Posts Tagged ‘taxes’

A Tax Base is…

Monday, August 3rd, 2009

A tax base is the total value of everything that can legally be taxed in a particular geographic area. For example, in the United States, the federal tax base is the total value of all taxable assets, property, possessions, and income in the whole country.

An Itemized Deduction is…

Monday, August 3rd, 2009

An itemized deduction is an expense that you can report on your tax return that decreases the amount you have to pay in income taxes. There are many expenses that can qualify as itemized deductions (if certain qualifications are met) – medical expenses, losses due to theft, investment interest, and so on.

Two for the price of one?

Monday, August 3rd, 2009

Once you’re married, you and your spouse probably live under the same roof and share most of the expenses, so it makes sense that you should be able to share taxes, too, right? The government does allow married couples this option: you and your spouse can choose to file joint or separate tax returns. If you file a joint tax return, the government basically taxes the two of you as one person, lumping your incomes and tax deductions together; if you file separately, you’re taxed in much the same way you both were when you were single.

Why does the government give you the option to file separately? Although filing a joint tax return usually means you and your spouse pay less in taxes, this isn’t always the case. The problem is tax deductions due to theft, casualty losses, or medical expenses: in order to earn a tax break for these and similar catastrophes, you usually have to have lost or been charged for a certain percent of your income (usually 10% for casualty losses and around 7.5% for medical expenses). If you file jointly, your income is higher, so it’s harder to reach the benchmark that would let you qualify for those deductions. It’s a matter of considering both options and figuring out which one saves you more money.

An Indirect Tax is…

Sunday, August 2nd, 2009

An indirect tax is a tax that can be transferred from the original taxpayer to someone else. For example, if there’s an increase in sales tax, retailers can increase their prices so they’re still making the same profit (therefore, it’s the customers, not the retailers, who are paying the tax).

Property Tax is..

Thursday, July 30th, 2009

Property tax is a yearly fee that you pay to your local government on any real estate, automobiles, and boats that you own. When people talk about paying a property tax, they most likely are referring to the one on their homes – it’s the most common form.

Tax Incidence is…

Thursday, July 30th, 2009

Tax incidence is an economics concept that describes how the burden of paying a tax on a good is shared – the burden can fall on the buyer, the seller, or both. Taxes on retail goods are an example where the tax burden falls on both the buyer and the seller. Often, tax incidence can mean who ends up paying the tax. If consumers are paying the entire tax, then the tax incidence falls on them.

Tax-Exempt Income is…

Wednesday, July 29th, 2009

Tax-exempt income is that portion of your income which is not subject to taxation. Examples of the types of income which are (generally) tax-exempt include tax refunds, interest on municipal bonds, some scholarships, welfare benefits, and much more.

What kind of taxpayer are you?

Friday, July 24th, 2009

You have a different filing status (taxpayer type) depending on your living situation. Your filing status helps determine your eligibility for certain credits and deductions and how much those deductions are worth, how you should submit tax information to the government, and how much you need to pay in income taxes. There are five main filing statuses, each generally designating a different level of financial dependence or independence.

“Single” is basically the square one of filing statuses: it means you’re only responsible for yourself.

If you’re married, you and your spouse can choose either the “married filing jointly” or “married filing separately” statuses. If you file separately, you’re basically treated as two “single” individuals, while joint tax returns make the two of you more like one entity.

If you file as “head of household,” it means that you have at least one dependent. A dependent is someone who has someone else (you, in this case) provide at least half of his or her income. Children and elderly or retired parents are the most common dependents, but you can claim anyone who fits this description as your dependent. When you file as head of household, you’re saying that you’re responsible for supporting at least one other person, so in return you have to pay less in taxes yourself. Lastly, you can file as qualifying widow/widower with dependent child; this status also decreases your taxes because you have a dependent to support and you’ve lost a source of income with the death of your spouse.

An Audit is…

Friday, July 17th, 2009

An audit is an independent investigation of an individual’s or corporation’s accounts to make sure they are correct. For example, the IRS can conduct an audit of your records if your tax returns look suspicious.

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.