Mike Kueber's Blog

December 30, 2011

Wikipedia and tax mediation for a frugal retiree

During college or law school, I was taught that there is a critical difference between tax avoidance and tax evasion – avoidance is legal and OK; evasion is illegal and not OK.  Wikipedia, however, seems to have blurred that distinction in the last sentence of the following definitions:

  • Tax avoidance is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax avoidance. The term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law. The United States Supreme Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.”  Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax avoidance and evasion can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state’s tax system.

If I may digress from my taxing subject for a minute, this morning I heard Doug Gottlieb, a substitute host on Mike & Mike’s sports talk show on ESPN2 rely on Wikipedia for the historical origins of the marathon and then gratuitously slam Wikipedia by saying that, because the info came from Wikipedia, it might be right and it might be wrong.  What an ugly thing to say!  Although Wikipedia may not have all of the overlapping validations of most reference sources, I have found it to be highly reliable and exceptionally well written.  The paragraph above on tax avoidance is typical.  That was a cheap shot, Doug, unless you are prepared to give us examples of you being misled by Wikipedia.

Back to my subject of “tax mitigation,” a lot of retirees with a moderate amount of assets don’t realize that the U.S. tax code allows them to earn a relatively sizable amount of income without paying any taxes.  Here is how:

  • The personal exemption and standard deduction for a single person combine to about $10,000 so that amount of income is tax free.
  • The Bush tax cuts allow people in the 10% or 15% tax bracket to pay $0 on capital gains.  For a single person, the 15% bracket changes to 25% with income of $35,000.

Thus, according to my calculations, an individual can earn income of $10,000 and take out capital gains of $35,000 and still pay no taxes.  If you need more than $45,000 a year to live on, you simply consume some of the assets that resulted in the capital gains.  Sweet!

Although I think the Bush tax cuts should be eliminated for everyone, not just the rich, I endorse Mitt Romney’s suggestion that the capital gains tax should be eliminated for everyone except the rich.  Providing an incentive for wage-earners (the proletariat) to become asset-owners (the bourgeoisie) would be a good thing.

The Rubric Theme. Create a free website or blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

Join 64 other followers