QUESTION: Every year at this time I get very upset at the complications associated with rendering one's accounting to the government. I really don't object to paying my share of the tax load-but why can't I just report my total income for the year, then pay a percentage?
ANSWER: You're not alone in your feelings of frustration at the complexity of the annual tax-preparation chore.
The simple solution you suggest might work if our tax system was intended solely for the purpose of raising the revenues needed to operate our government.
But it isn't. Our income tax structure is a highly sophisticated instrument of national social and economic policy; the implications of the various parts (and their inter-relationships) are not completely understood by anyone.
Do you own a home? Contribute to charity? Support a couple of children, or perhaps a parent with inadequate income? Are you faced with a large orthodontic bill, or the costs of a prolonged hospital stay?
Do you own any corporate stocks or municipal bonds? Did you finance a new car last year? Install storm windows to cut your fuel bills? Move to a more expensive home? Hire a babysitter so both you and your spouse could work?
Did you look for a new job? Move to another city to accept a better position? Pay union dues? Buy your own small tools for your job? Or attend school at night to learn more about your work? Do you get unemployment payments? Veterans Administration benefits? Or social security?
Each of these situations-and many others I haven't mentioned-can give rise to an exemption, an exclusion, a deduction, or a credit which in turn reduces your tax liability. And each of them is either a reasonable (maybe even a necessary) tax break or a loophole-depending on whether it's yours or the other guy's.
If we ever decide to divorce tax policy from socio-economic policy, the tax collection process could be greatly simplified. But as long as we use the income tax system to pursue unrelated goals or advance unrelated causes, the tax system will remain a towering edifice of dimly-lit corridors, half-open doors, secret passages and confusing directions.
Q: Last year we had additional insulation put in our attic, and took a $120 energy credit on our 1978 tax return. Now we're thinking about adding storm doors and windows. Is the energy credit effective for 1979 too?
A: Yes-through Dec. 31, 1985, as a matter of fact. But the total amount of qualifying expenditures for energy conservation measures cannot exceed $2,000. Since the credit is 15 percent, this equates to a maximum credit of $300.
That maximum applies to the entire period, not to each year. Since you used $120 of the total in 1978, you can still claim an additional $180 for any year up to the expiration date.
QUESTION: A couple of years ago-just before retiring-I bought some good-quality, high-yielding bonds to give me a regular income. Now those bonds have dropped in price so that the value of my capital has gone down quite a bit. Where did I go go wrong?
A: You may have not gone wrong. If your objective was the growth of your capital, then you probably were in the wrong investment medium.
But if-as your letter indicates-you bought the bonds for income, you haven't really hurt by the drop in market value.
Bonds bought to provide a steady retirement income should be looked at as a long-term investment. And in the long term, assuming you bought high-quality issues, the bonds will be redeemed at their face value with no loss of principal.
Meanwhile they are satisfying your objective of a regular income at a relatively high rate with low risk. In this context "risk" refers to the assurance of interest payments and redemption on maturity rather than interim fluctations in market value.
Stop looking at the price quotations every week and worrying about these market fluctuations. Enjoy the income for which you bought the bonds, and relax in the likelihood that your money is safe and will be repaid in full when the bonds mature.