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Sat Jan 5, 2013, 07:22 PM

How do we fix the inequity in tax deductions?

Our current system, for example, allows for an individual person who's marginal tax rate is 39.6% to get 39.6 cents back for every dollar they can deduct from their taxes that's above $400,000.00 while an individual whose marginal tax rate is 25% and makes $50,000.00 a year only gets 25 cents back for every dollar they deduct for income levels between $36,250 - $87,850.00

To make the math easy, let's say that the person making above $400,000.00 made $500,000.00 and bought a Chevy Volt. That person would receive a tax credit / deduction of $7,500.00. They don't actually save $7,500.00. What they really save is $7,500.00 x 39.6% = $2,970.00

To the person making $50,000 a year with a marginal tax rate of 25% and using the same deduction of $7,500.00, that person would only save $7,500.00 x 25% = $1,875.00

The difference is between $2,970.00 and $1,875.00 is $1,095.00. That's real money. It's not right that the person with more money saves more money on their deduction than the person with less money -- it should, at a minimum, be equal.

How do we make these deductions equal in dollar value regardless of marginal tax rate?

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Reply How do we fix the inequity in tax deductions? (Original post)
xxxsdesdexxx Jan 2013 OP
PoliticAverse Jan 2013 #1
xxxsdesdexxx Jan 2013 #3
Igel Jan 2013 #2
xxxsdesdexxx Jan 2013 #4

Response to xxxsdesdexxx (Original post)

Sat Jan 5, 2013, 07:43 PM

1. The $7,500 isn't a deduction it is a credit - it comes right off the tax you owe...

not off your gross income so it's not affected by marginal rates.

So if the person making $500,000 and the person making $50,000 both owe more than $7,500 in taxes they both
subtract the full $7,500 off the amount of tax they owe.

See:
http://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-%28IRC-30-and-IRC-30D%29
http://www.irs.gov/pub/irs-pdf/f8936.pdf
http://consumerguideauto.howstuffworks.com/a-7500-federal-tax-credit-not-for-joe-sixpack.htm

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Response to PoliticAverse (Reply #1)

Sat Jan 5, 2013, 10:49 PM

3. Thanks for breaking it down and thanks for the links - I think I understand now.

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Response to xxxsdesdexxx (Original post)

Sat Jan 5, 2013, 09:51 PM

2. Beyond the mangled Volt credit,

you should also know there are limits on what can be deducted. They were phased out in the '90s, but the claim (and it seems plausible) is that with them back in force the effective rate for those over 450/400k is likely to be higher than under Clinton. Simply because they limit deductions.

These iimits kick in at the same pre-Clinton limit of 250k/200k annual income per year, which is an important point because of the last 22 years' inflation isn't immaterial.

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Response to Igel (Reply #2)

Sat Jan 5, 2013, 10:50 PM

4. Very good to know. I was ignorant of these important facts. Thanks.

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