Tax Defined
What do I need to know about taxes?
If you're going to prepare your own return, the IRS estimates that it will take you at least 20 hours to learn the rules, assemble the information and prepare your own return. The most time is going to be spent in procrastination. Most people put off filing their Taxes for as long as possible and, the sad thing is: while you're doing this procrastination, it's always on your mind - it never escapes your consciousness. It's always something that you need to do and, that you put off doing because it's an unpleasant task to go look backwards, go through the last year and, see what you made and what you spent and, what you feel guilty about spending and putting this all together and then adding it up. It's a chore to do that and it's something you're going to do for the rest of your life. So, you might as well face up to it, feel that there's hope for you to reduce your taxes by keeping track of all your expenses. Now, when you go into your Tax Preparer, you say “Look, I spent $850.00 on my dog or on my cat.” And, He's going to say “Well, you know, that's not deductible.” but, at least you'll get an idea of what it costs for the dog or cat. Unless you have a security issue and you have a guard dog at your place of business, then, you get a deduction for your dog. I don't know about a guard cat though. That probably wouldn't cut it unless it's a big cat.
Who needs to file income taxes?
If you are over 14 years of age and earn over $8,500, you'll need to file an income tax return. If you have children under the age of 14, and they have more than $800 in unearned income - that's interest, dividends, capital gains, rentals - then that income over $800 is taxed at the parent's rate. If they earn money in a part time job, that's earned income and that is not taxed at the parent's rate.
Where do my taxes go?
Your taxes go into this gigantic pool of trillions and trillions of dollars that the government gets to spend. Congress decides with their appropriations where the money is to be spent, and the executive branch decides if and when they're going to spend it. Just because Congress votes to spend it doesn't mean that the President is going to spend it that way, and if the President decides in circumstances that money needs to be spent somewhere else, then he'll spend it somewhere else.
Why are the tax laws so complicated?
Why is the tax law so technical? Why can't we have a simple tax where everyone knows how much tax they're going to pay? Why isn't that done? Sadly, it's not done because there's special interest involved. For example, the Savings and Loan banks - and the homeowners - want to have mortgage interest on your residence deductible. Why should your mortgage interest on a residence be deductible whereas, if you don't have a primary residence and you have mortgage interest on some other property, that isn't deductible? It doesn't make any sense. Tax laws are not supposed to make sense and they're not supposed to be fair.
What's new this year in the tax laws?
What is really exciting is that there is more awareness of this alternate minimum tax, and the horrendous result is that it is reaching for millions and millions of people. It has sort of unintended consequences. It was originally set up thirty years ago to tax those taxpayers who invested in all types of tax shelters and legal devices to reduce their taxes. By making all of these things a tax preference item, it took all the glory out of it. But now, regular working couples are getting caught up in it by having tax preference items and paying the alternate minimum tax. It is projected that this number is going to rise dramatically in the next ten years.
What are state taxes?
State taxes are income taxes that the state imposes on your income. Some states don't impose any taxes. Some states impose fairly large taxes, up to twelve percent, thirteen percent, even. Some states have what they call a piggyback system, where they just figure out what your federal income is, make a few adjustments to it, and then tax you on that amount. Some states like California have their own independent taxing systems, so something that might be deductible on the federal return might not be deductible on the state return. There are different rules for both.
What's taxable income?
Your income is figured first with total income which is on page one of your return that represents your income from all the items in your return. From that you get to deduct certain things: some student loan interest, some educator's expense, and IRA contributions. Then you arrive at the adjusted gross income. From the adjusted gross income, you deduct the standard deduction or the itemized deductions if they're greater to arrive at a subtotal. From that subtotal, you deduct the exemption credit of $3,000 per exemption. After you have the exemptions taken off, you have your taxable income and then you figure you tax on that amount.
