Random musings on tax deduction law

For whatever reason that not even I’m sure of, I decided to try perusing the US Tax Code.

More specifically, it was Subtitle A Chapter 1 – Normal Taxes and Surtaxes.

As I was taking a stroll through this statutory ghetto, I stumbled upon some interesting sections.

§ 67. 2-percent floor on miscellaneous itemized deductions
I found this section interesting because in order to used itemized deductions other than those exempted in the section, they have to aggregate to at least 2% of the adjusted gross income.

Running numbers through excel using goal seek on a couple of income levels to check, you’re looking at having a minimum amount of deductions equaling approximately 1.961% of your reported gross.

“Sorry, you can’t use these deductions – you don’t have enough” What?

§ 68. Overall limitation on itemized deductions

I’m just gonna let the text do the talking:

(a) General rule
In the case of an individual whose adjusted
gross income exceeds the applicable amount, the
amount of the itemized deductions otherwise allowable
for the taxable year shall be reduced by
the lesser of—
(1) 3 percent of the excess of adjusted gross
income over the applicable amount, or
(2) 80 percent of the amount of the itemized
deductions otherwise allowable for such taxable
year.

So what is this applicable amount?

(b) Applicable amount
(1) In general
For purposes of this section, the term ‘‘applicable
amount’’ means $100,000 ($50,000 in the
case of a separate return by a married individual
within the meaning of section 7703).

Of course there are exceptions, but just like the first example, it’s basically saying “Well, your deductions didn’t drop your adjusted gross down far enough, so, we’re gonna negate whatever benefit it had”. Who the hell writes this trash?

§ 269A. Personal service corporations formed or availed of to avoid or evade income tax
This is real lush. If the government thinks you’re starting a corporation to give your self a tax advantage, they can apparently take those credits/deductions away. That’s right, Ms. Cleo apparently works for the IRS now.

Subchapter G—Corporations Used to Avoid Income Tax on Shareholders

Apparently I wasn’t the first one to think of the idea of starting a corporation and paying myself the bare minimum to avoid taxes. Apparently, they tax that “excess holdings” extra.

§ 533. “Evidence of purpose to avoid income tax” dictates the tax is placed on assets accumulated above “reasonable needs of the business”. What’s the definition of that?

§ 537. Reasonable needs of the business
(a) General rule
For purposes of this part, the term ‘‘reasonable
needs of the business’’ includes—
(1) the reasonably anticipated needs of the
business,
(2) the section 303 redemption needs of the
business, and
(3) the excess business holdings redemption
needs of the business.

Holy vagueness, batman! Yet again, apparently the IRS can determine what reasonably anticipated needs are.

Better yet, in certain cases, the burden is on the taxpayer to prove he isn’t wrong!

Yeah, it’s all messed up.

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