“I paid lower taxes when I was rich.” I said that last year. This year proves it out even more. Income was down about 40%. Income tax was up about 40%. I was traumatized by the numbers. Surely our system isn’t that dysfunctional; especially when approaching the poverty level. Surely I was wrong – and I have plenty of friends in similar situations to prove it, at least to me. There is a bit of good news but it only became apparent after downing a stiff drink and then venting with a dear friend who understands the situation too well. Maybe things will get better.

Was the first governmental conversation about income tax overly simplistic (the more a person makes the more they’re taxed because they’re more likely to afford it), or did they imagine the loopholes and byzantine paperwork to appease a draconian authority (fill out this form but attach this schedule if the worksheet produces a number in excess of the value on the appropriate table)? It must’ve seemed simple at the start. Maybe it was.

Really, I can understand the appeal of an income tax, but the reality of it has bizarre consequences.
“I make a mistake in the govt’s favor I’m a chump and they’ll happily take my extra money. If I make any little mistake in the other direction, I’m a criminal.“*
A math mistake, putting a number in the wrong box, or misinterpreting arcane language across reams of instructions carries the fear of being charged with a federal offense.

When I had far more than enough income and net worth, I trusted my tax preparation to a professional. She was honest and properly pedantic, and worked through W-2s, real estate rentals, stocks, options, and miscellaneous. During my temporary, early semi-retirement my taxes were so simple that I could do them because I had no income. Make some money by making one or two stock trades per year was easy in many ways, including the paperwork. After I bought my house, and then decided to sell books and photos I used software (TurboTax) to work me through the details. Then the Triple Whammy hit. I have been working several backup plans simultaneously since. None of my efforts have succeeded comfortably, but all combine to maybe make enough to keep my house. Unfortunately, having such a diverse set of incomes means many more forms. I relinquish control to the software because properly understanding the requirements for services, retail, wholesale, royalties, etc. would require so many hours that I could probably qualify as a tax preparer.
“filing taxes is a money losing proposition“*
“just found out I’m making about $6.00 an hour and working my heinie off besides. Owning my own business is not all that it’s cracked up to be.“*

From what I hear, the job market is improving. What I see is many friends, unable to get hired (in many cases despite multiple degrees and phenomenal work ethics) turning instead to entrepreneurship. I submitted job applications for two years and only received one interview for a full time position – and they even admitted that they didn’t plan to hire me, but they wanted to meet the person with such an amazing resume. Trust in the conventional job market has faded, just as trust has faded in many of our institutions and conventions.

Here’s where trying to get ahead when you’ve fallen behind puts you further behind.

Welcome to something I’ve skimmed past in the past, but ran hard into this year: self-employment tax. I don’t understand how it operates but I know that, because my business’ profit margin dramatically improved I ended up paying more in self-employment tax than I paid in total for the previous year. As I said at the top, “Income was down about 40%. Income tax was up about 40%“. Part of the reason income was down was that much of the early income came from early withdrawals from my IRA, which is now seriously depleted.
According to another friend,
“I’m better off earning $20K than $36K. at 36 I owe $4000 or more. Makes me sick.“*
The folks that considered themselves “lucky” were the ones who could claim large business losses.
“only reason we lucked out this year is because of business losses“*
Though, it doesn’t always work out that way.
“we are getting a little back, but the amount dropped significantly when I put in my little business loss…a loss…. I’m still trying to wrap my mind around that.“*
Making sense of a dysfunctional system is a waste of time, and most of these hard-workers don’t have that extra time.

One of the tenets of the American Dream is that good, hard work will be rewarded. We encourage people to work their way out of trouble. But it is while working hardest that taxes hit hardest. I worked hard enough at Boeing that my early retirement was largely encouraged for health reasons; yet, I work harder now. Corporate life also comes equipped with professionals responsible for properly accounting for withholdings and reporting. Tax season rarely held a negative surprise. When I worked the least was when I was comfortably living off my investments. (Though, for a while there I was doing nothing much for pay, but working 32 hours a week on charities. So much for lounging.) Living off investments can make life balance very easy. Trade once or twice a year, live off the proceedings, and match losses to gains. There were several years when I had two or three times my current income and paid less than a few hundred dollars in taxes. I’d like to get back there, but I wonder how the government can function under such a system.

Entrepreneurship is discouraged enough that a common chorus is a desire to return to the corporate world, just to simplify life.
“When I complained about taxes I’m told to “get a better job”.“*
“I got royally stung when I tried the non-S corp route. My taxes were over double previous years. You probably get that, right? I’d rather do the corp dance than see that situation again.“*
Of course, the entire issue started because better jobs weren’t available, despite the news reports and economic data.

If the system is flawed, change the system. It’s our country, right? We should be able to do that.
“The waste of humanity that is our income tax system. We need a flat tax.“* – David Nelson (and with his talents I’m surprised he hasn’t single-handedly made that happen)
“We need to repeal the 16th Amendment, make the states pay federal taxes… and start following the 10th amendment.“* – Peter Jungmann (and he has a plan to make it happen)

So, where’s the good news? At least for me, the good news is that last year I had to use my credit card to pay my taxes. This year, if I scrape around in various accounts and only pay the minimums on some bills, I might, might be able to pay in cash. Of course, some of the cash will come out of my skinny IRA which will kick off a tax penalty to be paid next year, but well, oh well. The taxes will get paid, then the health insurance (if I still have it), and then the trial payment for the mortgage – oh yeah, and incidentals like food and gas and . . . But hey, it is a step in the right direction. My business is growing (want to be part of the growth? hire me for some strategic planning or program management), and the increased revenues and increased profits will mean – increased taxes – and maybe enough left over to get ahead after falling so far behind.

* (Quotes courtesy of a very active social media response on Facebook with some comments on Twitter. Thanks to everyone who participated.)