President Obama's health care mandate has been ruled a tax. But there are many other ways the government uses taxes to promote behavior – and you can save by taking advantage of them.
When the Supreme Court recently upheld the Affordable Care Act, a majority of justices reasoned that the mandate to buy health insurance was a Constitutional exercise of Congress’ taxation power.
Whether or not you agree with this decision, it’s clear the government has always used its taxing power to steer you in certain directions. While not mandates, here are some examples where Uncle Sam uses both stick and carrot…
1. Raise children
Can the government mandate that you procreate? No, but it offers tax savings for those who do. The tax code currently offers a $1,000 per child tax credit – That’s a direct reduction in taxes owed. In addition, kids mean additional exemptions, which are essentially tax deductions. Each exemption you claim in 2012 is worth $3,800, so a married couple with two kids will get four exemptions that add up to $15,200 in deductions.
And that’s just the beginning. Uncle Sam also offers tax breaks for child care and education expenses, among others.
Why you should do this: Of course, nobody is going to have children just for the tax benefits – the cost of raising kids far exceeds any deductions you might earn. But if you do have a child before Jan. 1, the benefits extend across the entire tax year.
2. Get married
There’s no mandate to get married, but the tax code can be favorable to married couples filing jointly. True, combined incomes can result in a higher tax bracket, resulting in what’s traditionally been known as a “marriage penalty.” But that penalty was eliminated by the 2001 Bush Tax Cuts, and it’s not expected to return until 2013. Furthermore, combining incomes can reduce taxes, especially when one spouse earns a lot more than the other.
Why you should do this: According to Forbes, “Far more common than getting hit with this (marriage) penalty is the bonus married couples stand to derive from filing jointly. Since the lower tax brackets for married couples kick in at exactly twice the level of the same brackets for singles, couples with two substantially different incomes can benefit.”
3. Borrow money to buy a house
Our tax code subsidizes home buyers, but not renters. While mortgage interest is often tax-deductible, rental payments never are. Thus Uncle Sam offers persuasion to buy a home.
Why you should do this: When considering whether to purchase a house, figure in the mortgage interest tax deduction.
4. Stop smoking
Smoking isn’t illegal (yet), but the federal, state, and local governments tax cigarettes and other tobacco products at a much higher rate than most other goods.
Why you should do this: Spend an equal amount purchasing chewing gum, jelly beans, or nicotine patches, and you’ll spend far less in taxes. More importantly, you’ll reduce the likelihood of sickness and death from preventable illnesses.
5. Give to charity
Congress created charitable tax deductions so you can deduct money and property given to qualifying nonprofits. That means for most people, the out-of-pocket cost is less than the amount you give.
Why you should do this: The idea behind this tax deduction is to encourage giving to good causes. Hard to argue with that.
6. Drive your old car
The government won’t force you to drive your rusted wreck, but when you purchase a new car, most states will force you to pay sales tax on it. In fact, most states even require you to pay sales tax on used vehicles.
Why you should do this: Keeping your old car for as long as possible reduces the taxes you pay and saves you money vs. buying another one.
7. Buy a new fuel-efficient car
If you must buy a new car, the government wants you to make it as gas-sipping as possible. The federal government offers tax credits for diesels, plug-in hybrids, electric vehicles, and alternate-fuel vehicles. And many states do too.
Why you should do this: The federal and even state tax credits are nice, but as gas prices rise, so do the savings at the pump.
8. Invest for retirement
The government actually does mandate that part of your income be deducted to the Social Security program (with a few exceptions). Beyond that, the tax code encourages you to make additional contributions toward your retirement savings.
Why you should do this: From IRAs to 401(k)’s, the tax code is full of advantages when people choose to save toward retirement rather than spend their money or put it into other investments. If you ever hope to live on an income beyond your Social Security benefits, you’d be crazy not to use these tax-saving investment vehicles.
There are few instances where the government forces you to spend money. But Congress has created a complicated tax code that has the effect of promoting some behaviors while discouraging others. By understanding how this system works, you can make the best choices for you and your money.