America's Weird (And Insane) Tax System
Carly Fiorina and her husband are richer than most of us, but that really doesn't explain -- in any sane way -- why, as Josh Barro puts it in The New York Times:
Mr. and Ms. Fiorina had to file taxes in no fewer than 17 states in 2013, many of them with only the most tenuous connection to the Fiorinas or their financial interests. In 11 of those states, their tax bill was less than $250.Of course, the Fiorinas make more money than most people, about $2.5 million in 2013, which is a major reason they were taxed in so many states. But the tax rules that cause the Fiorinas to have around a 1,000-page stack of state income tax returns also hit many Americans with more moderate incomes, requiring them to file multiple state income tax returns.
In the Fiorinas' case, consider Michigan. The Fiorinas do not live or work in Michigan. They do not own a business or income-producing real estate there. Ms. Fiorina did not collect speaking fees from Michigan in 2013. But the Fiorinas do invest in a variety of funds, which generate income in a variety of places, including $946 in 2013 that was attributable to Michigan. So, the Fiorinas had to file a tax return there, which was 58 pages long, and reflects a liability of $40, which they paid.
And then they got the money back.
The Fiorinas' home state of Virginia gave them a tax credit of $40, fully offsetting the Michigan tax bill, because Virginia had already taxed the same income Michigan taxed. That's how the American system of state income taxes generally works: Your home state taxes you on all your income; states where you don't live tax you on the income you earned in those states; then, because some of your income has been taxed twice, your home state credits you back -- but only up to the amount of tax you paid on that income in your home state.
And people wonder why it's so hard for so many to make money these days. It's often keeping the money after the government gets done with you that's the problem.
I think a lot of professional sports are similar: Tom Brady plays in Chicago, Chicago wants a cut of his pay.
Just another example of how idiotic the taxes are in this country.
mer at June 16, 2015 3:56 AM
They are far worse for expats.
Amy Alkon at June 16, 2015 5:18 AM
Not hiring an accountant and doing my taxes myself I think has actually saved me quite a bit of money. The accountants are always happy to do more work for more pay increasing the paperwork. Instead when I see the paperwork increasing I stop doing the activity causing the paperwork. There are numerous tax deductions I could take advantage of, but the cost of generating and maintaining the paperwork to support those deductions is far higher than the deductions themselves.
Funds like the one that hit the Fiorinas are automatic sells for me. They just aren't worth the trouble.
Ben at June 16, 2015 5:33 AM
It's become a standard thing in my industry now to carefully manage and limit business trips to avoid triggering tax liability in another state. At least the state where the Fiornias live allows you to deduct the taxes that you pay in other states. Many states don't. There is a recent court case over this -- I'll try to go find it.
Cousin Dave at June 16, 2015 6:48 AM
Going to offer a general piece of advice here as someone who has done a lot of tax returns.
Say you are working in a country in Africa in a job that is being funded by Duke Univeristy, headquartered in North Carolina.
Your and your spouse live in Florida, or another no income tax state.
When you return from Africa you find that North Carolina has withheld a few hundred dollars from your pay against your presumptive income tax liability in that state.
What they want you to do is to file a North Carolina return to get back that money, but if you do, you will find that the filing will require you to include all your spouses income from Florida so they can then calculate the total tax you owe in North Carolina based on that double income.
This is a trap. Do not fall for it, and do not file a tax return in North Carolina. Let the couple of hundred bucks go, that they already have,
Carley and her husband don't have this option, as the democratic press would be on them in a heart beat as income tax scofflaws, but the average joe does.
Isab at June 16, 2015 7:06 AM
No pun intended? Expats? Tom Brady?11
Conan the Grammarian at June 16, 2015 8:34 AM
When I moved to California midway through the year, I was making significantly more than I'd made that year in Illinois and Florida (as a student).
I dutifully did my California tax return, citing only the income I'd made in California. The state sent my return back, saying my total income did not match my federal return.
I had to redo my California return, citing my entire annual earnings and calculate what my California tax would have been on the total income, then pay the percentage of those taxes represented by the percentage of my overall income earned in California. I ended up paying $600 more than if I had only been taxed by California on only my actual California income.
Conan the Grammarian at June 16, 2015 8:40 AM
The Michigan stuff is part of the lunacy from Rick Snyder where he thought he was socking it to the scofflaws and the tax evaders, but he really just made Michigan even more unattractive for investment.
Yeah, I had a guy from Texas, a guy from Washington state, and a couple other angel investors lined up to put money into my company, right around the time this lunacy was winding its way through the state legislature. In October, before this crazy idea that a company must do withholding and tax reporting - to the state for one of its owners, mind you, not employee or contractor, but withholding on estimated profits. Then, come January, it's law, and the state treasury department starts mailing out the threatening letters - you have a registered LLC; if any of the owners of any percent or point is not a Michigan permanent resident, you must estimate the profits and pay in their estimated tax burden.
You can bet that, when my Texas and Washington angels' accountants got their hands on that letter, they put the breaks on writing me any checks, as they had no desire to have any party to a Michigan investment with Rick's new crazy rules. (And, yes, if you operate in the state, even if you register with Delaware, they will require you to register under the blue sky laws, and you wind up caught in the same trap.)
El Verde Loco at June 16, 2015 12:29 PM
I think some of these states try to cast a wide net, just to see what they can catch.
Our HR company tried to make me fill out Pennsylvania income tax forms, because my department's main office was just outside Philadelphia. I've never been to Pennsylvania. I live and work in Texas. No, Pennsylvania doesn't even need to know that I exist, and I'm not filling out sh*t.
I've read that some states try to tax the income of truckers who drive through.
ahw at June 16, 2015 12:31 PM
New Mexico similarly has a nutty law regarding out-of-state money. You get taxed on the income you earn in the state, but they have a progressive income tax, and they use your total earnings to set your tax rate, and they assume the New Mexico money is from the top of your stash, so the out-of-state dollars count against the lower margins and the in-state against the higher margins.
El Verde Loco at June 16, 2015 12:31 PM
Hadn't though about the progressive marginal rates, Crazy Green. That would explain California's weird grab of my money. Higher income = higher marginal rate, so count as much of it as you can.
Conan the Grammarian at June 17, 2015 10:23 AM
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