Democratic presidential candidate Hillary Clinton has proposed a change in the top capital gains tax rates. Under current law, such capital gains have a two-tiered structure: short-term gains face a top rate of 43.4...
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Questionable Moments in Tax History: Obscure Rules for Alaska Permanent Fund
The Alaska Permanent Fund is a fund established by the Alaskan constitution that provides an income to permanent residents of Alaska. The payouts are modest, only a couple thousand dollars a year at most, but they’re not trivial to Alaskan residents.
Under current law, this constitutes taxable income. Given that the Alaska Permanent Fund is so unique in the United States, the tax policy governing it is also unique and requires some guidance. Fortunately, the IRS helpfully informs you that Alaska Permanent Fund dividends are not to be reported as dividends; they go as “other income” on your 1040. That’s the end, right? They get sorted into a category, and now they can be treated just like other income in that category, right?
In a saner, better world that might be the case.
Instead, almost every form redefines the Alaska Permanent Fund dividend income in a new way. A problem with treating the dividends as income is that Alaskan children end up having to file 1040s. In practice, their parents file for them or file a Form 8814 with their own returns. On the 8814, the payments do count as ordinary dividends, contrary to their treatment on the 1040, where they don’t.
But wait, there’s more! The Earned Income Tax Credit treats dividend-earners with suspicion, including people with children who earn dividends. If your total investment income is higher than a certain threshold ($3,300 for 2013) you may not file for the EITC. Some of your children’s investment income counts towards this threshold, including their ordinary (non-qualified) dividends. You use the 8814 in this calculation.
But if Alaska Permanent Fund income counts as “other income” for adults but dividends for children, you get the puzzling result that only your children’s Permanent Fund dividends count against your EITC investment income limit, while your own dividends do not.
The “patch” for this is worksheet two of Publication 596, which essentially asks you to recalculate the 8814 removing the Permanent Fund dividends from the calculation retroactively. This is silly extra work that is only relevant to a small number of people – low-income wage earners in Alaska with children – and only necessary because of the constantly-shifting definition of the income.
If your eyes glazed over at some point while reading this, that’s kind of the point: this is ridiculous, unnecessary, and extremely hard to follow because of its lack of logical consistency. It has unintended and ugly results, like expecting tax returns from ordinary four-year-olds. (“Look at Mr. Rockefeller over here with his $900 of investment income!” the tax code says, pointing an accusing finger at a toddler in Fairbanks.)
Alaska is a large state and a beautiful state, but not a state in which many people live. Adding extra worksheets to the 1040 every time some state of less than a million people decides to implement a new program is not really a reasonable option.
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