This started out as an essay on how Senator McCain's idea to exempt all capital gains from taxation was a bad idea. When I started to illustrate it with the Palins' 2007 tax return as an example, I found that the Palins not only don't think paying higher taxes is patriotic, but they aren't too eager to pay the taxes they currently owe.
Let's start off by pointing out that April 15 is NOT necessarily the deadline for filing your federal income taxes. You can get an automatic extension with form 4868, which makes the due date
August October 15.
The Palins didn't file their federal income tax return until sometime after September 9, which is to say, long after she was tagged to be John McCain's running mate on August 29.
How do I know this? Because there's a W-2 missing, and Todd Palin included a statement saying that he was using the figures from his pay stub. It's signed - and it's dated September 9.
As I mentioned, this was originally to be an essay on capital gains. The stock market is down 40%, and it's highly unlikely that anyone will be selling their stocks or shares in a mutual fund for a profit. Who, then, would benefit from free capital gains? Why, enterprising businessmen like Todd Palin.
Todd Palin considers his snowmobile racing to be a business. I would call it a hobby. The definition of a business is an activity engaged in for purposes of profit. Todd took in $17,000 this year, and ended up losing $9639 - after taking $10,858 in depreciation.
On the other hand, Todd bought two new sleds this year, and he sold the old one, one that was 2.5 years old, at a significant profit. The original purchase price was $2781, and he sold it for $5000. We know he had a nasty wreck, and finished the last 400 miles of the race with a broken arm. Do you suppose that his wreck made the snowmobile worth that much more?
Or do you suppose he souped it up? He spent $4608 for parts this year. It sounds like a considerable amount of his activity is turning ordinary snowmobiles into hot rods. If you lose money doing that, it's a hobby. If you make money, it's a business. Under no circumstances is it an investment.
But after depreciating out the $2781 in original purchase price, and deducting $4608 in parts this year, he faced $2781 recapture, and $2219 in capital gains.
Now, if he spent the money he deducted, and he's being taxed on the money he received, that looks like everything is square, right? It's not, because that money, recapture and capital gains, are being reported on the front of Form 1040. It should be business income - which is also reported on the front of Form 1040, but it's subject to Self Employment Tax as well.
When you get a paycheck, taxes are withheld that go to Social Security and to Medicare. A person who is self-employed doesn't get a paycheck, so he pays Self Employment Tax instead. Self Employment Tax looks like it's higher than the Social Security and Medicare taxes you pay, but that's only because both you and your employer each pay half; a self-employed person has to pay both halves.
This finagle saves the Palins about $578 this year. If capital gains were taxfree, they'd have saved another $555 on those.
Oh, and there's another interesting little tidbit. When you calculate the tax on their earnings, it's incorrect. In fact, it's exactly $250 short, the same amount you'd owe for $1,000 less income.
The return says it was prepared by H & R Block, but it appears to have been typed out, rather than printed by a computer. Computers don't make mathematical errors, and there's no preparer signature on the return.
Normally, if you've not paid enough in withholding and estimated taxes, there is a penalty. However, their 2006 return had a tax due of $11,944, and their estimated taxes plus withholding for 2007 amounted to $22,721, so they'd not get a penalty for underestimating their taxes. On the other hand, even if you get an extension to file, it's not an extension to pay. Their liability was $24,738 on the return, and there was $22,721 available to pay their taxes. That means they would have owed interest on the $2017 shortfall, from April 15 to the date they actually paid the taxes due.
And no paid preparer should miss that.
Has the return actually been filed, even now? October 15 is getting near.
Although you've heard lots of stories about the IRS and horrifying tax audits, the big secret is that nobody is out to nail innocent taxpayers. The biggest single reason tax returns are selected for audit is that they are ambiguous, that they've been prepared by someone who has no idea what they're doing - and it's not uncommon for an honest taxpayer to come out of an audit with an additional refund.
Most people think it's patriotic to pay their fair share of taxes. They don't want to pay any more than necessary, but they don't want to cheat on their taxes, either.
But sending in a tax return like this one is asking for an audit. Tax cheats think they're smarter than the IRS is - and the IRS is quite happy to let them know otherwise.