Good News/Bad News From Low Inflation Rate

If there’s anything good that may have come from Obama’s actions (or inactions, as the case may be) lately it’s the fact that inflation is little or none in the last year or so.

The bad news, of course, is that Social Security recipients can expect zero in the way of a raise, next year, because any annual cost of living increases arise when the consumer price index moves upward.  The good news, however, is that worker bees will experience no increase in the amount of their annual earnings which will be subject to Social Security and Medicare taxes.  Thus, for 2016 the combined FICA and Medicare tax rate will remain at 15.3%, paid half each by the worker and his employer.  Likewise, there will be no change in the tax rates or earnings base applicable to self-employed folk.

And speaking of FICA, an aspect of this annoying levy has long irked folks whose employment arrangements include their earning of certain forms of “deferred compensation.”  And a recent decision of the Court of Appeals for the Federal Circuit (in the case of Mr. Balestra) brings this annoying law front and center.

Seems Mr. Balestra was an employee of United Airlines (UAL) until his retirement in 2004.  He had earned some “nonqualified deferred compensation” which had not been paid as of his retirement date, upon which date the full present value of his deferred comp was included in the FICA tax base, resulting in FICA withholding on income which he didn’t receive as of that point in time!  And unfortunately, UAL had entered bankruptcy in 2002, two years before our boy’s retirement date.  Consequently, of course, UAL’s obligation to pay Balestra’s deferred comp was ultimately discharged, with the majority of the benefits never having actually been paid to Balestra.  In 2010, UAL made the final payments to creditors as required under its bankruptcy plan, leaving Balestra essentially out in the cold – no deferred comp, despite FICA having been paid by him!

O tempora, O mores!

Balestra went to Court, seeking a refund of the FICA withheld, but the Revenooers and the Courts told him to take a hike.

Nice.

And finally, this week, we recently learned via The Wall Street Journal that the Tax Foundation’s annual International Tax Competitiveness Index finds that, once again, the U.S. of A. ranks a dismal 32nd out of 34 industrialized nations.

The index measures various factors that determine how “friendly” a government is to business and investment, including the amount of taxation and the complexity of tax rules.  While Uncle Sam gets credit for not imposing any sort of “value added tax” over and above all of the other taxes, the U.S. comes in “dead last” among the 34 developed countries in the Organization for Economic Cooperation and Development (OECD) when it comes to taxing corporate income!  The U.S. top marginal corporate rate of 39% is a whopping 14 points above the OECD average of 25%!

Don’t laugh, but Estonia again cops the top ranking in this year’s index – with a flat 20% rate on both personal and corporate income – and zero tax on personal dividend income!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, with offices in Incline Village and Reno.  He can be reached at jquinn@ashleyquinncpas.com.

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