Tax Time and the Golden Paradouche!

I like filling out my own tax forms. Of course, I really hate it because its tedious and frustrating with all the convoluted instructions you have to worm your way through to find out that the thing you just spent an hour figuring out is something that doesn't apply to you after all. But the reason I like to fill it out myself is precisely because of the opportunity to come across various ways that different people get screwed and/or benefited by the tax code.

Yesterday's lesson came from the Form 1040 instructions for Line 60, "Other Taxes". I was pretty sure that this was not going to apply to me, but I perused them anyway. I was rewarded by item #10, "Golden Parachute Payments". It turns out that "if you received an excess parachute payment (EPP), you must pay a 20% tax on it".

This struck me with several questions. First, aren't ALL "parachute payments" excessive? Second, are the people that receive such gratuities unaware that they owe a tax on it? Third, why isn't this tax withheld from the payment? Fourth, 20%?! Or should I write, "20 & # * @ ^  % ?!"?

I certainly am ignorant of such things, but the concept I have of golden parachutes comes from the moniker "Golden", which the instructions quickly euphemize into EPP. It implies that we are talking about a rather large amount of money. I seriously doubt such things are ever $100, which the rest of us call a "Christmas Bonus".

How is it that 20% is arrived at as a "fair" tax? For some reason, such payments are not considered earned income, much like Capital Gains. So because someone didn't actually work for this money and they are really just paid for doing absolutely nothing except getting fired, they get a nice break in taxes from this massive amount of actual income that would be taxed at upwards of 30% if they had truly "earned" it.

I thought of this 20% as I scanned the tax table to fill in Line 44, "Tax", and discovered that if someone's Taxable Income is $5 (no, I did not forget any zeros on that), their Tax is $1, that is, 20%. I don't think I have to point out the irony here, though I guess I just did.

Now everybody that actually works for a living, be sure to check out Box 12 of your Form W-2 and see if there is a Code "K" there. The instructions are a bit confusing and I can't tell if this indicates you were already taxed or that you received a payment that requires you to pay a tax, but either way, it would be like winning the lottery without even playing if you see this. Or if you received a Form 1099-MISC, Box 13 will say "EPP", indicating that you are required to pay 20% of the amount shown.

My final thought on this is that anyone who received such a payment and is filling out this form for themself, should probably be doing it from a prison cell. I mean, if this were a fair and just world.