Keep Your Entire Paycheck. Make April 15 Just Another Day

Tuesday, May 31, 2005

Keep it Now or Later

I’m not really sure I know what it is sometimes. But, some people actually think they always have to spend money to save money. It’s like going shopping with a coupon, but you actually walked out with an item, but having less money than what you walked in with. People are like this all the time with tax deductions.

I actually heard my accountant (which I’m not going to fault, because they all do it) tell me that I need to come up with more deductions; because it will help me with my 1099 income. Hey, go buy a $2,000 computer, so you can get a $600 tax deduction. Does this make sense to you? Not me. But, hey maybe that’s why I favor the FairTax over the several other convoluted options presented to the President’s Tax Reform Panel earlier this month.

Under the FairTax, some important deductions would go away. I can tell you, however, that is a very good thing, for even the ones getting the deduction currently. The home interest deduction is one of them. For one thing, only about 30% of the American taxpayers even take this deduction. The remainder of us use the standard deduction, which is simpler. Under the FairTax, EVERY HOMEOWNER would take advantage of the tax laws. Under the FairTax, you would get that “deduction” without filing any paperwork

Take this as an example. Say you have a store coupon for $0.20 off of a $1.00 item, such as a box of crackers. You, an avid shopper, expect to pay $0.80 for the crackers when you get to the counter. That is what a deduction would be like for you. What if the cashier told you that they were having a sale today, and all the crackers are free? Would you be upset if you couldn’t use the coupon? I hope not. If so, stop reading…there is no hope. Under the FairTax, you wouldn’t have to use the coupon (deduction). You would be getting it for free. Interest, including mortgage interest, is not taxed under the FairTax.

So, not only do you save for a down payment much quicker under the FairTax; if it is a new home, you only pay a sales tax on the price of the house and not the interest. Even better, if it is an existing home (some call them “used”), you don’t pay any sales tax at all. Not only that, but the interest that you are paying will be less, by about 25%.

Now: on to something even brighter. Why do people make contributions to charities and/or churches? Once again, it would not be wise to come to the end of the year and say “I want to pay fewer taxes, so I’ll contribute my money to a charity”. Just because you donate, doesn’t mean you save money. People contribute money to organizations because they care about an issue, such as feeding starving children or building a church. It would be an insane assumption to believe that charity contributions would decrease because people no longer have a deduction. Under the FairTax, there is no need for a “deduction” when you don’t pay any taxes anyway on contributions and gifts. If you are not buying a product or service, you won’t be paying taxes. That means that without filing a 1040 and claiming a deduction, you can give till it hurts (more than before because you will be doing it with pre-tax dollars), without any federal bureaucracy taking a single red cent from your pocket. Would you rather give your organization $1.00 - free-and-clear or $0.70 from after-income-tax money (if you spent all your earnings on charity)?

If you think it would be awesome for your checkbook, think about the non-profit organizations, such as 501(c)3s. Non-profit organizations would no longer have to pay (time or money) for massive paperwork just to get their non-profit status or file tax returns. So, all in all your $0.50 gift from your gross pay becomes a $1.00 contribution to them. I think that they could stand to use double their money that they are getting now.

One more thing: the education tuition (i.e. college and private elementary schools) that is paid out for human capital (a “mental” investment) is paid with pre-tax dollars, too. If anybody has ever tried to claim a deduction for education, they know it’s not even a full deduction, such as the mortgage-interest or charity deduction. Without forms, education tuition will be tax-free.

Please sit down and think about it: If you are not paying income taxes, you do not need deductions! It is only when the government is taking your money in the first place, when you need deductions to compensate.


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