Tax-happy Buffett could stop claiming federal deductions 

Warren Buffett’s recent appeal for higher taxes for himself and other rich people has been pitched as a call for those with the means to do some kind of patriotic duty by anteing up more to the government. Some critics have noted that if the rich were really serious, they could donate to the government, but it seems unlikely they will do so.

There is another way anyone can pay higher taxes, however, and it may reveal the true nature of people who complain that their taxes are too low. While advocating higher taxes, they take every step they can to minimize their own taxes. The simple act of filling out a tax return tells us all we need to know.

Between lines 1 and 60 on IRS Form 1040 are no fewer than 35 credits and deductions the taxpayer is entitled but not required to take. These credits include such items as tax-exempt interest, education expenses, alimony, foreign tax credits, child care credits, residential energy credits, first-time homebuyer credits and a host of other expenses the taxpayer can deduct.

If the taxpayer has business income, he will fill out Schedule C where he is permitted to deduct various business expenses. If the taxpayer itemizes deductions, Schedule A permits, subject to some limitation, the deduction of state and local income taxes, sales taxes, real estate taxes, medical and dental expenses, mortgage interest, charitable contributions and a handful of other expenses.

Of course, Buffett and some others usually have substantial capital gains, which are taxed at a 15 percent rate, but in reporting capital gains, you are allowed to net losses out of gains and bring forward net unused losses from previous years.

The act of taking these deductions is deliberate, allowable and routinely done by taxpayers to keep their tax bills as low as possible. By taking these deductions, the taxpayer is saying that he does not want to pay a single dollar in taxes that is not required.

We look for every possible deduction and exemption, especially if it keeps us out of a higher bracket. While it is possible that Buffett and the rich do not take these deductions, exemptions and offsets, I think we can bet the national debt that they do.

The simple fact is that the IRS does not care whether we take these deductions or not. Unlike with forms W-2 and 1099, the IRS does not receive a statement indicating that you incurred certain expenses.

Thus, unlike with income, the IRS cannot have a computer determine if you took the deductions you were supposed to, the way it can easily see if you reported all income. It will not come after you for paying more taxes than you are legally required to pay, and its auditors cannot force you to take deductions.

So next time you fill out IRS Form 1040, remember that, while you are taking every deduction you are entitled to, so are Buffett and other rich people who claim their taxes are too low.

They do not want to pay more taxes themselves. Their actions belie their words. They want you to pay more taxes.

Don M. Chance, Ph.D., CFA, is MBA studies chair and professor of finance at Louisiana State University in Baton Rouge, La.

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