Weird Taxes – $102 tax on $126 income!

Posted: April 19, 2011 in Deep Thoughts, Personal Finance, Wild Hair
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I made a very small mistake in my Federal tax preparation this year.  I filed my Federal taxes electronically months ago, but my state taxes had to be filed on paper and I was just finishing up some of the paperwork I needed to send with the forms.  I had to modify a 1099-R for both my Federal and state taxes and was explaining the reason in a document to attach to my state tax form when I noticed a 126.00 mistake in my calculation.  I had over reported my taxable income by only 126.00 but when I fixed that in my tax software I noticed I was now getting 102.00 more back, 90 more back from Federal and 12 more back from state.  So I had only been allowed to keep 24 dollars of that last 126 dollars I made.  That is an 81% tax rate.  I’m glad I don’t have to pay that rate on every dollar I make.  If I had not made the mistake I would not have noticed this case of “weird taxes”.  To me this is evidence that the US tax code is a mess.  Too many tax credits with income thresholds (that’s what caused this weirdness).   Just too many weird and unnecessary exceptions both to the positive and to the negative.  No wonder the tax software updates every time I start it.  I think this is where the government has to start the process of fixing itself.  Create a tax code that you can fit on 500 pages or less.  It can be done, it could be made fair and there is no reason it needs to be any longer than that unless we really don’t want to have a fair and clear tax code!  Ah … maybe that is the weird truth.


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