This blog reports events and interesting tidbits from Rensselaer, Indiana and the surrounding area.

Tuesday, April 16, 2013

Another tax rant

I would like to say that it is time for my annual tax rant, but I cannot find one from last year. So it is not an annual rant. (But see here, here, and here.)

I wanted to file early this year because I was due money. It is not good to get a tax refund because a refund means that you gave the government an interest-free loan, but I am no longer in control of payments to the government. My pension fund, TIAA-CREF, withholds 20% of distributions, which is an absurdly high level for my circumstances. I was not able to file early because one 1099 form had a mistake and had to be corrected and another was very late. When they finally arrived, I logged onto a free-file website, but when I was almost finished I discovered that a form I needed would not be available until mid March. So I ended up giving the government a much longer loan that I wanted.

The government no longer sends out paper instructions or forms and the library did not get the printed instruction booklet until March. A reason for the delays is that congress keeps changing the code until the end of the year. The government wants people to file electronically but you cannot do that on the IRS website. My little bits of income come from several sources, so I end up filing forms B, C-EZ, E, and SE. The tax code is so complex that a whole industry has grown up to help people deal with it, and that industry has a vested interest in fighting any efforts to simplify the mess. Perhaps if those in congress could be required to fill out their own tax forms we would have a reasonable system.

One strange result for me this year was that I ended up paying a lot more in state/local income tax than I did in federal taxes. The federal taxes allow a large standard deduction and a large personal exemption, which lowers taxable income a lot. The state allows only a $1000 personal exemption, a level that has not changed since the late 1980s. The other reason for the high state/local tax is that Jasper County has the second highest county tax in Indiana. The county tax on $10,000 for Jasper County residents is $311.40, only slightly lower than Pulaski's $313. Corresponding taxes are $110 in Tippecanoe, $132 in White, $229 in Benton. The reason that our income taxes are so high is that the county council prefers to tax income rather than taxing property. Anything can be taken to an extreme, and our county council has taken the tax mix to an extreme. I will not vote for any candidate for county council who supports the present tax mix.

On a vaguely related subject, I have been wondering when I should start collecting Social Security benefits. A person can start taking Social Security at age 62, but the monthly payment is low and that level is then locked in for the rest of one's life. Each year of delay until age 70 raises the benefit level. In choosing the age at which you start collecting, you are making a bet on how long you will live. If you expect to die quickly, the best bet is to collect early. If you expect to linger on and on, delay is the better option. To find my break-even age, I solved an equation similar to this one:

(Monthly benefit @ 65)(x + 60) = (Monthly benefit @ 70)x

Based on the numbers that Social Security gave me on line, I should delay taking benefits if I expect to live beyond 81 years. Based on family history, there is a good chance I will not live to 81, but delay is a form of life insurance--protecting against the risk of living a long time. (The above calculation ignores interest and benefits to a surviving spouse.)

No comments: