What's eye-opening is the author's point about _how_ many people go about ditching some income at the last minute -- by buying a particular type of financial product whose value is likely to go to zero.
Which has the effect of transferring their wealth to someone else (the vendor of the financial product) who just sold something that was effectively worth nothing, for a great deal of money.
It's the most bizarre sort of wealth redistribution I've ever heard of.
> (the vendor of the financial product) who just sold something that was effectively worth nothing
It's not necessarily worth nothing.
It has a very high chance of going to $0, but it could also have a very small chance of going to $1 million so that the other party in this trade is not necessarily raking in a lot of profit (or any) by making this trade many times over.
It effectively creates "potholes" in the distribution --- anyone in that net-negative zone tries to move out of it.
The function looks like "y = x <= 48560 ? x : x - 7200" and means that, at the other end, someone who makes $55760 would end up with the same as someone who makes $48560.
You can't necessarily do it last minute. You have to realize the loss by the end of the tax year (Dec 31), which may be months away from the day you file taxes.
On the other hand, if you can deduct traditional IRA contributions, you can make prior-year contributions up until the tax filing deadline, and keep your money. If you're eligible for an HSA or solo 401k, you can also use those to similar effect.
For example, regarding health insurance subsidies (mentioned in the article), deductible IRA contributions must be added back when calculating your income. As are other sources of income. E.g. tax-exempt municipal bond income doesn't count for Federal taxes but it does count for income limits for the health care subsidy.
Offhand, I'm not familiar with income limits for an HSA. It's quite likely that allowed income sources and deductions vary for these various programs.
> deductible IRA contributions must be added back when calculating your income
Not true. IRA/401k/HSA reduce MAGI for healthcare purposes. Do not confuse MAGI for the healthcare marketplace with MAGI on your tax return; those are two different figures.
Ha. You're right about IRA deductions with respect to healthcare.
But I knew that I saw IRA being added back somewhere! It turns out I was thinking of FAFSA. IRA deductions are added back for computing income for financial aid purposes.
Tax exempt interest is added back for both healthcare and FAFSA.
That's why tax programs and tax accountants are essential. It's difficult for people who don't do this for a living to remember all of this.
Which has the effect of transferring their wealth to someone else (the vendor of the financial product) who just sold something that was effectively worth nothing, for a great deal of money.
It's the most bizarre sort of wealth redistribution I've ever heard of.