There's No Better Time

At this time of year the financial publications are rife with advice about income taxes. Usually the emphasis is on reducing taxes in the current year through taking deductions such as charitable contributions or dramatic steps such as moving to a low-tax state or getting married. This year, however, is different, and not just because tax rates are going up; the increase in complexity has been exponential.

With the introduction of the 3.8% net investment income tax (Sec. 1411), and the return of the 20% capital gains rate (Sec. 1(h)) and the 39.6% income tax rate (Sec. 1(i)), America shifted overnight at the start of 2013 from a two-dimensional tax system to a four-dimensional system. [snip]

The complexity of going from a two-dimensional system to a four-dimensional system is exponential, not linear, and requires a quantum leap in tax analysis methodology, tax strategy, and tax planning software tools.

It may only seem that the vast majority of Americans will not have to deal with this complexity; only if a married couple has income over $250,000 (or a single person over $200,000) will they be subject to the investment-income tax.

However, more people will be affected than just the supposedly "rich". As taxpayers approach these income thresholds, many will scale back their economic activity to avoid crossing them, just as small businesses avoid having more than 49 employees to escape the penalties of Obamacare.

Also, the interconnection between income and estate/gift taxes has become much more complicated. It is easy to be unconcerned about the problems of "wealthy" estates, which pay taxes if they are valued at more than $5.34 million, but it wasn't that long ago that having a $1 million estate was an uncommon experience.

In the view of your humble observer, society underestimates the cost of complexity. We regularly come across productive individuals---doctors, accountants, businesspeople---of a certain age who don't mind paying somewhat more in taxes; they hate the hassle of new regulations that have nothing to do with their fundamental business operations. So they are cutting back or quitting altogether. The silver lining--for them, not society--is that if they have been thinking about doing something else with their lives, there's no better time. © 2013 Stephen Yuen