How to Fix Income Taxes

In 1913 the U.S. Congress enacted the 16th amendment to the Constitution which made income tax a permanent reality and gave the Congress the legal authority to tax income for both personal and corporate income. Since then that has been the only thing constant in the evolution of the every changing tax code. The difference between man-made and God made, is that when man gets a hold of something the only thing constant, is change.

I have prepared taxes for over 20 years. I don’t think that the tax code in its sense of “fairness” has been any worse. When you have college graduates who because of the high cost of a secondary education, took out student loans and are now struggling to payoff their debt come to find out that they can not deduct their interest paid, something is wrong. The reason is because the tax code is claiming that their income is too high for them to take the deduction. I say isn’t that the reason why they went to school? Others may say, well that sounds correct, these people are rich, why should they get a deduction and pay less income tax.

But if you look at the threshold, you are barely in the middle class when you go over the amount stated in the tax code. If your single or a head of household your deduction starts to phase out when you have a modified gross income of $65,000 and is non deductible at $80,000. This is double if your married filing jointly. For a single mom with two kids $80,000 is NOT rich. After I prepare her income taxes, many times even after paying 10% in federal with holding tax, she still has a couple of thousand to pay the rest of the income tax owed. I as a C.P.A. feel for their situation and try to come up with solutions for her in the future.

On the other hand, there are single mothers who barely work. Never went to school, have two children. When I am finished preparing their income tax, they get easily over $5000 as a refund, many times they do not even pay one dollar to the U.S. Treasury. You would think they would be happy with the large refund, however sometimes they get disgruntled because “last year I got more”.

This is just one example I can go on and on. Just talk to any tax preparer and their eyes will light up when you ask them if the tax code is fair. So I do not want to beat on a dead horse. This article shall focus on the solution and not the problem.

Michele Bachmann, when she was running for president in 2012, was astonished when she learned that about 50% of the population in the United States do not pay income tax. She was astonished because everyone in the United States is protected by our military, which cost upwards of a trillion dollars per year, and her point was that people should at least pay one dollar. In reality it is worse than that, because most of those people who do not pay income tax get free money from the federal government. They are actually in the negative tax bracket. That is why Christmas, I have said, is not in December it is actually in February, the beginning of tax season. Sorry I regressed. But this gets me to my point.

This taxing of income is counter productive. I have told clients when their income tax got really high, was to take long vacations. Don’t work, don’t be productive. Why would you want to keep on working for less of the pie? Only stupid people work their asses off so that they can pay a higher percentage of their income to the U.S. Treasury. The “poor” are the smart ones. They get something for nothing. But what gets me is that they still complain. The people who are paying the taxes should be the ones complaining. They are paying for themselves and then some.

Our tax structure is insane. No one has come to me and said, “Rich, this year I want to pay a boat load of income tax. I mean really whack me.” It is always “Lets try to keep the taxes as low as possible.” So the dilemma is how do we as a nation pay for all the federal government programs that have to be paid and at the same time have it viewed, by most, as fair.

The only way to do this is with a hybrid consumption/income tax system. We are familiar with the consumption that it is another way of saying sales tax. Yes, this is the best way to fundamentally have everyone pay into the system. The trick is to get a percentage that will pay the programs needed and at the same time not curtail spending. I am not so much worried about spending because we as Americans love to spend. It is practically a hobby.

Many people feel that corporations are not paying their fair share. They have lawyers and accountants whose only job is to find out creative ways to minimize the corporations taxes. All in the name of the shareholders. Of course the CEO and executives do not get any bonuses or stock privileges, oh no. Corporations spend a tremendous amount of money purchasing goods and services and all of that would be taxed. Poor executives, it’s a shame when your paid only a million or two.

Think about it, all the money that criminals get from selling illegal drugs would get taxed when they go out and buy. Right now, the current tax structure misses out on all of that income. That was one of the main reasons why marijuana was legalized in Colorado and Washington.

What this tax structure does is spread out the amount of people paying into the system, it increases it two-fold. Unfortunately for some, Christmas will only be in December, however if your income is low you will still qualify for all of the other programs that the federal government already has, Medicaid, food stamps, etc. Also with taxes coming in from everyone people can not say that only some are providing when others are not. This is huge. The country would have a we sense and not a me versus you sense. I remember after 9/11 when everyone started buying flags and putting them on their cars and homes, it was this country coming together. It was beautiful to see. This nation needs more of that. If that can be accomplished this country will have no boundaries.

The hybrid tax structure has a second element. The one aspect that I agree with our current taxing structure is the, the more you make the more they take doctrine. Basically if you have more than most then you should pay more than others. It is true, so to compensate for the “rich” there would still be an income tax. But this would be for people, as Obama had drawn the line in the sand in 2013, making approximately $200,000 and higher. This is about the top 2 or 3% of the population. This way we can dramatically cut the IRS. It will still have some function but with only 2% of the population filing taxes there won’t be much to do. Also this income tax plan will still keep an eye out on corporations with some sort of threshold. The best way is to introduce certain tax rates and see how they function. I would keep the tax rates low on corporations because remember you got them paying the consumption tax. Also we want them to be competitive in a global world.

I believe changing what we now have to something that is different is not out of the realm possibility. We already are doing this with regards to sales tax. We can transition fairly quickly. The states are already collecting sales tax which is a consumption tax so why can’t the federal government have a national sales/consumption tax.

The other benefit to this plan is that everyone will have a say in how much tax they pay. Remember if you do not spend you don’t get taxed. As a result you will have saved money and hopefully put it aside in an account. Having money saved is a factor in means testing. This can have a positive effect on the reduction of federal spending and also decrease our federal deficit. This can teach us, as a by product, how to save and decrease our dependence on a failing social security system. We as a nation will be converted from spenders to savers

Income Tax Basics For Young Professionals

So you have only just started earning and are on the path of self discovery especially with regards to your financial life, right? And one of the vital aspects to that would be – taxes. Understanding tax is not easy, but very much necessary. So, lets take it one step at a time – we are going to specifically look at – Income Tax. Here are some of the common confusions and relevant explanations surrounding the whole process.

What is income tax?

Income tax is the tax you pay to the government. It is based on the income you earn, i.e. when your income exceeds a certain slab, then you are required to pay tax on the excess amount earned.

Why should I pay tax on my earnings?

Every citizen is obligated to pay income tax as per law [Income Tax Act]. The collected sum is used for further development of the nation.

How much should I pay?

The amount of tax you will have to pay is purely dependent on which income slab your salary falls in. The percentage of tax to be paid will also vary depending on:

1) Whether you are a man, woman or a senior citizen [the income slabs are different for all three]

2) Your income and the slab it belongs to(that is specific to you). For instance, the tax payable by someone who is earning between 180,000 and 500,000 will be 10% of the amount that exceeds 180,000.

Similarly, if the income is between 500,000 and 800,000, then the taxable income is a fixed amount plus 20% of the amount that exceeds 500,000 and so on.

How often should I pay?

Income Tax is paid on a yearly basis. The duration considered here is between April 1st to March 31st of the next year. This period is also known as a financial year or ‘previous year’.

And the last date to file your income tax returns would be July 31st.

How to file income tax?

Filing Income tax can be a daunting task, which is why you have to options:

– doing it yourself

– engaging a good chartered accountant.

You also have the facility of filing income tax online or offline.

What are the documents required for filing tax?

The documents to be submitted while filing are as follows:

1. Form 16 – is given to you by the company you work for. It consists details of the tax that was deducted from your salary. This is the main indication that you have paid income tax.

2. Form 16A – is given to you by the bank or financial institution where you have invested in term deposits. This indicates the various tax deductions at source for your account.

3. Bank Statement Summary – shows the transactions performed by you throughout the financial year. This will include everything from savings, investments, expenses, loans and also income earned.

4. Property details – any property sold or bought by you in the previous financial year should be recorded and duly submitted at the time of filing tax returns.

5. Interest certificate – In case you are paying monthly installments towards your housing loan, if you want to save on tax, then you will have to show the supporting documents in the form of interest certificate from the institution that provided you the loan.

6. Investment details – if you haven’t already declared it in the Form 16, then do it here. Details of your investments in tax saving tools such as public provident fund and so on.

7. Receipt of advance tax (if any) – to show that you have paid advance tax.

Is the salary I receive the only form of income?

No, there are various types of taxable income:

1. Your salary
2. Rental Income (if any)
3. Income from business
4. Capital gains (for eg, sale of property)
5. Incomes from bank deposits, cash gifts and so on.

Some of the key points to be kept in mind while filing income tax are as follows:

Make sure your signature is uniform across all the documents you use for filing
Do not overwrite or misspell in the form
Double check the PAN number you have given.
Even the date written matters
Original TDS certificates and receipts to be produced at the time of filing.
Avoid delay payment of tax as it attracts a fine.