Not correct.



All gone at the federal level, but all of those business expenses are still deductible at the state level in certain states, including CA, AL, AR, HA, IA, MN, NY and maybe others.

 

It’s treated that way because you took it as a deduction in the prior year. With the new 10,000 cap it will happen less often. If they did not have that rule everyone with two touching brain cells would increase their state tax withholding to the maximum possible since you will get it all back when you file and avoid a bunch of federal income tax.

 

Tunes -- Not trying to argue with you, and I live in a tax free state. I think if you look at this logically you can see the state's position. Let me give you a hypothetical that is uber extreme but illustrates my point. If a person made $70,000 in a year and chose his w-4 to overpay taxes of $5,000 a month (let's say he did not need current income), he would in effect pay $70,000 in taxes and have zero income. The state would be taxing nominally 7% of $0. So the state gets 0 money in their coffers to pay for infrastructure. The following year the federal government says, "I don't know WTF you're doing, but here is $55,000 taxes refund." (Thus you're $15,000 in taxes or thereabouts would have gotten paid to the federal government.) The state would still be left holding the bag with 0 income reported. The state, however, says "Wait a minute, you owe us taxes on $55,000 of income you didn't report," which seems fairly logical to me.

Since I don't pay any state taxes, I may have misunderstood what you were saying and if somehow you have to pay state tax on federal tax, I would agree with you wholeheartedly on the BS issue.

Clear as mud?

PS: Sorry, I see Sailing addressed this. I'm just a very slow typist.

 

thanks to the both of you...not really sure why i didnt think of that.

 

Not really, Buck. Income is income and paid taxes are paid taxes and they are separate.

In the old days (i.e. last year) you might have been able to deduct state and local taxes on your Federal 1040. The "income" issue comes in at the Federal level with a state tax refund. Let's say In 2016, you had income of $100,000 and paid $10,000 in state income tax. As such, you deducted the $10,000 of state income tax from your federal tax return and then reduced your federal tax bill based on that $10,000 deduction. Also in 2016, you filed your state tax return showing $100,000 in income (income is income) and $10,000 in paid state income tax. However, your state says, "Oh no Mr. Buck, you were way too generous to your great state and you only needed to pay us $8,000. Here is your refund for $2,000." Now, in 2017, the Feds are gonna want to know about that $2,000 you claimed as a deduction in 2016 (deducted $10k but only paid $8k). So, on your 2017 Federal Tax return you would kindly let them know you "overdeducted/underpaid" on your 2016 Federal rerurn to the tune of $2,000. Not as much of an issue under the new tax law with the SALT cap in higher taxed states as any state tax refund would likely result in you still having payed taxes in an amount over the cap.

 

Yep. Simple flat tax on a postcard. (Get rid of deductions, too.)

 

That should be a Presidential campaign slogan.......oh.......wait, it was. (I liked him, too) 😁

 

I believe that the problem with the concept of a flat tax is that it is only straightforward for salaried workers. What about self employed sorts? If you own a car repair shop and make $150000 in revenue but also spent $50000 on equipment and supplies how do you determine your income? Now you are right back to complex paperwork to figure all that out, which the flat tax was supposed to eliminate.

I am no expert on this nor do I wish to be.

 

I agree it would be too simplistic. There has to be a way to define "income:" whether it be from an employer, self-employed, dividend, interest. Once it's defined it should all be taxed at the same rate (perhaps some gradation for higher incomes.)

As far as simplification goes, we can start with getting rid of ...

Mortgage interest,
Charitable contributions,
Depreciation.

 

On 2nd year pay, single income family, no AMT - my effective tax rate is increasing by about 4%. Every situation is different, but for me, losing the personal exemptions is a hit.