Taxes, are we ready for these new ones?

[CharonY]

Also one has to consider that social mobility in the USA is low(among the lowest in the OECD, comparable to GB and Italy, but lower than e.g. Germany, France or Canada). Thus the assumption that one can climb the ladder by hard work is faulty. At the very least it is harder to do so in the US. Even worse, for someone in the middle class, it is more likely to drop down the social ladder, rather than climbing up.

 

Even by measures of relative mobility, Middle America remains fluid. About 36 percent of Americans raised in the middle fifth move up as adults, while 23 percent stay on the same rung and 41 percent move down, according to Pew research. The "stickiness" appears at the top and bottom, as affluent families transmit their advantages and poor families stay trapped.

Article

Edited August 13, 2012 by CharonY

[Moontanman]

A little bit of levity about libertarians...

 

[John Cuthber]

In the interest of balance, perhaps someone should indicate what Libertarians are good at.

Also, if some newbie came here and said "Everyone can make capital gains, rich or not." then failed to support or even discuss it we would probably start looking at the rulebook.

[ParanoiA]

And, like iNow, I'd still like to see ParanoiA back up the assertion that "Everyone can make capital gains, rich or not."

 

Talking of counterpoints that get ignored., and at the risk of repeating myself.

 

like iNow, I'd still like to see ParanoiA back up the assertion that "Everyone can make capital gains, rich or not."

 

Also, if some newbie came here and said "Everyone can make capital gains, rich or not." then failed to support or even discuss it we would probably start looking at the rulebook.

 

So the rules are I must log in every single day and take counterpoints every single day or I'm ignoring counterpoints and failing to support or discuss my assertions?

 

John, we haven't soaked the rich enough here for me to have the same time on here as you and still be able to feed myself and my family.

 

If you require this much attention in order to discuss things in your forum then I'll have to bow out. And from the looks of things, you will too. You failed to rejoin the discussion and deal with your comments that I replied to many days ago, even weeks. You're only just now coming back and you still haven't supported or discussed your "not normal" comments about rich people.

 

 

 

Now, this is where iNow's and most liberal ideologies miss the mark on reality. People are not static actors. There's this ideal "poor person" to them, that works a job, back and forth, saves and budgets, and that's all they do. This is why imagination fails them when someone speaks of the poor trying to mobilize economically and running into the license laws and regulations that crony business and government built together.

 

A poor person encounters long term capital gains on the sale of a main home owned less than 2 years, longer than 1 year. A poor person trying to claw out of poverty can use real estate to make gains. They have to live in a home anyway, so you borrow the money, fix the place up over the next year and then sell it. Capital gains will be figured, and depending on their wage salary they may end up paying taxes, or receiving a reduced refund or credits.

 

In our case, I make less than 30K a year at my new job. Median is 51K, so I bring home a little over half of the median income here in America. Poverty is set at 23K for a family of four. We are a family of four and I make 7K above poverty. I think I stand as an example of the working poor, but not impoverished.

 

I bought our house in July of 2011 for 31K with cash from my 401K upon leaving my job that was making me miserable. I put in 15K immediately, made the house very nice and livable with our own labor - we lived on concrete floors for over a month though, since it took time to get the walls, windows and doors finished and sealed. It was embarrassing so we didn't invite anyone over. Now, a year later, the house is wonderful, though it still needs a new central AC air handler. I make no house payments, but I do pay insurance and real estate taxes.

 

When we sell the house this year, it will be capital gains. We will have owned the house less than 2 years, but more than 1 (I can't afford to sit around and grow another year older just so I can save 15% on capital gains). We will gain 45K, and when you add that to my wage salary of 30K, I will show income of 75K for that year. I will be paying taxes on this.

 

That's just an example of how *one* poor person encounters capital gains.

 

The people always forgotten are the working poor. The working poor always know exactly what kind of headaches you've created in government because they are the ones who hang their heads in discouragement after interacting with anything government trying to start a business of some kind of pull off some kind of outside-the-box financial scheme . They are the ones that encounter just how ridig and inflexible this supposed "open market" really is.

 

The working poor aren't some static parameter on a spreadsheet, they can be quite inventive and creative about their situations constantly struggling and resisting and as they try to mobilize themselves they run into the laws we created around "big" business, like capital gains. And your failure to recognize that, and instead grasp at conveniently childish black and white partitions - capital gains = rich people - helps to keep them poor, rigidly in place.

 

A little bit of levity about libertarians...

 

 

Ha ha, definitely one of the funnier ones.

 

 

In the interest of balance, perhaps someone should indicate what Libertarians are good at.

 

Not owning people and not hating weirdos, is one thing we're good at. Neither of which can be claimed by both parties nor their respective ideologies that each, at one time or another, provided for the ownership of black folks and the bigotry against them, women, homosexuals, people with lots of stuff,...etc.

 

We're real good at accomodating value systems of all kinds, providing an inclusive environment for everyone to chase the things that make them happy, however weird or ordinary they may be. Free to associate, form bonds of all kinds, communes or total isolation - we make room for all of it.

 

Only we can do that because only we allow the freedom for that to happen. The two major ideologies taking down the country right now are too restrictive and invasive and rely heavily on extortion to maintain the government's existence. Even if we pretended as if their beliefs provided for such liberty, despite mounds of evidence to the contrary, they're tax needs alone drain the citizenry of their resources otherwised used for their own happiness and conscience.

Edited August 13, 2012 by ParanoiA

[John Cuthber]

I'm pleased that you were able, as far as I understand your post to pay cash for a house to live in.

If I were in a position to do that- say I won some cash on the lottery- I wouldn't need to pay a mortgage.

That would save me about 16% of my income (after tax) which would be nice.

 

Also, I'm lucky: I bought my house before the prices went up suddenly (due, incidentally to people speculating on them fuelled by the low rate of tax on that income).

If I were setting out now I think roughly half of my income would go directly towards getting somewhere to live (rent or buy).

So having a lump sum that paid for it would, in effect, double my income.

 

That would make the difference between me being rather skint and quite affluent.

Sorry to have to break this to you, but - since you already own a house- you don't count as poor.

 

Enough cash to buy a house outright doesn't count as poor.

[CharonY]

Well, depending on the circumstances (e.g. change in job) of the move you may be able apply partial exclusion, which would cover the whole value of your house. But overall it looks like a rather unique situation, rather than the rule. With a salary of 30k and a family it is very hard to save up to the 30k to begin with and the 2 year rule is specifically to accommodate people who make capital gains by selling their main house. I think e.g. reducing it to, say, 1 year, may have a better impact rather than change the tax rate.

[ParanoiA]

I'm pleased that you were able, as far as I understand your post to pay cash for a house to live in.

If I were in a position to do that- say I won some cash on the lottery- I wouldn't need to pay a mortgage.

That would save me about 16% of my income (after tax) which would be nice.

 

Also, I'm lucky: I bought my house before the prices went up suddenly (due, incidentally to people speculating on them fuelled by the low rate of tax on that income).

If I were setting out now I think roughly half of my income would go directly towards getting somewhere to live (rent or buy).

So having a lump sum that paid for it would, in effect, double my income.

 

That would make the difference between me being rather skint and quite affluent.

Sorry to have to break this to you, but - since you already own a house- you don't count as poor.

 

Enough cash to buy a house outright doesn't count as poor.

 

I'm so glad you made that point, because you're wrong. There are plenty of people out there with the cash to buy a house - 401K, that's where mine came from - that are considered "poor". I work for the city, making a measly 7,000 more per year than the nationally "impoverished" - people who would pay ZERO taxes and clean up on earned income credit. I'm much further away from the median - 21K, 3 times as far as I am from the impoverished. I can qualify for food stamps and all kinds of stuff if I wanted.

 

If you don't think I'm poor, then congratulations, you are a heartless conservative. Most of the poor are like me - I live in a neighborhood called "Meadow Valley" that has been affectionately renamed "Ghetto Valley". We each have unique situations, just like how people are all unique....weird huh?

 

That was half of the point of my post. You all have no idea who the poor really are or what they're lives are really like, apparently. They don't except themselves from the methods of the rich as you would have them do. They refuse to sit still and they try things - usually against the recommendation of "educated" types that look down their nose at the silly idiots trying to use their retirement to secure a home.

 

When the poor try to claw out of their trenches, they run into barriers we put in place for bigger business types, making it incredibly difficult to achieve their ideas.

 

Just like right now..my biggest obstacle is taxes. I'm going to get taken because laws were created about how to use 401K funds, and the government doesn't like what I did, so I'll have a very bad tax bill - over 6,000 in penalties alone. I expected that, I knew that going into it, but again, who's standing in the way of this poor person? Taxes, not Wal-mart. That 6 grand is going to be tough to come up with - I already extended to October and the IRS won't let me extend it any further.

 

Dealing with that penalty making the beans I bring in...it isn't going to be easy. But alas, the working poor are used to government invented hurdles in an already tough competitive life. Government is always more of an impediment than the legitimate open market.

 

Well, depending on the circumstances (e.g. change in job) of the move you may be able apply partial exclusion, which would cover the whole value of your house. But overall it looks like a rather unique situation, rather than the rule. With a salary of 30k and a family it is very hard to save up to the 30k to begin with and the 2 year rule is specifically to accommodate people who make capital gains by selling their main house. I think e.g. reducing it to, say, 1 year, may have a better impact rather than change the tax rate.

 

That's just it Charon, you would make the same claim about "unique situation" if you interviewed everyone in my neighborhood. We're not cookies, we're people. We haven't been sitting around watching TV being "poor" for all these years. Working poor people don't just say "well I'm poor, let's just eat some corn and go to bed". Instead they dream, hope and scheme and attempt their ideas because "sitting around" and accepting ourselves like a caste system never did anything for us.

 

And this 1 year vs 2 year rule...this is just one example of how a simple rule can screw people. If I wait until next year to sell my house, I won't have any of this profit to pay my tax bill with but I won't have to pay capital gains on the house. If I sell the house right now, I can pay my tax bill but I'll be stuck with capital gains on the house.

 

This means I have to pay my tax bill with 401K penalties on my 30K a year poor man's salary.

Edited August 13, 2012 by ParanoiA

[swansont]

I agree with John Cuthber. Having $31k to buy a house and $15k to put into it is rather atypical. You don't mention your previous employment; was that also at $30k a year? Just getting a house for $31k is unusual, especially one you can sell for $91k a year later (doubling your investment in a year!), even if there was substantial fixing up. I also wonder why you are selling the house.

 

Just like right now..my biggest obstacle is taxes. I'm going to get taken because laws were created about how to use 401K funds, and the government doesn't like what I did, so I'll have a very bad tax bill - over 6,000 in penalties alone. I expected that, I knew that going into it, but again, who's standing in the way of this poor person? Taxes, not Wal-mart. That 6 grand is going to be tough to come up with - I already extended to October and the IRS won't let me extend it any further.

401k's are not taxed initially, are they? If so, you never paid taxes on it to begin with. That's why the penalties are in place — so people don't try an end run around the rules.

[CharonY]

That was half of the point of my post. You all have no idea who the poor really are or what they're lives are really like, apparently.

 

Which is funny, since we have not posted our incomes here. Suffice to say that I have quite some experience with below 30k income and the limitations that come with it. However, according to various studies (as well as personal experience) access to education is one of the key elements.

I do not know enough about 401ks to comment on that, but assume the income tax would be lowered for families with income less than 30k, and increased for those above 300k. Would you view that favorably?

[John Cuthber]

OK, we can debate whether or not ParanoiA is poor but let's not bother.

Lets consider Fred in stead.

 

Fred lives in a run down bit of a city. He didn't do well at school. He knows that school wasn't that great but he also knows that he's just not that bright.

On the other hand, he's lucky: he has a couple of jobs. The day job flipping burgers used to just about cover the bills but the prices went up a lot and minimum wage didn't.

A friend of a friend put his name forward for a cleaning job and so he now does a few more hours a day.

He's just about keeping his head above water. In fact, he even has some savings. He can put aside a little at the end of the month. But he knows that cash is earmarked.

 

A while back- about the time he got the second job, Fred's dad died. A pity- but there was a slight silver lining. Dad left Fred some money. Not much- enough to buy a season ticket for the commute to his night time job. Fred knows that, if he doesn't have the cash to replace that ticket each year when it runs out he is stuffed.

 

Fred has heard that there are jobs going in the next city along but he doesn't think much of the idea.

For a start, he heard on the news that this recession is world wide so there's no way there will be many jobs for unskilled labour in that city, any more than there are lots in his town.

Also, he knows that he was lucky to get his jobs where he is. If it hadn't been for that friend of a friend he'd be in trouble. Probably the same sort of trouble as his brother Joe.

Joe went into the "recreational pharmaceuticals" business and, predictably, went to jail.

So Fred is too scared to move to another town- and even if he wanted to the landlord would want a deposit and there's no way he can raise that.

Also, he still has hopes of marrying his girlfriend though her dad has other ideas. He understands that well enough. Dad want's someone who can look after her well. And of course, while she's living at home with dad she's helping pay his rent.

 

Still, there's one ray of hope in his life.

He heard that some bloke called ParanoiA will tell him how he can make enough money from capital investments that he will have to pay tax on it. That looks like a pire dream now.

 

Well Paranoia: over to you.

How does the story end?

(And no lottery tickets)

[zapatos]

The $6000 in penalties will be in additon to paying all the taxes due. It is true that the penalties are in place to deter a run around the rules, but in this case the rules insist he spend the 401k money on retirement in 20 years rather on housing now. I'm not sure the government should be making the call about that one, and in fact, with a Roth you could cash out without penalty to buy a first home.

 

Also, I believe that if ParanoiA uses the proceeds from the sale of the house to purchase another primary residence, then he will not have to pay capital gains (yet). If he does does not roll the proceeds into another primary residence then he can at least reduce the capital gain by the amount he spent upgrading the house.

[ParanoiA]

I agree with John Cuthber. Having $31k to buy a house and $15k to put into it is rather atypical. You don't mention your previous employment; was that also at $30k a year? Just getting a house for $31k is unusual, especially one you can sell for $91k a year later (doubling your investment in a year!), even if there was substantial fixing up. I also wonder why you are selling the house.

 

 

401k's are not taxed initially, are they? If so, you never paid taxes on it to begin with. That's why the penalties are in place — so people don't try an end run around the rules.

 

I don't know how atypical it is for a relatively poor person - certainly not rich or comfortable - to risk their 401K on a house, business or whatnot. I suspect it's more typical than you think, but certainly not prolific. We got the house at a good price because of the market and since we were paying cash it was easier to get the bank to let go of it at our price - it had sat for 3 months, starting at 46K. The people that lived there before got foreclosed on and they trashed the place, urine, fecal matter, the whole nine yards.

 

This market is great for poorer people to make some money. Cheap housing is good for poor folks even though the middle class and rich are up in arms about it.

 

We think we can get around 85 to 90K based on market comps in the area and we did a much better job of the work that the other remodels we've seen. Not trying to say we're super awesome, but we do honest work and we fix things like we'd like them to be and that's just another step up from the contractor mentallity we see in other remodels. Doubling our investment is what we've always done in real estate fix ups.

 

We're selling the place so we can do it again, and again. Our idea is to live in the houses we want to "flip". By living there we gain the advantage of not being in a hurry, not requiring large crews of cheap labor and all that hassle but we also aren't paying enormous monthly payments to hard money lenders, or even paying a dime on interest. But this also means we have to do every bit of the work, and it's time consuming when you do it all yourself, and the place is under construction most of the time you live there. Takes a while before you can relax on some carpet and hear the TV without trying to overcome a drill in the back room.

 

Oh, and you pay taxes as income when you get your 401K withdraw and I have no problem with that, because as you pointed out, it was pre-taxed going in. It's the 10% penalty I have a problem with. It's a creative penalty and really sucks because 401K savings are one the few places a poor person can go to get funds for their ideas.

[John Cuthber]

It doesn't matter how "typical" it is.

One person who can't make capital gains is enough to falsify the assertion that everyone can.

I grant you that Fred is imaginary, but I don't think he's remotely implausible.

Real "Freds" exist.

[ParanoiA]

Well Paranoia: over to you.

How does the story end?

(And no lottery tickets)

 

Well, the story does not end good John. The rich people have all the money and the earth is warming really fast anyway, so he visits his brother to get the hook up on some good pharmaceuticals and checks out....

 

It doesn't matter how "typical" it is.

One person who can't make capital gains is enough to falsify the assertion that everyone can.

I grant you that Fred is imaginary, but I don't think he's remotely implausible.

Real "Freds" exist.

 

Well I didn't mean that statement the way you are taking it anyway - you could have proved it false pointing out a homeless man with zero money.

 

My statement was meant to convey that poor, middle class and rich all encounter capital gains and it's the same rate for all of them.

 

But...Fred can buy a single stock, sell it for a penny more a year later, and he's made a capital gain of 1 penny. When he figures his taxes at the end of that year, he'll have to include this penny he made as a capital gain. Probably after all the deductions, credits and income thresholds he won't have to pay anything out of pocket, though the gain was still figured in the return.

Edited August 13, 2012 by ParanoiA

[John Cuthber]

So, what you meant by "Everyone can make capital gains, rich or not." was "not everyone can make capital gains and there's a whole readily identified group of people who can't because they are too poor".

I hope you can understand why I got confused there.

 

 

My other point is that only a little of my income is capital gains (on which I pay a reduced rate of tax) I pay normal income tax on pretty much the whole of my income. So my overall % tax is a bit less than the income tax rate.

Poor Fred has practically no way to enjoy the benefit of low tax by getting part of his income via capital gains.

 

On the other hand, Mr Rich gets more of his actual income from capital gains than through normal "income" so he pays the lowest percentage tax.

I really don't think it's right that the poorest people generally end up paying the highest % tax.

 

 

(Incidentally, Fred's neighbour, Bert, is even worse off than Fred. Bert's income is so low that he and his family get state benefits which are means tested. If Bert manages to get some sort of temporary job then half the money he gets is deducted from his social security cheque. Bert pays a marginal income tax rate of 50% on any extra money he earns.)

 

We seem to have set up a perfectly inverted tax structure wher the less you earn, the more of it you pay. And it wasn't the poor guys who set that up.

 

(I know I'm ignoring the tax thresholds, but the principle still stands. The tax thresholds don't matter to you if none of your income is treated as a salary because it's all paid to you in stock options and you only pay capital gains tax on it. Bert is still goosed anyway- no matter what the thresholds are.)

Edited August 13, 2012 by John Cuthber

[Cap'n Refsmmat]

My statement was meant to convey that poor, middle class and rich all encounter capital gains and it's the same rate for all of them.

But it's not the same rate for all of them. Capital gains tax rate is based on your tax bracket, as swansont noted yesterday.

[iNow]

Also, the idea of 401Ks and home ownership is a giant red herring anyway. Most of the poor cannot buy a house with cash, nor can they secure a mortgage to obtain one. What most often happens is that these folks cannot obtain quality credit and have to rent at awful rates on month to month leases.

 

I'm not sure how we've had to spend so much time clarifying this, but as many of us shared earlier... No, not everyone can earn capital gains.

[swansont]

I don't know how atypical it is for a relatively poor person - certainly not rich or comfortable - to risk their 401K on a house, business or whatnot. I suspect it's more typical than you think, but certainly not prolific. We got the house at a good price because of the market and since we were paying cash it was easier to get the bank to let go of it at our price - it had sat for 3 months, starting at 46K. The people that lived there before got foreclosed on and they trashed the place, urine, fecal matter, the whole nine yards.

 

This market is great for poorer people to make some money. Cheap housing is good for poor folks even though the middle class and rich are up in arms about it.

 

We think we can get around 85 to 90K based on market comps in the area and we did a much better job of the work that the other remodels we've seen. Not trying to say we're super awesome, but we do honest work and we fix things like we'd like them to be and that's just another step up from the contractor mentallity we see in other remodels. Doubling our investment is what we've always done in real estate fix ups.

 

We're selling the place so we can do it again, and again. Our idea is to live in the houses we want to "flip". By living there we gain the advantage of not being in a hurry, not requiring large crews of cheap labor and all that hassle but we also aren't paying enormous monthly payments to hard money lenders, or even paying a dime on interest. But this also means we have to do every bit of the work, and it's time consuming when you do it all yourself, and the place is under construction most of the time you live there. Takes a while before you can relax on some carpet and hear the TV without trying to overcome a drill in the back room.

 

Oh, and you pay taxes as income when you get your 401K withdraw and I have no problem with that, because as you pointed out, it was pre-taxed going in. It's the 10% penalty I have a problem with. It's a creative penalty and really sucks because 401K savings are one the few places a poor person can go to get funds for their ideas.

So you flip houses in addition to your "9-5" job. That's great. But you can't pretend that you're 20k below the median, because you're doing this as well. If you flip a house every 2 years and make $40k doing it, that's $20k a year in income, on average, and you're only going to pay 15% on that income, so good for you. Flipping houses for profit is one reason why the rules are in place about 2 years of occupancy. Using retirement money for other purposes is why the penalties are in place. To make it harder to exploit the system and avoid taxes that you should be paying.

 

But it's not the same rate for all of them. Capital gains tax rate is based on your tax bracket, as swansont noted yesterday.

And if you're fortunate enough to be able to get the lower rate, great. But a lot of people below the median income level are never going to be in a situation where they can apply capital gains taxes instead of the marginal rate.

[iNow]

Well I didn't mean that statement the way you are taking it anyway - you could have proved it false pointing out a homeless man with zero money.

Yet that's sort of been our point all along, the one where you were arguing the contrary.

 

I think this might be an actual real-time example of my recent criticisms of the libertarian position in the what is freedom thread... Over simplifications to the point of inaccuracy.

 

You said everyone can earn capital gains. That's true in the same way that everyone can technically "have sex with Scarlett Johansson." Sure, there's nothing legally or practically preventing it I suppose, but it's of such a low order of probability as to be effectually impossible for all but a select few. Well, my friend... It's the same with poor people and earning capital gains... especially those countless many poor people who are renting and living paycheck to paycheck with no assets to their name except the shirt on their back and the Bic lighter and 6 cigarettes in a soft pack crumpled in their pocket.

[Moontanman]

Yet that's sort of been our point all along, the one where you were arguing the contrary.

 

I think this might be an actual real-time example of my recent criticisms of the libertarian position in the what is freedom thread... Over simplifications to the point of inaccuracy.

 

You said everyone can earn capital gains. That's true in the same way that everyone can technically "have sex with Scarlett Johansson." Sure, there's nothing legally or practically preventing it I suppose, but it's of such a low order of probability as to be effectually impossible for all but a select few. Well, my friend... It's the same with poor people and earning capital gains... especially those countless many poor people who are renting and living paycheck to paycheck with no assets to their name except the shirt on their back and the Bic lighter and 6 cigarettes in a soft pack crumpled in their pocket.

 

 

What!? You've never had sex with Scarlett Johansson? I am about tired of her, I think I'll go ahead and win the lotto this week, 365 million dollars... I think I'll just pay 15% in taxes on it too, I mean why not, all the other rich people do that... Are we living on different planets? Other than not smoking cigarettes, I couldn't afford a habit like that, that sounds more like my planet... 1/4 of my income goes to insurance, another 1/3 goes to rent, car payments? I hope not, If I did I couldn't put gas in the thing and eat regularly... Isn't having a dream wonderful...

[zapatos]

Using retirement money for other purposes is why the penalties are in place. To make it harder to exploit the system and avoid taxes that you should be paying.

I agree that the penalties are there to keep you from using the money for other purposes, but how do they keep you from avoiding taxes? Or rather, how could you avoid paying the taxes whether the penalties are in place or not?

 

And since the money you take out of the 401k is taxed based on your current income, I imagine you pay more taxes by taking it out while you have a job, rather than when you are in retirement.

[iNow]

Paranoia - You may not believe it, but I truly do understand the circumstances you describe. I do understand what it means to be poor, and to live in shit houses in shit neighborhoods with shit income and shit to eat. I'm no stranger to that, my friend... and like you, it's part of what drives me to be better and do better and maximize every opportunity I am fortunate enough to encounter. I work twice as hard as anyone else, and three times as hard as most.

 

I do have to say, though... Your 401K example is not at all a strong one in this discussion. First, as I and others have been pointing out above, most people who are poor don't have a 401K... At least, not the type of poor people I am thinking of based on my own family and my own experiences. IMO, if you have a 401K at all then you're practically middle class by definition alone. No ifs, ands, or buts about it. The poor I'm around are folks living 7 people to a room in disgusting duplexes that they rent from some guy who owns 15 of 'em and couldn't care less about conditions. The poor I know are taking any job that's offered even when the pay doesn't cover the electric bill or the groceries or the anything... Some of them are turning tricks between here and the laundry mat or standing in front of Home Depot hoping for day labor. There are no capital gains for these folks, no 401Ks nor private health insurance or even automobiles to get them to and from a job. They don't have a home of their own, they've sold everything they could to buy some milk, and they're hardly spending their welfare checks on playstations like Pangloss used to love saying in these discussions. They are folks that got dealt a crap hand in the lottery of life, and even the really inspired, intelligent, and industrious people in these circumstances are failing because they have no power and no voice to alter the system relative to the rich with connections in government and funds with which to bribe them contribute. I digress, though...

 

Second, your 401K example is not at all a strong one in this discussion because you knew there were consequences for early withdrawal when you setup the account. You signed off that you understood that risk when you started taking a portion of your paychecks and putting that money into those accounts. You checked the box and said, "I agree," when you entered into that contract and began your contributions, and you also knew there were consequences for early withdrawal when you took out the money to buy a house. You had to agree there, too, before you could execute the transaction. However, for whatever reason you actively chose to accept that penalty. That's cool, but that's on you, buddy. That's your bad, not the government. Saying anything about the government in this particular instance is another red herring.

[swansont]

I agree that the penalties are there to keep you from using the money for other purposes, but how do they keep you from avoiding taxes? Or rather, how could you avoid paying the taxes whether the penalties are in place or not?

 

And since the money you take out of the 401k is taxed based on your current income, I imagine you pay more taxes by taking it out while you have a job, rather than when you are in retirement.

 

There's the possibility that you deferred the income while in a high tax bracket and then withdrew it while in a lower bracket. Also, by deferring the tax, even if it is the same dollar amount, the tax itself is worth less when adjusting for inflation.

 

If I have an income of $50k and invest $2k in an IRA or a 401k, I am taxed only on $48k, saving me $500 in the 25% bracket. That's additional money I can possibly invest and only have it be subjected to capital gains. My overall tax rate goes down.

[ParanoiA]

I do not know enough about 401ks to comment on that, but assume the income tax would be lowered for families with income less than 30k, and increased for those above 300k. Would you view that favorably?

 

No I would not. Only the destitute poor get my sympathies, sorry. The rest of us are just bitching because our stuff is not as nice as others.

 

I prefer a sales tax solution that exempts medical, food and shelter. This moves taxation to surplus, away from survival resources. Private, personal information no longer required means more power to the people.

 

So, what you meant by "Everyone can make capital gains, rich or not." was "not everyone can make capital gains and there's a whole readily identified group of people who can't because they are too poor".

 

More like anyone can make capital gains, rich or not. There's a whole readily identified group of people who can't take the earned income credit either, is there a reason why this matters? Lots of poor folks and middle class folks run into capital gains when attempting to mobilize themselves economically. Nothing changes that. You change the capital gains rate, you *will* necessarily knock little people down.

 

I think you're more concerned about knocking big people down such that a those little people don't bother you.

 

So you flip houses in addition to your "9-5" job. That's great. But you can't pretend that you're 20k below the median, because you're doing this as well. If you flip a house every 2 years and make $40k doing it, that's $20k a year in income, on average, and you're only going to pay 15% on that income, so good for you. Flipping houses for profit is one reason why the rules are in place about 2 years of occupancy. Using retirement money for other purposes is why the penalties are in place. To make it harder to exploit the system and avoid taxes that you should be paying.

 

But I haven't though Swansont, that's the point. I'm still *attempting* to mobilize and acquire house flipping as another occupation, but it is not complete. I have merely bought a house - saving about 600 a month in mortgage, but I still pay insurance and real estate taxes. The house is not sold, we're living in it, paying bills, struggling to come up with the tax bill. We have not achieved this yet, we are broke mostly, and not prepared to sell the house yet. My plan is still not yet realized.

 

Building a business is not one day your poor, working for the man, the next day your business is up and running. For those of us with limited means, it takes time and creativity. Creativity being limited by laws and regulations. These 401K tax laws are keeping us from continuing on the house and getting it ready for sale. That's the facts, man. I can't continue to divert my funds to further improving this home while this tax bill looms over our heads.

 

We do pay taxes on the 401K, I'm not sure why you keep pretending as if we've skirted something. You pay when you withdraw, whether that's when you're 67 or 41. It doesn't matter, you pay taxes on that money as "income". I have no issue with this part of the 401K tax problem, and I did not figure it in here as such. My problem is with the penalty of 10%. It's an imagination penalty because goddamnit they want you to build a retirement, rather than do things that might eventually make you happier or more independent.

 

And if you're fortunate enough to be able to get the lower rate, great. But a lot of people below the median income level are never going to be in a situation where they can apply capital gains taxes instead of the marginal rate.

 

Actually they do on the sale of a main home, all the time. I'd like some numbers on this, but I suspect most home sales are occupancies 2 years or longer. This means they're enjoying a 0% capital gains on the sale of their homes up to 250K for singles and 500K for married couples. That's definitely a lower rate than their marginal tax rate, such as short term capital gains.

 

Yet that's sort of been our point all along, the one where you were arguing the contrary.

 

Yeah, I'm a little out of practice here, sorry. The careful parsing of words...

 

I meant, however, anyone can run into capital gains, rich or not. When one tries to improve their situation financially, and begins to imagine and create ways to acquire more resources, they will encounter the barriers you built for the rich. It happans all the time. I've struggled against government bullshit my whole life and it is absolutely discouraging. It takes a long time to save money and risk it on an idea - years and years - the last thing you need is government pigeon holding you into a business model that doesn't give you an advantage.

 

Our business model gives us an advantage over the big cheap labor crew approach, a competitive edge, something the little guy needs, particularly an upstart. But we still have to overcome the government's disapproval in the form of tax penalty before we can continue on with it. How is this good for the economy?

 

If we did things the government's way, I would still have my 401K, outrageous house payment, 65K a year job, and paychecks that get eaten alive by monthly obligation piranha's. Because I don't have any other money to buy a house with or attempt a business with. The working poor will use whatever funds they have, and 401K's are becoming more and more popular for even the most dead end of low paying jobs. My son has one and he works for Pizza Hut as a delivery driver.

 

I think this might be an actual real-time example of my recent criticisms of the libertarian position in the what is freedom thread... Over simplifications to the point of inaccuracy.

 

You said everyone can earn capital gains. That's true in the same way that everyone can technically "have sex with Scarlett Johansson." Sure, there's nothing legally or practically preventing it I suppose, but it's of such a low order of probability as to be effectually impossible for all but a select few. Well, my friend... It's the same with poor people and earning capital gains... especially those countless many poor people who are renting and living paycheck to paycheck with no assets to their name except the shirt on their back and the Bic lighter and 6 cigarettes in a soft pack crumpled in their pocket.

 

That wasn't an oversimplification, it was mistatement of the word "every" instead of "any" body. The funny part is, I'm the one attempting to show that poor people are more complex than any of you are giving them credit for. That they are more resourceful and busy than you think they are. That you may have built barriers aimed at the rich, but you're hitting little people trying to change their lives for the better because they don't throw their hands up and give up on themselves as you have.

 

Further your last sentence is a caricature, or a stereotype of what you think the poor are. That's silly. You should visit Sand Springs, OK sometime and I'll show you whole neigborhoods of poor - they are a struggling class of people, not static sacks of tissue. They have more than you think, and they are capable of more than you think.

 

And since the money you take out of the 401k is taxed based on your current income, I imagine you pay more taxes by taking it out while you have a job, rather than when you are in retirement.

 

That's what I was thinking. Further, that it's merely a savings account in which the gamble is post or pre tax dollars. I would never have thought that the timing of withdrawal could be considered "bad" or skirting something. It's in your interest to leave money in there to continue to compound interest, so it's a natural consequence to cash out early.

 

Paranoia - You may not believe it, but I truly do understand the circumstances you describe. I do understand what it means to be poor, and to live in shit houses in shit neighborhoods with shit income and shit to eat. I'm no stranger to that, my friend... and like you, it's part of what drives me to be better and do better and maximize every opportunity I am fortunate enough to encounter. I work twice as hard as anyone else, and three times as hard as most.

 

Then you understand why they don't need our sympathies. They have cars, houses, air conditioners, TV's, stereo's, computers, and etc and all kinds of stuff - it's just shitty versions of it. Our poor mostly don't do without, they do *with* ugly and pre-owned.

 

I say if you care about poor people, remove the bureaucracy that makes it so hard for the little guy to start up a business. Stop taking his tax money on his paychecks, what little he has. Move to a sales tax that only taxes surplus - let him have all of his money so he can be in a better position to try his own ideas of labor or service, that may make him/her happier in their lives.

 

In other words, fight for open markets for them. Support removing regulations invented by business-government cronies.

 

I do have to say, though... Your 401K example is not at all a strong one in this discussion. First, as I and others have been pointing out above, most people who are poor don't have a 401K... At least, not the type of poor people I am thinking of based on my own family and my own experiences. IMO, if you have a 401K at all then you're practically middle class by definition alone. No ifs, ands, or buts about it. The poor I'm around are folks living 7 people to a room in disgusting duplexes that they rent from some guy who owns 15 of 'em and couldn't care less about conditions. The poor I know are taking any job that's offered even when the pay doesn't cover the electric bill or the groceries or the anything... Some of them are turning tricks between here and the laundry mat or standing in front of Home Depot hoping for day labor. There are no capital gains for these folks, no 401Ks nor private health insurance or even automobiles to get them to and from a job.

 

That's extremely destitute iNow. The poverty threshold is set at 23K for a family of 4. 7 people to a room and can barely afford groceries? This is not the typical poor. This is not the majority of poor people you're talking about, this is that slice of destitution that is the most depressing and least hopeful.

 

My son lives at home, 19 years old, fulltime delivery driver for Pizza Hut - pays into a 401K. I'm not sure how much he puts in it, but I've tried to get my boys to invest in the idea of a lifetime savings account.

 

Most of the people he works with are working poor. Young men and women just starting out, but with 401K's mind you. They're very popular.

 

But the point I'm making is that it is a point of gravitation for someone ready to try something to improve their financial situation. To write this off as most poor people don't have 401K's so we don't need to make any changes to it, is to write off those little people you refuse to notice that won't just lie down and be helpless like our numbers say they should be.

 

Poor people, and lower middle class try not to be poor all the damn time. How do you think that looks? What form does that take? One form it takes...cashing out 401K's.

 

Second, your 401K example is not at all a strong one in this discussion because you knew there were consequences for early withdrawal when you setup the account. You signed off that you understood that risk when you started taking a portion of your paychecks and putting that money into those accounts. You checked the box and said, "I agree," when you entered into that contract and began your contributions, and you also knew there were consequences for early withdrawal when you took out the money to buy a house. You had to agree there, too, before you could execute the transaction. However, for whatever reason you actively chose to accept that penalty. That's cool, but that's on you, buddy. That's your bad, not the government. Saying anything about the government in this particular instance is another red herring.

 

That's a bit like saying putting someone to death for running a stop sign is ok as long as they knew about that consequence ahead of time. Sorry, I'm a bit more inclined to criticize bad laws. It's not right to assign capital punishment for stop signs, and I would readily blame the government for murder if they did it.

 

It's a bad law to dictate to citizens how to spend their money on otherwise legal things. Yeah, I knew about the penalty and did it anyway. I knew the government was going to be a brick wall, but did it anyway. Is that somehow a good argument for government to build brick walls in the first place?

 

Like I keep saying...your laws and regulations impede the progress of creative people with limited means. That 401K was the key to this move for us, and the government has been the only obstacle, certainly the worst one. Imagine if they weren't an obstacle at all? I could spend the next 4 paychecks finishing the siding, the windows and the air handler and would be ready to sell in about 4 weeks. Instead, I'll be saving for taxes the rest of the year if I'm lucky.

 

This could be a real-time example of how you overcomplicate rules due to an overcomplicated view of society. People need room to innovate, and there's very little room for little people to innovate in this rigid system built to contain big business.

 

There's the possibility that you deferred the income while in a high tax bracket and then withdrew it while in a lower bracket. Also, by deferring the tax, even if it is the same dollar amount, the tax itself is worth less when adjusting for inflation.

 

If I have an income of $50k and invest $2k in an IRA or a 401k, I am taxed only on $48k, saving me $500 in the 25% bracket. That's additional money I can possibly invest and only have it be subjected to capital gains. My overall tax rate goes down.

 

Isn't the possibility of deferring income while in a high tax bracket (earning wage income) and then withdrawing it while in a lower bracket (retired) by design? Don't we expect people to be in a lower tax bracket when withdrawing? So if they're still earning wage income, yet withdraw 401K savings, aren't they paying more than they would have if they waited until they retired? Plus there's less money to earn more interest.

[swansont]

But I haven't though Swansont, that's the point. I'm still *attempting* to mobilize and acquire house flipping as another occupation, but it is not complete. I have merely bought a house - saving about 600 a month in mortgage, but I still pay insurance and real estate taxes. The house is not sold, we're living in it, paying bills, struggling to come up with the tax bill. We have not achieved this yet, we are broke mostly, and not prepared to sell the house yet. My plan is still not yet realized.

And you have not paid any cap gains tax yet, either.

 

Building a business is not one day your poor, working for the man, the next day your business is up and running. For those of us with limited means, it takes time and creativity. Creativity being limited by laws and regulations. These 401K tax laws are keeping us from continuing on the house and getting it ready for sale. That's the facts, man. I can't continue to divert my funds to further improving this home while this tax bill looms over our heads.

The 401k tax laws put money in your pocket in the first place, up until you decided to prematurely withdraw it. Can you at least acknowledge that? That without the laws, you would have had less money?

 

We do pay taxes on the 401K, I'm not sure why you keep pretending as if we've skirted something. You pay when you withdraw, whether that's when you're 67 or 41. It doesn't matter, you pay taxes on that money as "income". I have no issue with this part of the 401K tax problem, and I did not figure it in here as such. My problem is with the penalty of 10%. It's an imagination penalty because goddamnit they want you to build a retirement, rather than do things that might eventually make you happier or more independent.

The purpose of the law is for encouraging retirement savings. And I was as clear as I could be about ways your taxes could be lower (not absent) by withdrawing the money. It is possible to evade some of the tax you would have otherwise paid. Hence the penalty, to discourage such attempts.

 

Actually they do on the sale of a main home, all the time. I'd like some numbers on this, but I suspect most home sales are occupancies 2 years or longer. This means they're enjoying a 0% capital gains on the sale of their homes up to 250K for singles and 500K for married couples. That's definitely a lower rate than their marginal tax rate, such as short term capital gains.

How much cap gains do you figure the people who had to sell their home to you had to pay? What about the 1/3 of the US population that rents?