What comes to mind when you hear the words, “Tax deduction?”
It covers a cornucopia of definitions in my experience.
Personal filers use it as a catch-all phrase for itemized deductions.
Business-folk tend to equate “deductions” with “expenses” quite often, and I can dig it.
People also interchange deductions with credits, which is completely wrong (technically), but again I get it.
Let me share the main distinction. Credits are juicy and awesome, because they reduce tax, not just income.
When you take a deduction, it generally reduces taxable income, which still reduces tax, but only at the effective tax rate.
Does that make no sense? Here you go, then: let’s say you have a gas hog at the pump, and you load $100 worth of gas into that puppy.
(Hog= puppy? Piglet?).
You reduce the amount of gross income you made in that same month by $100 to get to net income.
If you pay tax at the 14% effective tax rate (pretty typical) you just got $14 off your tax.
Not $100.
That’s the shell game the IRS plays with you with the employer deduction for self-employment tax, but that’s a discussion for another day.
With a credit, however, $1,000 is $1,000 less tax.
Like the earned income credit, or the child tax credit.
Therefore, credits are better than deductions.
But I got off-track a little.
You have your itemized deductions, and your business expense deductions, and…
…there is a little thing we tax nerds refer to as “above the line” deductions.
A hold-over term from when the AGI used to be at the bottom of page 1 of a 1040, and the top of page 2.
(AGI is adjusted gross income, by the way. The number lenders want to see when you buy a house).
Business expenses, and business taxes in general are a specialty of ours, and I’ll certainly get back to all of that stuff another time, but for today, let’s talk about the other two things.
Itemized, and “above-the-line.”
Both of these things prompted the “unfortunate” title I gave this piece.
Because, as of 2018, they both suck.
A lot.
1) Itemized Deductions
These are filed on Schedule A. The only reason you ever need Schedule A is if your itemized deductions are higher than the standard deduction, which of course is a set amount the IRS increases a little bit for inflation every year.
In 2018 it doubled. And the knuckleheads of Congress did a lot of chest-thumping about how great they were, that they made this happen for the American Public.
Bullshit.
They played the ole “hide-the-pea” shell game with personal exemptions and child tax credits, moved some numbers around, and tried to sell us on how wonderful our lives were now.
I’m reminded of a Stephen King turn of phrase in one of his books, and I’m probably going to not get this perfect, but it’s something like:
“A suger-frosted dog turd is still shit.”
“Gee, Eric, don’t hold back, say what you mean. Repressing your frustration is hard on your stress levels.”
Don’t get me started!
Oops.
Too late.
I would say somewhere between a quarter and a half of those taxpayers I did taxes for in 2017 and 2018, and that owned a home that they were able to write off mortgage interest and property tax on paid MORE tax, not less.
This is not a tax break for the middle class.
This is not a political statement.
This IS a statement of mathematical logic.
Good hard-working folks making less than certain levels got screwed, and still are.
When they stripped away personal exemptions and doubled the standard deduction, you see, it put folks that used to itemize out of reach of this benefit.
Oh, and they just plain got rid of unreimbursed employee expense.
Not to mention the punishment to the generous of heart.
The charitable contributions deduction is a…yes you guessed it…itemized deduction.
Who thought THAT was a good idea?
The only consolation is that they dropped this stink bomb on us with an expiration. It does have a sunset, but it’s not until 12/31/25. Four more bloody years.
(Unless, of course, somebody manages to change it again between now and then. From your lips to God’s ear.)
Now, let’s move on to my other pet peeve.
My high-octane rant fuel.
2) Above-the-Line Deductions
The educator deduction, in particular.
This is for working-class teachers, the unsung heroes of our country in my opinion.
They used to get a lousy $300 adjustment to income above the AGI line.
At 14% that’s a $42 break.
I’ll tell you something else, too – most of the teachers I met as a preparer didn’t even bother taking it.
They loved what they were doing so much that it didn’t matter to them that they had to spend a little of their own money on their kids, and their classrooms.
I worked for one of the famous franchises for one tax season, and had several teacher’s returns.
I don’t think any of them ever even took it when I explained that in the unlikely event of an audit, they might have to produce receipts.
Sad.
Want to hear something even sadder? In a very large cross-section of this country, they are also dealing with the reality of something called “live-shooter drills.”
A teacher died sacrificing herself to save her students at Sandy Hook, and all we had for these people was about $42 a year?
Assuming they even bothered taking it?
Now, here’s the big crappy booby prize Congress handed the teachers of America – they stripped the educator credit out of the code completely in 2018. 2019, also.
What the hell were they thinking?
It came back in 2020, because of COVID, and they so magnanimously allowed the expenses to include sanitation and cleaning supplies.
Oh, and it’s only $250! Not even the original $300.
Yup, that’s only a $35 break.
Now, here’s what has prompted today’s entry, and has put me on the edge of holding myself back, with veins popping out of the backs of my hands.
I got an IRS bulletin delivered to me just the other day that had my wife asking what the hell was wrong with me, because of my reaction to it.
This year, in all their infinite largesse, they’re allowing you $500 if you and your spouse are both teachers!
Oh, thank you, fearless leaders!
Are you not pissed off about this now?
If not, why not?
This deduction should be a full $1,000 at minimum, and for that matter if you have student loan debt from college your interest, if not the entire nut, should be forgiven too.
Who hasn’t had that “One Teacher,” that changed their life in some meaningful way?
Why, oh why, are we, the so-called “Leaders of the Free World,” taking a big wet crap on these modern-day heroes?
Who have in modern-day America literally taken a bullet for their children?
If you read this far, thank you so much.
If you feel even a LITTLE bit of the angst and frustration I’ve tried to get across today do me a favor?
Share this with somebody?
Our nation is far and away the home of the most generous private benefactors of the world. We give more to charity than any other country as private citizens, and it’s not even close.
So, I know our fellow Americans have a heart.
And empathy.
A desire to change the world, and leave it a little bit better than we found it.
My teachers told me we have a voice because we are American.
With a right to free speech.
Use it. But not on social media, trying to convince people that can’t do jack how right you are.
All you have to do is use a search engine. Every one of use has a congressperson and 2 senators.
Let ‘em have it. Hit ‘em with email and postal mail both.
We live in the best time in the history of civilization, with mass terabytes of data at our fingertips.
Our teachers should be revered as saints. That’s all I’m saying here.
Have a blessed, grateful, and simply amazing Thanksgiving this Thursday…
And hug, or at least sincerely thank a teacher for their service. Today.