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Fair taxes: It isn’t hard to do

 

By Randy Neumann

“Imagine there’s no Heaven.  It’s easy if you try. No hell below us.  Above us only sky.  Imagine all the people.  Living for today.”
John Lennon, “Imagine”

Let’s imagine a tax system that allows workers to keep their entire paychecks and retirees to keep their entire pensions.  A system that gives tax refunds in advance on purchases of basic necessities, allows American products to compete fairly, and brings transparency and accountability to tax policy.  One that insures Social Security and Medicare funding, closes all loopholes and brings fairness to taxation, and abolishes the IRS.

What follows is a description of the FairTax from the website FairTax.org:

“The Fair Tax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The Fair Tax Act (HR 25, S 13) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax  administered primarily by existing state sales tax authorities.

The Fair Tax taxes us only on what we choose to spend on new goods or services, not on what we earn. The Fair Tax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.”

Well, we can all “imagine” such a system, but it “ain’t happenen,” at least not right now.

So, here’s a dose of reality from IRS.gov website IR 2009-118 Dec 16, 2009:

“The Internal Revenue Service today issued proposed regulations under a new law that will require reporting of basis and other information by stock brokers and mutual fund companies for most stock purchased in 2011 and all stock purchased in 2012 and later years. The reporting will be to investors and the IRS. This additional reporting will be optional for stock purchased prior to these dates.”

“This important reporting change will improve tax compliance while reducing the recordkeeping and paperwork burden for millions of investors,” said IRS Commissioner Doug Shulman. “These taxpayers will now receive the information they need to more easily report their gains and losses correctly.”

What does this mean?  Let me explain.  There is a federal tax on income and there is a federal tax on wealth which is the estate tax (also known as a death tax).  Simply stated, if you die and you own more than $5 million in assets, you owe the government 35% of anything above $5 million.  There is also a federal “gains” tax which is what this new law is about.

Here’s how the gains tax works.  If you buy a capital asset, i.e., a stock, a bond or a business and you sell it for a profit, Uncle Sam wants to be your partner and share in your profit.  If it is a “short-term” gain, less than a year, you will pay at the rate of your income tax which ranges between 10-35%.  If you hold an asset for more than one year, you are entitled to the “long-term” capital gains tax rate of 15%.  This is Uncle Sam’s way of encouraging long-term investment.

Heretofore, we were on our own to report the amount of any gain to the IRS.  As an example, if you bought a stock for $10 and sold it (after one year) for $15, you would owe long-term capital gains tax on the five dollars.  You were obligated to report this information on your 1040 tax return.

Under the new law, Uncle Sam will receive information from the broker, mutual fund or any other agent as to the value of the transactions.  So, if you were to report that you purchased a stock for $12 and sold it for $15 (a gain of three dollars), this would conflict with the report sent by the custodian stating you bought the stock for $10 and sold it for $15, hence a gain of five dollars.  I wonder whom they will believe.

I know that they will believe the custodian and send you a bill for the difference because the same thing happened a few years ago regarding Required Minimum Distributions (RMDs).  Prior to the 2006 Pension Law, we were on our own to calculate and withdraw the proper RMDs from our qualified retirement plans.  The 2006 law requires retirement plan custodians to send us an annual report on how much we were required to withdraw.  They also have to send a copy to the IRS which makes it very easy for them to make sure that we take out the required amount.

Well, we can “imagine” as suggested by John Lennon, or we can take action and visit the website FairTax.org.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP ® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 600 East Crescent Ave., Upper Saddle River, N.J. 201-291-9000.

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