Posts Tagged ‘income tax’

How do you know if you have to file an income tax return?

Monday, December 21st, 2009

Income tax filing requirements are easy to describe but difficult to state specifically. Basically, you have to file a tax return if your income for the fiscal year is above a certain level. What is that level? That’s the tricky part. The numbers can vary from year to year, so if you’re not sure whether you qualify, you can check the IRS website to find out. But here are some general rules of thumb that determine the relative level you have to reach:

Here are the minimum income requirements for several filing statuses for 2008:

  • Single and under 65: $8,950 (though if someone else can claim you as a dependent on their tax return, this number will be slightly lower)
  • Single and over 65: $10,300
  • Head of household and under 65: $11,500
  • Qualifying widow(er) with dependent child and under 65: $14,400

Hungry for more filing facts? We’re here for you:

  • If you are over 65, your income has to be greater than a younger person’s to qualify for taxation.
  • If your filing status is head of household or qualifying widow(er) with dependent child, your income has to be greater to qualify than if you file as single.
  • If your filing status is married filing separately, you must file a tax return.
  • If someone has claimed you as a dependent on his or her tax return but you still received income for that year, you have to file a tax return if your income is above a certain level (usually relatively lower than for non-dependents).
  • You may also have to file a one-time-only tax return if you don’t normally make these levels but you come into a sudden sum of money (say you’re unemployed and win the lottery, for example).

So while the numbers may change, the basic principles behind them are that the IRS cuts you more of a break if you’re over 65, the head of a household, or widowed with a dependent child.

Income Tax is…

Monday, October 5th, 2009

Income tax is an annual tax collected by federal, state, and sometimes local governments. It is structured so that the more money you earn, the higher the percentage you pay in income taxes. Income tax is the main source of revenue for the U.S. government.

A Proportional Tax is…

Thursday, August 20th, 2009

A proportional tax is a system of taxation in which individuals are taxed at the same rate regardless of their income level. So whether you make $25,000 a year or $3,000,000, you’re still paying the same percentage of that amount in income taxes. The U.S. uses a progressive tax system for income tax purposes.

What’s the idea behind taxing the rich more versus less?

Friday, July 17th, 2009

It might seem fair to make everyone pay the same percentage of their income in taxes. That way, the rich pay more money than the poor do, but everyone keeps the same fraction of their money to use however they wish. Then why does the government make you pay a higher percentage the more money you make? Don’t the rich contribute enough as it is?

In the U.S., we have what’s called a progressive income tax, which means you get taxed at a higher rate the more money you have available for taxation. The reason we have a progressive income tax, even though a proportional tax (where everyone gets taxed at the same percentage) might seem fairer, is because a progressive tax reduces the tax incidence of people with lower ability-to-pay.

What does this mean? Tax incidence “falls” on the group that ends up bearing the brunt of taxation. Usually, tax incidence falls on those with less money (the amount they have to pay in taxes more drastically affects their standard of living). You could take away half of Bill Gates’ or Warren Buffet’s money, and they’d still be amazingly rich, but if you took away half the income of the average worker, his ability to live comfortably – even just to pay all his bills – would be seriously affected. Our economy has made some people incredibly well-off, so we ask them to give more back because they can more easily afford to part with it.

What does the government do with all this tax money?

Tuesday, July 7th, 2009

If you’ve ever received a paycheck, you’ve probably noticed that a big chunk of your earnings go to Uncle Sam. The government collects trillions of dollars in taxes every year. There are different types of taxes, such as income tax and property tax, but all funds collected are ultimately spent by the government.

In 2004, the federal budget was approximately $2 trillion. Here is a breakdown of how that money was spent:

  • 26.2%—Military
  • 22.6%—Interest on the national debt
  • 19%—Health care
  • 5.5%—Income security
  • 3.4%—Veterans’ benefits
  • 3.3%—Education
  • 2.5%—Nutrition
  • 1.6%—Housing
  • 1.6%—Environment
  • 11.4%—Everything else

You can get much more detailed information by visiting government agency websites like the Congressional Budget Office.

A Tax Bracket is…

Tuesday, June 23rd, 2009

A tax bracket refers to an individual’s level of income tax. Once your income reaches a certain level, you fall into a higher tax bracket, and you have to pay a greater percentage of your income in taxes.

How can spending money save you money?

Wednesday, June 10th, 2009

No one likes having to pay bills, but some things that cost you money have a silver lining. When tax season rolls around, some of your expenses from the past year can actually help lower your taxes.

Everyone who makes money has to pay income taxes, which are generally higher the more money you make. But when the government figures out how much to charge you in income taxes, they use a measure called the adjusted gross income, which is an attempt to better represent the portion of the money you make that you actually get to use. For example, you may make $1,000 a month at your job, but that doesn’t mean you can actually put $1,000 in the bank at the end of every month: you’re spending at least some of that money on various things that the government views as tax deductible (or the amount you “adjust” your income by).

Tax deductible items are things like donations to certified charities, work expenses, and certain educational expenses. On the other hand, if you spend money on, say, an iPod or a pair of jeans, that’s money you could technically save, and you’re spending it for your own enjoyment, so it doesn’t lower your adjusted gross income. While tax deductible expenses usually don’t come from things you’d enjoy spending your money on, there is a consolation prize: those items you’re paying for now mean more money that’s yours to keep later on.