I am already basically done with my taxes and those of my fiancée.
I am a pretty hardcore math dork in that I actually enjoy doing taxes.
Not only do I enjoy doing them—I enjoy running the numbers multiple ways to see, for example, if I should take a credit or a deduction.
The only thing more gratifying/frustrating is finding flaws in the tax code. The one I found this year falls under the latter category.
In doing some research, I looked at the “contribution to retirement account” credit. Form 8880 if you’re scoring at home (and if you’ve read this far, you most assuredly aren’t).
In simple terms, this is an incentive for low-income-earning Americans to contribute to a 401(k) or IRA.
Here’s the problem: if you file as “single” and your adjusted gross income is $16,000, and you contributed $2000 to an IRA, you are ostensibly eligible for a tax credit of $1000 (50% of your contributions). Good deal, right?
But if your AGI is $16,001, you’re eligible for a credit of only $400!
Seriously—if you earned one additional dollar, you would LOSE $600 worth of tax credits. This is why we have marginal tax rates, folks. This is why every other credit on the books has a linear phaseout, not a big freaking step like this.
And don’t even get me started on the fact that it would be almost impossible to get the full credit anyway because your tax liability for the year at that income level would be less than $1000.
Stupid tax code writers.