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Sneaky Taxes

A stealth tax is a sneaky way for governments to raise revenue without causing too much of a backlash
Sneaky Taxes

A stealth tax is a sneaky way for governments to raise revenue without causing too much of a backlash from the public. It is often levied through indirect means, such as inflation, excise duties, or hidden charges. The idea is that citizens won’t notice or understand the tax, and therefore won’t be inclined to protest or resist it.

While stealth taxes may be effective in generating revenue for governments, they can also create unintended consequences. For instance, inflationary stealth taxes can disproportionately hurt those on fixed incomes, such as retirees and low-wage workers. This can lead to higher poverty rates and decreased economic mobility.

Moreover, stealth taxes can create mistrust and frustration among citizens who feel they are being unfairly burdened without their knowledge or consent. This can erode confidence in government institutions and lead to increased polarization and political unrest.

It is important for governments to be transparent and upfront about how they are raising revenue from their citizens. This can help build trust and foster a more equitable tax system that benefits everyone.

Here are some of the latest sneaky taxes:

10-year Inherited IRA Payout Rule

As we get older, many of us start thinking about the legacy we will leave behind for our loved ones. For those with a sizeable retirement account, an inherited IRA may be part of that legacy. However, it’s important to understand the 10-year inherited IRA payout rule and the tax implications that come with it.

With the 10-year rule, non-spouse beneficiaries of an inherited IRA must withdraw all funds from the account within 10 years of the original owner’s death. This means that the beneficiaries will need to take required minimum distributions (RMDs) annually, which can impact their tax bracket and may result in a higher tax bill.

To avoid a big tax hit, it’s important to plan ahead and consider distributing the funds evenly over the 10-year period. This can help keep beneficiaries in a lower tax bracket and reduce the amount of taxes owed.

It’s also important to note that the type of IRA (traditional or Roth) can impact the taxes owed on withdrawals. Traditional IRA distributions are taxed as ordinary income, while Roth IRA distributions are tax-free if certain requirements are met.

In summary, the 10-year inherited IRA payout rule can have significant tax implications. By planning ahead and working with a financial advisor, beneficiaries can minimize their tax burden and make the most of their inherited IRA.

Taxation of Social Security Retirement Benefits

Retirement is a time to enjoy the fruits of your labor, but when it comes to Social Security benefits, you may need to factor in taxes before planning your budget. Social Security retirement benefits can be taxable, depending on your income level. If you earn above a certain threshold, a portion of your benefits may be taxed.

The taxable portion of your Social Security benefits is based on your combined income. To calculate your combined income, add up your adjusted gross income, any tax-exempt interest income, and half of your Social Security benefits. If your combined income is between $25,000 and $34,000 (single filer) or $32,000 and $44,000 (joint filers), up to 50 percent of your benefits may be taxed. If your combined income exceeds those limits, up to 85 percent of your benefits may be taxed.

It is important to consider the potential for Social Security taxes when planning for retirement. Working with a financial planner or tax professional can help you understand your tax obligations and make the most of your retirement income.

Increased Medicare Part B Premium

As of 2021, many Medicare beneficiaries are facing an increase in their Part B premium. This can be a significant and unexpected expense for fixed-income seniors and those with limited financial resources.

The increase in premium is due to rising healthcare costs and an aging population. In addition, the COVID-19 pandemic has placed additional strain on the healthcare system, further contributing to rising costs.

It is important for beneficiaries to understand their options and resources for managing the increased premium. Those with limited income and resources may qualify for assistance programs such as the Medicare Savings Program or Extra Help.

Additionally, beneficiaries can explore alternative Medicare plans, such as Medicare Advantage or supplemental plans, to potentially lower their overall healthcare costs.

Overall, it is crucial for Medicare beneficiaries to stay informed and take proactive steps to manage the increased Part B premium. Seeking assistance and exploring alternative options can help to alleviate the financial burden and ensure access to necessary healthcare services.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT) was introduced by the Affordable Care Act (ACA) in 2010, and it is a tax on net investment income generated by individuals, estates, and trusts. The NIIT is levied at a rate of 3.8% and applies to personal income tax returns that exceed certain thresholds, such as adjusted gross income (AGI) of $250,000 for married couples filing jointly and $200,000 for individuals.

In general, net investment income includes passive income such as interest, dividends, rent, royalties, and capital gains, among others. However, certain exclusions and deductions may apply, so it is crucial to consult a tax expert to determine your tax liability accurately.

The NIIT also applies to non-resident aliens, but the thresholds and rules differ. Additionally, some taxpayers may be exempt from the NIIT, such as charitable trusts and non-profit organizations.

Overall, the NIIT can add significant complexity to your tax planning, but proper planning and seeking professional advice can minimize your tax burden.

Widow(er)’s Income Tax Penalty

The loss of a spouse is a difficult and emotionally taxing experience. Unfortunately, being a widow or widower can also have a significant impact on your finances, including your income taxes. This is because widows and widowers are subject to a tax penalty that can reduce the amount of income they can keep each year.

The widow(er)’s tax penalty occurs when a surviving spouse receives a lower standard deduction than they would if they were filing a joint tax return. This means that widows and widowers may end up paying more in taxes than they would if their spouse had not passed away.

To mitigate this penalty, widows and widowers have a few options. One is to file as a head of household, which can provide a larger standard deduction. Another option is to claim the qualifying widow(er) status for a limited time period after their spouse’s passing. This allows the surviving spouse to receive the same standard deduction as if they had filed jointly.

In conclusion, losing a spouse is a difficult time and dealing with the tax implications can add to the stress. Understanding the widow(er)’s tax penalty and exploring your options can help you make informed decisions to ease the financial burden during this challenging time.

$10,000 Limitation on State and Local Taxes

The $10,000 limitation on state and local taxes has been a hot-button issue since it was implemented as part of the Tax Cuts and Jobs Act in 2017. This provision limits the amount that taxpayers can deduct in state and local taxes (SALT) to $10,000 per year, which has had a significant impact on taxpayers in high-tax states such as California, New York, and New Jersey.

For many taxpayers, the $10,000 limitation means they are unable to deduct the full amount they pay in state and local taxes on their federal tax return. This has resulted in higher federal tax bills for many individuals and businesses.

Proponents of the $10,000 limitation argue that it helps to prevent taxpayers in low-tax states from subsidizing those in high-tax states. Critics argue that it unfairly targets high-tax states and penalizes individuals and businesses in those states.

Regardless of your stance on the issue, it’s important to understand the impact that the $10,000 limitation on SALT can have on your tax bill. Speak with a qualified tax professional to learn more about how this provision may impact your individual or business taxes.

Desert Financial and Tax Services provides financial guidance and tools to aid individuals in becoming debt-free. Contact us today for more information! (928) 315-0040.

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