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3 Things to Know About Taxes

I know, I know, some of you are already bored at just the mention of the word “taxes.”  But I’m here to tell you that the U.S. tax code is an incredibly dynamic and exciting piece of literature!

 

I… I… I just can’t lie to you.

It’s not really dynamic or exciting.  There are no exclamation points to be seen.  No pictures. It’s 44,000+ pages of I-don’t-know-if-I’ll-ever-regain-my-vision-this-writing-is-so-tiny.

I spent hundreds millions bazillions of hours in college stabbing myself in the hand with a pen just to stay awake during Corporate & Partnership Taxation.

However unfortunate, taxation is an important subject in real life (versus that fake life you’ve been living).  That’s why you’ve been hearing about it non-stop in the news ever since the November election.

I’m assuming that you’ve never read a lick of tax code (at least not recreationally).  I’m assuming that you are a good and decent human being and do not harbor such sadistic tendencies.

Correct me if I’m wrong.

Today I’m going to impart a little painless knowledge on ya regarding the subject.

Hopefully, it’ll make you feel a little smarter, a little less intimidated, and a little bit like me in that you want to yell at the television box whenever a newscaster uses “tax credit” and “tax deduction” interchangeably.

 

1. Tax Rates – 6th Graders Cannot Do Your Taxes

I’m not really sure why you’re surprised.

6th grade is about the time when you learn that 26% of 97 is calculated by doing .26 x 97 (=25.22).

This is not how tax rates work.  You do not take simply your income and multiply it by your tax rate.  Yes, it would be simpler, but it would also induce riots, mayhem and other expensive consequences.

I’ll explain:

Assume that tax rate for people who make less than $80,000/year is 15% and the rate for people who make more than $80,000/year is 25%.  Assume also, that we are doing 6th grade math.

Ben made $79,999 this year; his tax liability is $12,000 ($79,999 x .15).

Jerry made $80,001 this year; his tax liability is $20,000 ($80,001 x .25).

Jerry only made $2 more than Ben, but he owes $8,000 more in taxes.  Jerry begins to harbor resentment for Ben.  Pretty soon Ben and Jerry decide to go their separate ways and the world of ice cream as we know it is forever and irreparably shattered.

For this reason, tax rates look something like this (this one is for single folks in 2010):

10% on income between $0 and $8,375
15% on the income between $8,375 and $34,000; plus $837.50
25% on the income between $34,000 and $82,400; plus $4,681.25
28% on the income between $82,400 and $171,850; plus $16,781.25
33% on the income between $171,850 and $373,650; plus $41,827.25
35% on the income over $373,650; plus $108,421.25

From here on the calculator can get a little tedious.  So to avoid losing those of you who are slowly drifting to sleep (I hope no one’s driving), let’s leave the lesson here for today.

 

2. Newscasters Everywhere, Deductions & Credits are Not the Same Thing

Deductions reduce your taxable income, credits reduce your tax liability.  Simple right?

I suppose a couple of extremely simplified examples are in order.  

The difference between a $500 deduction and a $500 credit:

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There.  A $450 difference.  Deductions and credits are not the same thing.

 

3. Who Pays What

Politicians will debate the issue of taxation until the end of time (or the end of taxation… ok, the end of time).  During these debates, facts are frequently distorted by both parties. 

Here is a distortion-free visual aid of who is paying how much in taxes.  Feel free to double check me.  You can recreate this chart from data on the IRS website (it’s more exciting than the tax code!).

The Tax Foundation also does an excellent (in my opinion) analysis of these figures here, just in case you’re feeling adventurous.  

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Ok.

The top 1% of income earners (rich people) paid 38% of taxes collected in 2008 (the most recent year with data available).

The bottom 50% of the population paid 12.8% of the tax burden.

 

Article publié pour la première fois le 17/11/2010

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