Well it has been about three months since the last post and I am sorry about that. Life sped up and may never slow down. With a new job and starting grad school the posts will surely be fewer and further between but we will try to keep them coming as we can.
With that, lets talk about the most exciting topic ever...TAXES. Taxes are no fun. It sucks paying money to the goverment. Even if you benefit from every program in return, its easier to let the rich pick up the tab. Its even worse preparing your own tax filing every year. Or you could just pay someone to do it for you. But if you take some time to understand some of the relevant tax code, you can apply it to maximize your deductions and credits and minimize your tax liability.
Taking a step back, when you owe the fed money, its a tax liability. You owe them for income generated over the year. This could be from your salary, business, stocks, interest income, etc. (there are a few sources of income not taxed but we'll either talk about that later or not worry about it).
You can offset this income with either 1.) Tax Deductions (lowering your tax basis - or the amount you pay taxes on) or 2.) Tax Credits (a dollar for dollar reduction of your tax liability). A quick sidenote - tax credits are better than tax deductions. If you get a $500 tax credit, you save $500 on your taxes. If you get a $500 tax deduction, you saving your marginal tax rate (lets say 25%) times the deduction or $125. See the difference.
When computing your taxes, you take your taxable revenue or income and subtract your deductions to get a "tax basis". You then apply this to the marginal tax rates to come up with your tax liability. You can then reduce this by all available credits to come up with what you owe the government.
Something important to keep in mind. Federal income taxes are progressive and are based on a marginal tax rate. This means richer peeps pay more dough that poorer folk (progressive). A marginal tax means that your tax rate is based on the next dollar of income. Made up Example: If you made $100,000 then the first $10,000 may not be taxed, from $10,001 - $25,000 may be taxed at 10%, $25,001 - $50,000 may be taxed at 15% and $50,001 - $125,000 may be taxed at 20% (these rates are fictitious). This means that your MARGINAL tax rate is 20% because if you made $100,001 that next dollar would be taxed at the 20% rate. If you made $125,001 your marginal tax rate would be whatever the next tax bracket rate is set at.
As a result, when looking at tax increases or decreases you are typically going to calculate the net tax effect by your current tax bracket because that is the rate that is going to be applied to the marginal change in income or deductions.
So i'm going to stop there and just bitch about how much I hate our tax system. Why is it this difficult? The marginal tax rate was developed so that the rich paid more or their "fair share". Now you have 50% of the population paying $0 AT ALL, so for them, no taxes must be their fair share. Way to have skin in the game and contribute to your country. Bunch of leaches. Then you have all these crazy rich guys (named Warren Buffett) saying the rich should pay more because they can. Well then Mr. Buffett, if taxes are such a noble cause, why not retract the commitment you made to the Gates Foundation for $20 billion dollars or however much it was and send that check into the Federal Government (Attn: Mr. Timothy Geitner).
I'm a big proponent of a consumption tax, because this too is progressive, but it would be based on what you spend not on what you make. You want a nice yacht, pay a tax. Send your kids to a better private school, pay a tax. Invest that money into your business or the economy...no tax. Pay the government for what you consume/use and no more.
And I am perfectly aware that property tax is not a federal tax, but why do I need to pay taxes on the same asset over and over and over? Your federal and state income tax and your sales tax are all one time taxes on your income or expenditures. But that damned property tax kicks you in the A$$ year after year for the SAME EXACT THING. To me, that's criminal.
During the next discussion of taxes, we'll examine ways to use the current system to pay less taxes and save more of your hard earned (well maybe hard earned) dollars.
Sincerely,
Coco
