Posts Tagged ‘taxes’

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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.

Tax Evasion is…

Thursday, July 2nd, 2009

Tax evasion is a general term for the deliberate and illegal act in which a person, company, or any other entity avoids or underpays taxes. Tax evasion includes declaring less income and more tax-deductibles than you really have to the IRS.

A 501(c)(3) is…

Tuesday, June 30th, 2009

A 501(c)(3) is a religious, literary, charitable, educational, or scientific nonprofit organization that is exempt from paying certain taxes. The name refers to the specific section of tax law that allows this.

Understanding New Options for Retirement

Thursday, June 25th, 2009

Now that Roth IRAs are undergoing a rule change, people at higher income levels can get access to these highly desirable accounts. Read on to learn what the new rules do and don’t allow you to do, as well as how best to convert to a Roth and the pros and cons of doing so.

  • On January 1st, 2010, the government is removing the income restrictions that prevent some individuals from converting to a Roth IRA.
  • Roth IRAs are desirable because there are virtually no taxes on withdrawals – for you or your inheritors – and you aren’t required to start making withdrawals when you reach a certain age, as is the case with traditional IRAs.
  • The obstacle to conversion is that you have to pay taxes to do so, and since you can’t pick and choose which assets to convert, these taxes are often quite high.

Facts & Figures

  • Currently, you can’t open a Roth IRA if your modified adjusted gross income is more than $120,000, or $176,000 for married individuals who file joint tax returns. These restrictions will stay in place in the future.
  • The restrictions that will be eliminated are those on converting to a Roth: currently, you can’t convert if your modified adjusted gross income for your entire household is more than $100,000. In addition, someone who is married but who files an individual tax return can’t convert regardless of his or her income.
  • The government is providing a special deal for those who convert to a Roth in 2010: they can split the taxes they’re charged for the conversion over 2011 and 2012.

Best Quote

“If I can take a portion of my assets and shift them over to a Roth, am I going to sleep better knowing they can’t be touched by future tax increases?” – Ben Norquist, president of Convergent Retirement Plan Solutions LLC

A Progressive Tax is…

Monday, June 22nd, 2009

A progressive tax is a tax system in which the more money you make, the more you pay in taxes as a percentage of your total income (this is what we do in the U.S.). For example, if someone who makes $200,000 a year pays 10% of his income in taxes and someone who makes $550,000 pays 15%, that is a progressive tax system.

The IRS is…

Wednesday, June 17th, 2009

The IRS stands for “Internal Revenue Service” and is the government organization responsible for handling everyone’s taxes. If something is wrong with your taxes, you may have a friendly run-in with one of its auditors.

Why do people have bank accounts in Switzerland?

Wednesday, June 10th, 2009

Swiss bank accounts are world-renowned for their security, but it’s a different kind of security than what you’d see in a heist movie. The protection that applies here has nothing to do with maximum-security vaults and armed guards giving body checks; it’s about the unique privacy provided by Swiss banking law.

Most of the perks of having a Swiss bank account come from the fact that, under Swiss law, no banker can reveal anything about your account (including its existence) to anyone else without your permission. Any banker who violates this agreement is prosecuted by the state and can face fines and jail time. So once you put money in a Swiss bank account, the only people who know that money even exists are you and your banker.

Why is this anonymity so desirable? Some people just want privacy and believe that their financial situation is their own business. Others, however, try to hide their financial information from the government to avoid higher taxes. This is called tax evasion and it’s illegal. When the government tries to figure out how much money to tax you, it first needs to know how much you have. Generally, the more you have, the more taxes you pay. When the government can’t see the money you have in a Swiss bank account, they can’t include it when they calculate your taxes and you end up getting taxed for less than you’re actually worth.

Swiss banks are so popular – and so notorious – not for their physical security systems, but for the anonymity they provide to their clients. Just remember, if you live in a country like the U.S., you need to report how much money you have in a Swiss bank account to avoid getting in trouble.

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.

What does it mean when they say your donation is tax deductible?

Tuesday, June 9th, 2009

Philanthropy can do more than just aid a worthy cause; in certain situations, generosity can reward the giver as well. Giving to charity can actually reduce the taxes you have to pay, but there are special conditions that have to be met first.

When you donate to charity, you’re spending money, right? So no matter how much money you make, you now have less of it to use. But even though donating to charity means you’re using your own money in a way you choose, you’re not using it to buy new things for yourself, you’re using it to benefit a worthy cause. As long as you donate the money to a qualified recipient – a person or organization the government trusts to use that money effectively – you have the right to be rewarded for using your own wealth to help others. So your donation becomes tax deductible, which means you have a lower adjusted net income.

To put it simply, when you donate to charity, you’re really getting two benefits at once: you’re helping your chosen organization and you’re also reducing your own income taxes.

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