Welcome To The Destruction of Democrats, 2022 Edition

Back when Biden and Pelosi got the "child tax credit" turned into an advance refund I (and a number of others) warned that this was going to blow up in people's faces, potentially with disastrous consequences.

Now it is.

Generally-speaking people are not real smart when it comes to tax planning on a "routine" (every year) basis.  Oh sure, some people pay for "advice" on retirement and, especially if you have a lot of money, succession (that is, when you die) tax planning.  But few people put the noodle work in to figure out through the year how to do taxes correctly.

As a self-employed person for a long time, and with the exception of the years when Macro Computer Solutions Inc. was a "C" corporation, a necessary evil when you get big enough in certain circumstances, being a Sub-S or LLC owner for a good part of the rest of the time, I've put the noodle time in because when you have to pay estimated taxes if you get it wrong the penalties can be rather significant.  Further, I don't like giving people money that I don't get paid interest at a market rate on, and for the last 15 years or so "a market rate" hasn't been possible anyway with anything government-attached.

So if I'm in the "safe harbor" I'll pay the rest on April 15th.  But if they're going to owe me money I want it to be as small as possible.  Whatever I owe, I owe.  Tax laws are what they are; nobody likes paying taxes, but I like the prospect of audits even less, and if you try to screw them and get caught the penalties are significant and its stupid to pay penalties to the government when the reason you owe them is nothing more than arrogance and a belief that you can cheat and get away with it.

Most people don't think this way.  They overpay intentionally because its the "standard" take-out from their check and they don't want to do the work to make it otherwise.  Further, many people see that refund as more-or-less a "forced savings account" that goes cha-ching every year.  That's dumb, by the way, but it is what it is.

Not this year.

Biden and Pelosi's change to the child tax credit, if you have kids, making it a thing paid out over the year, means that instead of reconciling it after the end of the year and getting it back in a big chunk you got it in payments over the course of the year.  Biden and Pelosi thought this would help families meet their expenses.

Maybe it did, but what it also did was for many people erase the refund, and for those who were somewhat on the wrong side now they owe money come April 15th, and maybe a lot of it. 

Even worse is that for many wage-earners, even without kids, the "standard" withholding is very close to zero, not set to generate a large refund.  I'm seeing this among friends already; they go through all the arm-waving and motions and.... owe $30.  Last year?  $800+ refunds.  Biden claimed that his tax changes wouldn't increase taxes on people making less than $400,000.  I knew that was crap when I read it originally and now, well.... it is crap.

What's worse is that if you owe money this time for last year you may be in a situation where you must make estimated payments (or adjust your withholding with your job) or next year you will get penalized and owe both penalties and interest.  The "Safe Harbor" rule is that you must have paid 90% of what you owe in a given tax year or 100% of the taxes owed the previous year, or have less than $1,000 owed for the previous year beyond what you paid, or you're subject to penalties and interest.

When you're doing a lot of independent work and your income is all over the place you frequently end up in a "year on, year off" situation where you must make estimated payments one year to stay in the "safe harbor" (since you can't predict what the next year will be), then if that year was soft you don't have to do the following year because you wildly overpaid to be within the safe harbor, and then back to it again.  That's life when you are doing independent work and have no idea what your earnings will look like in a given year, and pre-Obamacare where I actually put in effort to make money (and thus paid taxes) this was the world I lived in post-MCSNet.

Obamacare destroyed my willingness to engage in such work or start a new business because from about $20,000 to $40,000 an utterly enormous percentage of it gets recaptured in the form of losing the Obamacare subsidy.  There are zero circumstances under which I will effort to earn money when my effective tax rate on that piece of my earnings is 70, 80, 90 or even 100%.  Nope, especially since my health-care spending for the last 20 years that would be covered by said "insurance" has been zero.  I'm forced to pay for something I get no value out of with the only possibility of it working out is if something really awful happens.  Yes, I know, once you "punch through that" it goes away but there's never a guarantee you'll succeed at that in a given year as an entrepreneur, and if you don't pull massively away from it (north of $100k or more) the effective tax rate on your actual earnings as an independent is ridiculous.  In short you either have to know you can make materially into six figures in a given year or the only wise decision is to stop earing around $25,000 which is where the phase-out starts for a single person who is not working a W2 job.

For most wage-earners with kids this will be the first time they get hit over the head like this and it doesn't end this year if the amount is over $1,000.  If it is, and for many people it will be, now you have to make the estimated payments or adjust your withholding -- or you risk getting hammered next year.

Plenty of people thought this was going to be a bonanza for those who quite-reliably vote Democrat when Biden and Pelosi made this change, and I suspect that was exactly their thinking too; oh look, we gave you more money, vote for us!

Uh..... how's that looking now, Nancy and Joe, considering that there's an election coming up and, for most of the people in your base, from their point of view they got screwed.

No, they didn't really get screwed; the actual change was a timing change rather than an amount.

But perception is reality when it comes to politics, and the perception is that you hosed your constituents.

Good luck. (read more)