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Tax Code Insanity

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tax filingAh, the weekend before federal income taxes are due.

By now, I expect the nation’s follicle count is swiftly dwindling as a frustrated population struggles to comprehend and comply with what I consider the biggest national embarrassment the US has: our tax code.

As of April of 2014, the federal code took 73,954 pages to explain. To tax professionals.

According to a 2011 study conducted by the Laffer Center,  U.S. taxpayers pay $431.1 billion annually, or 30 percent of total income taxes collected, just to comply with and administer the U.S. income tax system.  Not only is this system inefficient, it is downright irresponsible, and dare I say, immoral.

A properly run Federal Government, adherent to the Constitution, would need substantially less revenue in order to operate.  That said, government does have roles to fill for which it needs income.  In my opinion, the flatter the rate and the broader the pool taxes are collected from the better.  I’ve long been an advocate for eliminating the income tax all together and replacing it with a consumption tax, much like the Fairtax or some other system that removes the individual responsibility of filing and keeps our income levels private, while not punishing productivity.

Our tax code is ridiculous, and the purpose of this article is to actually point out an example I have this year of how the code ends up making no sense when applied to real life situations.  After my story, I’d love to hear any of yours in the comments.

As many of you know, I am an avid casino aficionado. It’s my hobby and it allows me to travel and experience good food and good shows all at a fraction of the retail price.  I might write a primer on this someday for those interested.

Last year, on a trip to the Horseshoe Casino in Tunica, MS, I hit a small jackpot on a slot machine that required a hand pay of $2,000. While exciting, I generally aim for multiple small wins vs single big wins.  The reason is, for pays of over $1,200, a taxable event has occurred and you will be handed a Form W2G along with your winnings. The Feds also get a copy.  This is added to your income when you file your taxes.  Additionally, in accordance with Mississippi law, the casino automatically deducted 3%, or $60, from my payout for MS taxes.  I received $1,940 in cash.

Now, when filing my taxes, that W2G income is added to my total income on my 1040.  Here’s where it gets interesting.

The IRS does allow you to deduct gambling losses up to the amount of documented gambling winnings. I pretty much broke even last year, so I had losses that would compensate for that $2,000 in “income”.  Unfortunately, in order to do this, one must itemize using Schedule A.

Now, this sounds all well and good…but not everybody should file a Schedule A.  I am among them.  The standard deduction of $6,200 is higher than the amount I can deduct filing a Schedule A. My mortgage interest, charitable donations, and gambling losses come to less than the standard deduction, so it makes no sense to file.  As a result, I end up paying taxes on money I didn’t actually earn.

It gets better!

My W2G amount is for $2,000.  I only received $1,940 but pay taxes on the whole $2,000.  This “income” then also becomes part of what is transferred to my state return, on which I pay taxes to the state as well.

Now, SC does allow a deduction for taxes paid to other states. I should at least be able to deduct the $60 I paid to Mississippi.  Nope!  In order to claim this, I must provide a copy of the Mississippi state income tax return.  Mississippi does not allow casino winners to file returns because the tax is collected at the time of winning and there is really no reason for it.

In conclusion, I won $2,000, immediately paid $60 to Mississippi, and while this win was offset by losses, I still pay taxes to both the Federal Government and South Carolina on $2,000 worth of “income” that doesn’t exist.

This sort of makes me want to beat my head against the wall, but I know that will do little good.

What sort of loopholes and insanity have you discovered while filing your taxes?

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