Income Inequality and Tax Policy

ruhk wrote:
DSGamer wrote:

I became even more Libertarian today. And those plans to buy a new home? F that.

Oh man, as if the tax thing weren't bad enough, you had to become more libertarian as well. Ouch. This just isn't your week. ;)

Being taxed an extra 8% of your income (on top of what you've already paid) will do that to you. I don't know what to do. The taxes will mean a huge chunk of our free income will go towards servicing the tax bill. We could move back into the house, but honestly if it comes to that I'd be tempted to walk away. This is a nightmare.

PS - The humor isn't lost on me. I cracked a smile. Just not in a great mood right now. I went from meeting with a financial planner on Wednesday to talk about ways to reduce our tax burden, including buying a new home, to having the entire situation completely reversed. I guess that's a wake-up call that you're not really middle class under current tax law until you're part of the 1%.

Robear wrote:

I've seen proposals to tax capital gains at the full income tax rate for taxation purposes. The idea is out there.

Didn't it used to be 30-35%?

DSGamer wrote:
ruhk wrote:
DSGamer wrote:

I became even more Libertarian today. And those plans to buy a new home? F that.

Oh man, as if the tax thing weren't bad enough, you had to become more libertarian as well. Ouch. This just isn't your week. ;)

Being taxed an extra 8% of your income (on top of what you've already paid) will do that to you. I don't know what to do. The taxes will mean a huge chunk of our free income will go towards servicing the tax bill. We could move back into the house, but honestly if it comes to that I'd be tempted to walk away. This is a nightmare.

PS - The humor isn't lost on me. I cracked a smile. Just not in a great mood right now. I went from meeting with a financial planner on Wednesday to talk about ways to reduce our tax burden, including buying a new home, to having the entire situation completely reversed. I guess that's a wake-up call that you're not really middle class under current tax law until you're part of the 1%.

DS, your story reminds me of some of the tax shenanigans California is pulling lately. First, the state rescinds a tax break to start new businesses, which is bad enough. Then the state decides to charge back taxes plus interest, which is insane.
http://www.businessinsider.com/calif...

This is one of the reasons I'm always hesitant to support taxes as a way of shaping social dynamics, with the exception of maybe sin taxes that help offset the negatives that something like tobacco causes. There are many unintended consequences when you radically change the tax code, and I'm not convinced that taxes alone will help solve income inequality. I'd much rather see the government cracking down on tax dodgers and corporate outlaws who got rich during the boom by breaking the law.

Besides, there are lots of other factors that contribute to income inequality, including macro factors like globalization and personal factors like education, fiscal discipline, and dare I say it work ethic. A lot of the people in the upper middle class got there through years of sacrifice and working 60-80 hour weeks.

A lot of the people in the upper middle class got there through years of sacrifice and working 60-80 hour weeks.

I definitely did. I want to make sure that people who start out like I did have the opportunities I was given, and right now, many of those have been pulled back as "entitlements", as if they were a bad thing, or their usefulness erased by the idea that everything should only be done for a profit. Government at least is looking to fix things, and until conservatives decide that the poor are a decent source of voters, they won't even throw crumbs. I'll take inefficient over non-existent every time.

I think that's the trap that politicians have set. That it's somehow class war between upper middle class and lower class. It's class warfare between megacorps and everyone else. It's asymmetrical and they're winning handily.

Pardon me for being selfish for a moment. Any CPAs or Mortgage experts in the house? My wife and I have a creative plan to make lemonade out of lemons and I'm curious about running it by someone before our meeting with our financial advisor next week.

Oh, and obviously I'm asking if someone wouldn't mind PMing me. I don't want to hijack the thread any more than I already have.

DSGamer wrote:

My wife and I have a creative plan to make lemonade out of lemons and I'm curious about running it by someone before our meeting with our financial advisor next week.

You're thinking about burning down your house with Aperture brand combustible lemons and collecting the insurance money, aren't you?

OG_slinger wrote:
DSGamer wrote:

My wife and I have a creative plan to make lemonade out of lemons and I'm curious about running it by someone before our meeting with our financial advisor next week.

You're thinking about burning down your house with Aperture brand combustible lemons and collecting the insurance money, aren't you?

The funniest part about that is that now you have me wondering if that was actually a reference in Portal 2.

DSGamer wrote:
OG_slinger wrote:
DSGamer wrote:

My wife and I have a creative plan to make lemonade out of lemons and I'm curious about running it by someone before our meeting with our financial advisor next week.

You're thinking about burning down your house with Aperture brand combustible lemons and collecting the insurance money, aren't you?

The funniest part about that is that now you have me wondering if that was actually a reference in Portal 2.

It is.

Kind of want to quit my job right now. Drop us down a tax bracket and allow us to claim our mortgage deduction. Time for me to pop out a kid.

DSGamer wrote:

Kind of want to quit my job right now. Drop us down a tax bracket and allow us to claim our mortgage deduction. Time for me to pop out a kid.

It's like I don't even know you anymore!

DSGamer wrote:

Kind of want to quit my job right now. Drop us down a tax bracket and allow us to claim our mortgage deduction. Time for me to pop out a kid.

Right, because you not working will make your financial situation better, and the deduction(s?) for having a kid will outweigh the financial burden of having a child.

Look, I understand why you are frustrated, and I think you are justified in your anger, but making statements like the above only undermines the legitimacy of your complaints.

The likelihood of DSGamer having a baby as a tax shelter is roughly equivalent to that of me growing a second head.

clover wrote:

The likelihood of DSGamer having a baby as a tax shelter is roughly equivalent to that of me growing a second head.

Yeah. Just really frustrated. Trying to refi our home to lessen the blow and being told we make too much to qualify for streamline this afternoon.

DSGamer wrote:
clover wrote:

The likelihood of DSGamer having a baby as a tax shelter is roughly equivalent to that of me growing a second head.

Yeah. Just really frustrated. Trying to refi our home to lessen the blow and being told we make too much to qualify for streamline this afternoon.

You'd think this has to have happened to more than just you guys, and so there should be some sort of workaround to mitigate this.

Had you consulted with a realtor, an accountant, or legal counsel prior to making that decision on your house? My fiduciary duty sense is tingling.

KingGorilla wrote:

Had you consulted with a realtor, an accountant, or legal counsel prior to making that decision on your house? My fiduciary duty sense is tingling.

Yes. We engaged an accounting agency prior to converting the house *expressly* for the purpose of ensuring that as we before / as we proceeded with our plans we got the best advice possible on the tax ramifications. Prior to that my wife had done our taxes for the previous 14 years flawlessly. She's a manager of a PMO. She's sharp and can handle running through that stuff just fine. But she's no expert at tax law. So we made the conscious choice to spend hundreds of dollars for something my wife previously did for free. And we ended up in a worse place.

Then in my largely unqualified legal opinion, they done messed up like a coyote in a hen house. If they did not make it clear the tax ramifications after converting to a rental property, they royally boned up. You may want to see about finding a malpractice attorney. A licensed accountant, CPA, attorney should have mentioned that to you. That is what you pay them for. Note, I am probably not licensed to practice law in your state.

Farscry wrote:
DSGamer wrote:
clover wrote:

The likelihood of DSGamer having a baby as a tax shelter is roughly equivalent to that of me growing a second head.

Yeah. Just really frustrated. Trying to refi our home to lessen the blow and being told we make too much to qualify for streamline this afternoon.

You'd think this has to have happened to more than just you guys, and so there should be some sort of workaround to mitigate this. :(

Nah - banks/mortgage brokers take a one-size-fits-all approach to refinancing. It's probably the least amount of work they can do and still make their money on all the bullsh*t fees associated with a refi.

I tried with my rental and was told no because it a) wasn't my primary residence and b) was underwater. So instead my ARM (based on LIBOR) is now at 3%. I get a letter from the bank every few months asking me to refinance. I assume they'd still turn me down because it's still underwater and is still a rental, but I haven't bothered to call and check as I'm quite happy with 3% and LIBOR would have to rise dramatically to get to the point where I'd be paying my initial rate of 6.125% (yes, I bought at the absolute peak of the market).

@DSGamer: If you don't mind me asking, were you aware that the tax credit had to be repaid when you opted to take advantage of it? I asked because I bought in late 2007 and specifically remember cursing when that credit came around... and then noticing that it would have to be repaid anyway and thought to myself, "F that, even if I qualified," in particular when I saw this part: "If you sell your home, all remaining annual installments become due on the return for the year of sale." I only ask out of pure curiosity since this particular tax credit stands out in my mind as the only one I've ever thought to myself that I wouldn't take it even if I could.

Edit: Also, from the way I read http://www.irs.gov/uac/Tax-Credit-to... shouldn't that number be $6500 instead of $7000?

For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

So you should have paid $500 on your 2010 and $500 on your 2011 and the remainder should be $6500.

We did know it would have to be repaid. We didn't know that turning the house into a rental would immediately trigger the repayment of the balance. That was news to us and the part that the CPA didn't tells us about. And yes, it's $6500 in really. We also lost $4,000 on not being able to deduct the house. Throw in a few thousand because our current county is more expensive and you get our current tax bill. The actual over liability that results from the change in the house status is $10,500.

Why not just move back into the house? Why did you move out of it?

Ulairi wrote:

Why not just move back into the house? Why did you move out of it?

It's on the table. We moved out because my wife wanted to get into the city proper and take advantage of walking to the grocery store, walking to movies, etc. Largely that's been a success and it's helped us to make progress on our fitness, eat better and frankly we've been happier. So it's a lifestyle premium to be sure. One that we wouldn't have to pay to the same degree if we could sell the house.

Moving back into the house doesn't spare us the $6500 as far as we understand. That bell can't be unrung. But it would save us significant money. I could tolerate a couple years in the burbs waiting until we saved money for a new house / sold the old one. Not sure my wife can, though.

I'm in the process of a refi even though it's underwater and a rental. HARP just changed their rules, so you may qualify now.

DSGamer wrote:

I became even more Libertarian today. And those plans to buy a new home? F that.

Erm, I don't mean to be the bastard voice of reason here, but you didn't buy a new home. You bought a rental property that you lived in for a while before renting it out.

The point of the tax credit was to incentivize homebuyers, and unfortunately for you, you didn't read the smallprint. The reason it was designed that way was to prevent real estate investors (which you became when you rented the house out - albeit that that investment sadly underperformed) from claiming the tax credit.

sh*t like this is why the tax system terrifies me. It's nothing but smallprint.

Also this:

KingGorilla wrote:

Then in my largely unqualified legal opinion, they done messed up like a coyote in a hen house. If they did not make it clear the tax ramifications after converting to a rental property, they royally boned up. You may want to see about finding a malpractice attorney. A licensed accountant, CPA, attorney should have mentioned that to you. That is what you pay them for. Note, I am probably not licensed to practice law in your state.

DSGamer wrote:
Ulairi wrote:

Why not just move back into the house? Why did you move out of it?

It's on the table. We moved out because my wife wanted to get into the city proper and take advantage of walking to the grocery store, walking to movies, etc. Largely that's been a success and it's helped us to make progress on our fitness, eat better and frankly we've been happier. So it's a lifestyle premium to be sure. One that we wouldn't have to pay to the same degree if we could sell the house.

Moving back into the house doesn't spare us the $6500 as far as we understand. That bell can't be unrung. But it would save us significant money. I could tolerate a couple years in the burbs waiting until we saved money for a new house / sold the old one. Not sure my wife can, though.

I guess you're going to have to pay the price to make your wife happy.

Are the rental prices in the Seattle area really that out of whack that you cannot at least cover your mortgage? In the long run, if the market returns to its historical normal having a rental property is a really good investment. Keep in mind that if you are claiming a loss on the rental income currently, it's a passive loss so you don't get any tax benefit now but in the future if you do claim income from the rental property those passive losses can be used.

Jonman wrote:
DSGamer wrote:

I became even more Libertarian today. And those plans to buy a new home? F that.

Erm, I don't mean to be the bastard voice of reason here, but you didn't buy a new home. You bought a rental property that you lived in for a while before renting it out.

We bought it with the intent of it being our home and up until the point we decided to move to the city it was our home. Life changes. You make different choices later.

Jonman wrote:

Also this:

KingGorilla wrote:

Then in my largely unqualified legal opinion, they done messed up like a coyote in a hen house. If they did not make it clear the tax ramifications after converting to a rental property, they royally boned up. You may want to see about finding a malpractice attorney. A licensed accountant, CPA, attorney should have mentioned that to you. That is what you pay them for. Note, I am probably not licensed to practice law in your state.

I'm still torn on this to be honest. I feel like they screwed up. I don't know that it would do us any good to pursue that.

It might be easier considering most professionals need to warrant their own work, typically. A CPA must warrant that they are filling out your tax return correctly. But if they file that you have 3 more kids than you told them, that mistake is theirs, and they must make restitution when the IRS audits you.

One more update since a few of you are asking about our situation right now. I appreciate the feedback more than you guys know. Thus the reason I'm going to be a little more self-indulgent here. Thanks for putting up with that. Hopefully we can soon get back to the topic as a general concern. On we go.

Ulairi wrote:
Moving back into the house doesn't spare us the $6500 as far as we understand. That bell can't be unrung. But it would save us significant money. I could tolerate a couple years in the burbs waiting until we saved money for a new house / sold the old one. Not sure my wife can, though.

I guess you're going to have to pay the price to make your wife happy.

There is truth to this. It's more than just being happy, though. She's talking about going to the gym more, spending time on cooking more fresh meals, etc. I think the move could be beneficial and I'm starting to get swayed by that idea.

Ulairi wrote:

Are the rental prices in the Seattle area really that out of whack that you cannot at least cover your mortgage? In the long run, if the market returns to its historical normal having a rental property is a really good investment. Keep in mind that if you are claiming a loss on the rental income currently, it's a passive loss so you don't get any tax benefit now but in the future if you do claim income from the rental property those passive losses can be used.

We're in Portland. And yes, Portland is pretty out of whack right now. Especially in the suburbs. It's a good market to be a renter, I feel. Once we started looking for rentals in downtown Portland we found really nice apartments right in the heart of everything that cost barely more than our mortgage in the burbs. Yet we can't charge close to the cost of our mortgage yet.

We did get a bit of good news yesterday. We have been working with a mortgage agent to talk about buying again downtown once we cleared our tax bill, etc. and he worked with us to get us on a streamline. So you are correct that this is possible, Mixolyde. We're in the process of getting our APR down significantly, which should at least help us pay back the taxes.

DSGamer wrote:

One more update since a few of you are asking about our situation right now. I appreciate the feedback more than you guys know. Thus the reason I'm going to be a little more self-indulgent here. Thanks for putting up with that. Hopefully we can soon get back to the topic as a general concern. On we go.

Ulairi wrote:
Moving back into the house doesn't spare us the $6500 as far as we understand. That bell can't be unrung. But it would save us significant money. I could tolerate a couple years in the burbs waiting until we saved money for a new house / sold the old one. Not sure my wife can, though.

I guess you're going to have to pay the price to make your wife happy.

There is truth to this. It's more than just being happy, though. She's talking about going to the gym more, spending time on cooking more fresh meals, etc. I think the move could be beneficial and I'm starting to get swayed by that idea.

Ulairi wrote:

Are the rental prices in the Seattle area really that out of whack that you cannot at least cover your mortgage? In the long run, if the market returns to its historical normal having a rental property is a really good investment. Keep in mind that if you are claiming a loss on the rental income currently, it's a passive loss so you don't get any tax benefit now but in the future if you do claim income from the rental property those passive losses can be used.

We're in Portland. And yes, Portland is pretty out of whack right now. Especially in the suburbs. It's a good market to be a renter, I feel. Once we started looking for rentals in downtown Portland we found really nice apartments right in the heart of everything that cost barely more than our mortgage in the burbs. Yet we can't charge close to the cost of our mortgage yet.

We did get a bit of good news yesterday. We have been working with a mortgage agent to talk about buying again downtown once we cleared our tax bill, etc. and he worked with us to get us on a streamline. So you are correct that this is possible, Mixolyde. We're in the process of getting our APR down significantly, which should at least help us pay back the taxes.

The IRS will also work with you on a payment plan. Give them a call.