April 15, 2005 is the deadline for filing income taxes in the United States and they are the lowest they have been in ages due to President Bush and the Republican government (although the national debt is larger than ever).
If you made $8,000 or less (what a part time employee or student generally earns) you pay no taxes at all and generally don’t even have to file unless withholding income taxes were taken out of your paycheck at anytime, in which case you are probably due a refund!
When the Democrats and President Clinton were in office this cut-off figure was closer to $4,000 so for the little, little guy this means a lot (however Clinton was the first to balance the budget and generate a small surplus since Richard Nixon or maybe even further than that)!
If you’re married you are allowed even more before you have to pay, closer to $16,000! A widow or widower can get closer to $12,000 if they meet the qualifications. A single head of household with one dependent gets to keep $13,000 or more tax free (depending on the number of children you get an extra $3,000 for each dependent above 2).
The internet has also made filing and doing your taxes a lot easier! It used to be you could (and still can) get forms at the Post Office for state and Federal taxes, however these forms were limited. Some libraries carried additional forms you could copy. Today you can get every form available and the instructions to go with them on the internet at www.irs.gov.
These forms comes in Adobe PDF format and you can generally fill-in the amounts into the various fields built right into the form. That means you can type away at your computer and do your taxes, then either print the form out and mail it in or do an “e-filing” through a low cost or no cost service center.
If you mail your forms in the Post Office in many locations stays open until midnight or even later to accept last minute filings (one of our people once remembers running down to Terminal Annex in Los Angeles at 11:45 PM to make one of these last minute filing).
On the downside, modern computer systems have made audits of every return automatic. The IRS checks your return against filings from your bank, employer, insurance company and stock broker to make sure what you report is the same as what they reported. Any deviation sets you up for a real person audit, which can be a nightmare (see our next issue for more on this).
These new, higher deduction and exemption levels also mean many people who “itemize” they taxes may no longer have to do this. If your total bills for child care, medical, dental, mortgage interest and certain types of health or home insurance don’t equal $8,000 you can just take the standard deduction and forget about filing “Schedule A.”
People who run a “home based business” can deduct a segregated area of their home (house or apartment) that is used exclusively for that business (and nothing else), along with a second telephone line and part of the utilities (that equal the area of the room used for business), plus all other direct business expenses. You cannot, however, take off more than two years losses on any business in any five year period of time or you face an audit and the IRS may declare your business a “hobby” if you can’t prove substantial income or show that it will eventually turn a profit.
Capital gains and inheritances taxes have also come down a little over the years, so if you sold property or assets of any type your extra tax bite won’t be as much as it was a dozen years ago.
All-in-all about 10 years ago if you made about $20,000 in total income you paid about $1,600 in income taxes without any special deductions. Today you pay about $1,200 on that same amount.
Do you need to use a tax service? Only if your business, interest, dividend and royalty income is so huge that you need a supercomputer to do the math.
Doing taxes is simply understanding how many people have lived with you six months or more last year and don’t file taxes on their own or make incomes that are taxable. These are dependents and you get about $3,000 for each of them. They must be people and somewhat related to you.
You must know your total earnings, which includes bank interest, dividends from stocks and certain insurance policies, as well as any unemployment compensation paid to you last year. Bonus checks and gifts from your employer are also included, which means technically that turkey or ham you got for the holiday season was an income “perk” and you are legally supposed to declare the face value as extra income. You also must declare your bonus check and profit sharing, along with any alimony you received. Lottery winnings, income tax refunds and some court award judgements may or may not be taxable, consult a professional or the IRS to find out about these types of earnings.
Your income, any total “other payments” made to you by a single person or firm over $500 and any royalty payment made for oils wells and entertainment industry licenses over $10 are generally reported by the payer to the IRS and you are given a W-2 or 1099 form for these amounts. You must let the IRS know if there is any 1099 forms (but you don’t include these in your returns) and use the proper additional forms to report items such as royalty income. This may require going to a tax service!
If your income from job and interest falls below a certain amount and you have no other source of income or deductions you can use a 1040EZ form for filing or a 1040A. If you interest is over $400 or you had other sources of income or loss you must use a full 1040 form.
On side one of 1040 you list all your income. On side two you list all the exemptions and deductions. Then you get a “net taxable amount” of money which you find in a tax table. That tells you how much tax you owe. Next you list how much in taxes were taken out and subtract how much you owe from how much was withheld. If more was withheld, the you get a refund. If less, you must pay some taxes. If you must pay a lot (more than $100) you might want to get to a tax expert and see if there is something you did wrong or a point on the form you missed. They might get this amount down to nothing or a refund and that is worth the $30 to $200 they will charge you to do all the forms and math.
If you do your own taxes and come out with a refund that is about 20% or less of your total taxes withheld you probably did the forms properly and are due the refund without a tax service to help you! If you are getting back an astronomical amount you better fully understand why or see a tax professional.
Why do people get astronomical amounts back? You start a business in your garage, buy expensive equipment to do the tasks, maybe pay someone to help you, pay for materials and shipping, then take that part of your house off the taxes. If your business made $10,000 in income but cost $20,000 to operate and you had day job income of $25,000 you can generally write off all or part of that $10,000 in business losses, leaving you with $15,000 in tax liability, but if you are married with a kid your pay not tax at all on that 15,000 because of the deductions and exemptions. In this scenario it might be wise to just write off expenses up to the tax break off point and then carry the rest of them forward to the next year so you get continue to get another tax break, but you really should consult with a tax expert on this concept to make sure nothing harms you later in years! But, this person would get back literally all of the $1,800+ that was withheld from their taxes.
The average single person’s tax, however, is generally as simple as:
- 7,950 deduction and exemption
$17,050 net taxable income
$2,204 tax due
$ 146 in refund due you
That's basically how simple it is for may people filing their taxes. The only thing simplier would be to move to El Salvador, where a friends of ours is from. Yes, they have taxes! Yes, they are taken from you pay check! But filing a form and getting some of that back, are you kidding me!? Get real! Government give money back? Ha!
Aren't you glad you live in the U.S.A. where the government taketh from you and then giveth back if you can prove they took too much!?...