use Wikipedia in searches has been revoked, on grounds that since the information is constantly changing - the information is not fit for determining a patent's validity.

Since discovering Wikipedia - I have developed a certain regard for its ability to evolve and update with new information, and especially its ability to be driven by a conglomerate of pre-critiqued ideas, while the final product is continually open to revision. Although I certainly don't think it wise to use Wikipedia as a fundamental basis for a patent proposal, or any other legal document (that's why we have primary law sources), I have no reservations as to its general guidance for basic contextual direction for a subject. It seems however, that this "ousting" to Wikipedia and subsequent "blow" to its credibility draws to mind whether something such as this could ever be considered a "valid" source of knowledge. But knowledge shouldn't be something static, and it is ineviteably open to change. So why the fuss about Wikipedia, the one purporting ultimate "up-to-dateness" as not serving the test of validity? Sounds like the debate should be more around "accuracy" and "reputation" rather than it's discredit for "changing with new information," which in itself is a highly respectable quality.

Get Rich Investing With Kaburobos?

Need someone to manage your mutual fund or ETFs?

Ask for a "Kaburobos."

As a result of a couple of Japanese companies' creative efforts, the production of "robotic fund managers" may someday become commonplace. Ten of these so called "fund managers" will be ready to give investing strategies to individuals as early as next year. The robots will make their "investing decisions" through internal algorithmic programs using market data from the past 15 years.

Who's behind this current AI idea? Former Microsoft employee Koichi Kato - now with Trade Science, Inc. He originally created a model in association with Tokyo's Waseda University which yielded annual returns as much as 300%.

Now that's an innovative way to get ahead of the market!!