Who Really Pays Income Taxes

With all the allocution of the affluent not advantageous their fair allotment of taxes and the tax cuts beforehand this decade alone activity to the rich, actuality are some facts to contemplate and you as the clairvoyant can accomplish up your own opinion.

·    The statement above could be true when you look at it from a pure dollar point of view.  Someone who makes $500,000 versus someone who makes $50,000, if they each get a 5% tax cut, the first one pays $25,000 less in taxes, where the second one only pays $2,500 less in taxes.

·    I believe if you want to make an argument who pays more in taxes, you should look at a percentage of income paid and not the dollar figure.

Let's look at some facts here from the latest statistics from the IRS that can be found on their website:

·    The top 25 percent of income earners pay 86% of all personal, federal income taxes. That is up from 84 percent in 2002.

·    The top 50 percent of income earners pay 97% of all personal, federal income taxes, which also means that the lower half of all income earners in this country pay 3% of all personal, federal income taxes.  The medium in 2006 was just over $48,200.

·    What is amazing is that the top 1 percent of income earners pay 39% of all personal, federal income taxes, which is up almost 6 percent since 2002.

·    20 years ago, the top 1% paid a little over 27 percent of all personal, federal income taxes, and the top 50 percent paid about 94 percent.

All the talk about the lower income bracket not getting enough of a tax cut has a mathematical problem.  How can you cut taxes for someone who already pays very little or nothing?  That was actually answered during the tax cuts in 2003 by cutting the lowest bracket from 15% to 10%.  So the people who pay most of their taxes in the lower of two lowest brackets received a 30% tax cut. This obviously is not a large dollar figure, but a nice percentage cut.  In addition tax credits were increased.

Anyway, the issue we have at hand is that the taxes are paid by a smaller and smaller part of the population. This results in several problems:

·    There is a large part of the population that is no longer contributing, even if it is a small amount.  Any tax law changes do not affect them and therefore they don't care.

·    The smaller the pot from where the taxes come from, any changes in the economy or the behavior of people will have a much bigger impact on the amount of money received by the treasury.

The problem is even worse than people not paying any taxes, you can actually get money back even if you don't owe any.  There are two that come to mind, the Child Tax Credit and the Earned Income Credit. I think the second one is a good thing as it is an incentive to work, and the more you work, the more you get and it is capped at a low income and favors people with children.  There is nothing wrong with the Child Tax Credit, but I don't see why someone actually needs to get a refund beyond their over payment.

The tax laws are also screwed once you make too much money in the government's point of view regarding credits and deductions.  Anyone making more than $100,000 is rich in the government point of view.  I would certainly disagree on that, ask a mom or dad with two or three kids making in the low $100s if they feel rich.  Anyway, once you reach that level, many of the deductions like tuition are being phased out, the child credit disappears just to mention a few.  You will not get a dollar for dollar deduction anymore for your mortgage, charity, state taxes etc.  I could go on and on.  In some circumstances, because of the phase outs, the effective tax rate for a certain income range (like the income from $110K to $115K, which is just an example as it depends on the situation), is in the confiscatory category where literately a huge chunk of extra earned money goes to the government.  This is offset somewhat by not having to pay social security taxes anymore, but that is story for a different day.

I think what we need is a flatter tax with less deductions.  All of us should pay something, because once you have some money invested, you might actually have some interest how it is spend.  We need to be generous to the ones in need and the unfortunate, but that is not almost half the population that pays only 3 percent of the taxes.  We should be more generous with families than with single people, nevertheless they should all pay the same rate, just the dollar figure when you start taxing should be different.

Using Mortgage Interest as an Itemized Deduction

What is mortgage interest?  It is any interest you pay on a secured loan when you bought your first or second home. The loans include the mortgage to buy your home, a second mortgage, a line of credit or a home equity loan.  The loan must be secured debt or it will be considered a personal loan and the interest is not deductible.

For the average consumer who has managed to acquire credit card debt, car loans, and various other small debts, is the mortgage interest, especially with an interest only loan an answer to mortgage interest deductions and the elimination of non-deductible interest?

What options does the average consumer have in accommodating the tax need in relation to the housing need?  What about the interest only loan option on a new house mortgage?  Today’s housing and mortgage market has seen a tremendous growth in mortgage packages, variety and amount.  The mortgage interest deductible on the interest only loan option, once thought to have gone the way of the Edsel automobile, is back today and in use by the masses.  The mortgage market has seen an unbelievable increase in the interest only loans from just a mere sliver of the market a few years ago, to around 25% of the market share today.  That’s huge growth, especially when you talk less than five years to experience that growth. 

What benefit does the mortgage interest (especially the interest only loan) bring to the table, and does this benefit the homeowner as a taxpayer?  This is one question the mortgage lender probably won’t be able to answer for you, and one you probably won’t think to ask.  But you should, because it’s one question that can make a difference to you and to your federal tax return and the amount of the mortgage interest that will actually provide you with a federal income tax deduction.  A mortgage interest deduction is one of the best financial reasons to purchase a home.  Who gets the deduction?  You do, if you are the primary borrower, legally obligated to pay the debt and actually make the payments.  If you are married and both of you signed the loan then both of you are the primary borrowers.

The interest only loan and the amount of interest you can deduct on your income tax return are one and the same if your income levels are low enough; the concern for the average consumer is the total dollar value they get to take off their tax return.  Quite often, the deductions for the consumer aren’t enough to contribute to the bottom line, because the income level the percentage of deductible interest is calculated on is simply too high.  Higher dollar amounts in interest will usually mean a greater possibility of a greater deduction.  There can be limits to the tax deduction.  Your tax deduction is limited if all mortgages on your home are either more than the fair market value of your home or more than one million dollars ($500,000 if married and filing separately)

The greater deduction would be the only advantage to the interest only loan as far as the taxpayer is concerned, unless of course, they use the money saved from the interest only loan to fund a 401k, an IRA, or an MSA (that’s a topic for a completely different paper).  The mortgage interest and especially the interest only loan is sold to the consumer as a way to afford more house, pay off credit card debt, or provide a means to fund a savings of some kind, and if that’s true, it can be used for that purpose.  And if you’re considering paying off those high interest credit cards, the mortgage interest you’re charged on the interest only loan is fully tax deductible, while the credit cards are not; a word of caution, however, make sure you don’t turn around and use those credit cards again, putting yourself right back where you started from, just with a bigger interest payment and less house equity.

Why has the market experienced such growth?  It’s not totally related to the income tax benefit; the home mortgages of today satisfy a common desire for the consumer: instant gratification of bigger and better.  Such is the case when it’s time to make those needed repairs, or house expansion.  A second mortgage makes it possible to retain the same monthly mortgage payment, and still pull a lot of equity out of your home.  This may sound like the ultimate solution, but is it really?  It also adds to the amount of interest an individual can deduct at the end of the year; and if income levels are growing, the interest expense must grow in order to keep up.  Now, this is a somewhat skewed way of looking at the benefit of a mortgage, but it figures right into the same scheme as the elimination of credit card debt and saving for 401(k) s as a valid reason to borrow money against your home.
   
Remember that your home mortgage must be a secured loan from your main home or second home.  No deduction can be made for a mortgage from a third home, fourth home and so on.  The mortgage and the resulting interest are great tools, when used by the right people, in the right situation.  For the average consumer and long-term homeowner, unless you think a better deduction on your tax return is worth the forfeiture of equity in your home, you’d better think twice before re-financing with a second mortgage that generates more interest, but less equity.

Deciding when to File a Tax Return?

April 15th – “The Day of Reckoning”!  Every year, millions of Americans get ready to pay taxes to Uncle Sam, or get ready to collect a tax refund from Uncle Sam; when did this become the great day that it is for taxpayers, and when are we actually required to file a income tax return?  Let’s take a look at the beginnings of the income tax date of April 15 and why it was chosen? 

The first known income tax that Americans were legally required to pay was enacted during the early 1860s, and the Presidency of Abraham Lincoln.  The Civil War was proving very costly to finance, and the President and Congress created the Commissioner of Internal Revenue and enacted a law requiring citizens to pay federal income tax.  This could be considered the start of our modern day income tax.  This income tax was based on principles of graduated or progressive taxation and of withholding income at the source.  The commissioner was given authority to assess, levy and collect federal income taxes.   The authority to enforce tax laws by seizure of property and income and by prosecution.
   
Originally, the deadline for completing and filing your individual income tax was not April 15th.  In the beginning, it was first set for March 1st.  Then, during 1918, Congress pushed the date out to March 15th.  Then, in the great overhaul of 1954, the date was once again moved forward to April 15th, and this is where it remains today. Why April 15th?  The main thought from most scholars say the reasoning is that the date gives the IRS more time to handle the work load and more time to hang on to your money before offering a tax refund.  This date has only been set this way for a little over 50 years.  That’s not very long, in historical terms, and it could possibly be changed again.
   
If you are an individual taxpayer, you are required to file either a return or an extension of time to file (Form 4868) by April 15th.  Corporate and other legal entities are required to file their federal income tax return by March 15th, and if not, they also must file an extension of time to file.  What this extension does not do, is to extend the amount of time you have to pay any taxes due the government.  So, if you are unable to ready your personal or business financial information in a timely manner, and have no reasonable estimate as to the amount of tax you may owe, you can expect to pay some form of penalty.
   
In the years following WWII, the burden of tax responsibility was shared fairly equally by the corporate world and the individual taxpayer.  Today, however, the shift has been toward more responsibility on the part of the individual, and less on the business backs.  To demonstrate how special interests have begun to overtake American politics, during 1867, public opinion was so strong, and the outcry of the general public so loud, that the President and Congress abolished the income tax law in 1872, and from 1872 until 1913 almost all of the revenue for government operation came from the sale of liquor, beer, wine, and tobacco.  Although the income tax did make a small come back in 1894,  it was found unconstitutional in 1895 by the U.S. Supreme Court because it was not apportioned among the states in conformity with the Constitution.

An interesting time during the formation and eventual taxation of America occurred during 1918.  Until that point in time, the vast majority of tax revenue for government funding came from alcoholic beverage sales and high tariffs.  In 1919, Congress passed an amendment to the Constitution that made it illegal to manufacture or sell alcohol; what would replace the revenue?  American federal income tax was the proposed solution, and we’ve been paying since.  Although during the great years known as Prohibition, many “revenue agents” spent their days tracking down “moon shiners” not tax evaders, the American citizen, the individual taxpayer took on the heavy burden of supporting government revenue, and it has become heavier with each passing year.  On a side note, although “moon shining” was illegal, the “moon shiners” still had to pay taxes on the moon shine so they were incarcerated for tax evasion and not “moon shining”.   Taxes seem to always come into play when looking for a way to prosecute someone.

Then, during 1942, the Revenue Act of 1942 was passed and the “New Deal” era was begun.  Since that point in time, government control, power, and expenditures has continued to increase at a phenomenal rate, and today the American taxpayer supports a trillion dollar giant known as the United States government.  This ravenous beast consumes more than 10% of our earned income each year, and if the Social Security Administration has their way, will continue to consume even more of our weekly earnings.  We can foresee no other relief in sight.
   
Currently, all the tax regulations for this country are the responsibility of the Internal Revenue Service, and there are four major divisions of this government office: the Wage and Investment, Small/Business Self-Employed, the Large and Midsize Business and the Tax Exempt and Government Entities.  Each division has responsibilities as they pertain to their individual specialty.

There continues to be talk on the hill to change the way taxes are calculated and collected.  The most common themes are the flat tax and the national sales tax.  Until Congress actually has the courage to step up to the plate and change it, taxes will remain as cumbersome as always.