Very occasional thoughts concentrating on the useful.

Wednesday, February 28, 2007

Taxation perversion

Well, it's tax season and I blew some potentially productive hours filling out stupid forms.

I noticed a few non-obvious perversions in the tax codes:

1. It is not always true that you should take the standard deduction on your US return when it is more than your itemized deductions. (Corollary: in some cases someone could profitably cheat on his taxes by making up bogus itemized deductions even if all itemized deductions totalled less than the standard deduction. I wonder if the IRS would be smart enough to catch on to that!)

2. Massachusetts gives some tax advantages to gambling winnings that aren't afforded to capital gains. (Yes, I must report my poker winnings this year.)

3. The IRS provides a federal tax incentive to pay your estimated state taxes late in some cases.

In order to relieve some of the tedium of filing taxes, I'll temporarily leave it as a brain-teaser to readers of this blog to figure out why the above statements are true. (Hint: the example I have of #1 being true applies only to Massachusetts residents, although I suspect it may be true elsewhere as well.)

The answers will be revealed after April 15. Any readers getting correct answers to all three questions will receive a "gift" icon on facebook.com.

Answers:

1. Medical costs are deductible in Massachusetts only if they are deducted as itemized deductions on Schedule A of the US tax return. In some situations you may benefit enough on state taxes that you should take the hit with Uncle Sam. (I'm irritated that Massachusetts interferes with federal taxes.)
2. Apartment rent is deductible against gambling winnings but not against capital gains.
3. State tax payments are federally deductible based on the calendar year in which you actually pay. In particular, there could be a big tax difference between paying estimated taxes on Dec 31 or on Jan 1, for example if you're taking the standard US deduction in one year but not in the next (or if you're changing tax brackets).