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Taxes! Financial Planning – Mr. Yates
Taxes! • In this world nothing is certain but death and taxes. - Benjamin Franklin
Taxes in the New World… • The Massachusetts Bay Colony in 1643 was the first to impose income taxes. • From 1791 to 1802, the United States government was supported by internal taxes on: distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. • The high cost of the War of 1812 brought about the nation's first sales taxes on gold, silverware, jewelry, and watches. • In 1817, however, Congress did away with all internal taxes, relying on tariffs on imported goods to provide sufficient funds for running the government.
Income Taxes! • In 1862, in order to support the Civil War effort, Congress enacted the nation's first income tax law. • It was a forerunner of our modern income tax in that it was based on the principles of graduated taxation and withholding income at the source. • During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%. • Those with incomes of more than $10,000 paid taxes at a higher rate. Also sales and excise taxes were added.
16th Amendment • In 1913 the amendment passed and allowed Congress to impose an income tax system • This was the year zippers were invented, and Cracker Jacks put toys in their boxes • The tax was 1% on an income greater than $3,000. • Only about 1% of the population had to pay taxes.
Taxes rollin’ in • In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. • With the advent of World War II, employment increased, as did tax collections—to $7.3 billion.
Graduated (Progressive) Taxes • Our present tax system is a progressive, or graduated tax – increased income means increased taxes
For instance… • A married couple making $70k combined would fall into the 25% tax bracket • However, the total $70k isn’t taxed, the difference between their income and deductions are taxed
Exemptions & Deductions • Exemptions – the IRS-allowed reduction in your income – you are given 1 exemption for yourself, spouse, and each dependent • Deductions – expenses that reduce taxable income • Standard Deduction – a set deduction allowed by the IRS, no matter what your expenses actually were
Back to our couple… • Our married couple ($70k) has 3 children – hence, they receive one tax exemption for each person in the family $3,050 x 5 • They take the standard deduction (which turned out to be more than their itemized) of $9,500 • So – they have $15,250 + $9,500 = $24,750 in deductions and exemptions • So their taxable income is only $45,250
So what do they pay? • Taxable income of $45,250 – does that mean they pay 15% of that whole amount to Uncle Sam? • No, they pay 10% on the first $14k, and 15% on the next $31,250 • Hence, (before any credits) they are forecasted to pay $6,887.50 (Federal Tax Only)
So that’s all they pay? • Well, in addition to Federal Taxes, there’s also State Income Taxes, Social Security Taxes, and in some cases City Taxes. • So let’s assume you lived in NYC – • a marginal tax rate of $25%, • State income tax of 4.75% • City income tax of 2% • Social Security of 7.65% • For a grand total of 39.4% in taxes
Capital Gains Taxes • Almost any asset you own (except for certain business assets) is called a Capital Asset. • A Capital Gain is what you make if you sell a capital asset for a profit • A Capital Loss is when you lose money on that sale • Example: if you owned 100 shares of GM stock at $50/share and sell them 2 years later when they were at $70/share ($2,000 capital gain) • You will pay Capital Gains Taxes on that profit (which varies by your income bracket)
More on Deductions • Deductions are itemized such as: • Medical and Dental Exemptions • Home Mortgage and Investment Interest Payments • Gifts to Charity • Casualty and Theft Loss • Miscellaneous – such as work expenses
Credits • Tax Credits offset your taxes in a dollar-for-dollar manner. They don’t reduce your taxable income, they offset taxes. • Examples: • Child credit - $1,000 per child under 17 • Education - $1,000 off your college expenses 50% off your next $1,000 for a total of $1,500 knocked off your taxes • Earned income, child and dependent care, adoptions, etc.
Speaking of breaks… • More than 60% of all U.S. companies paid no federal tax at all during the boom years of 1996 to 2000, the General Accounting Office reports. • In 2000 alone, 94% of all U.S. corporations paid less than 5% of their total income in corporate taxes, according to the GAO • Among the largest corporations -- the 1% of all corporations that own 93% of all corporate assets -- 82% paid less than 5% of their income in taxes.
Right in our backyard… • Companies with a presence in Oregon, including Verizon, AT&T, and Boeing, were among the companies paying next to nothing or receiving rebates in 2001 through 2003. • 2/3 of Oregon's corporations pay Oregon's $10 corporate minimum tax. • In 2003, the average American taxpayer paid more federal income taxes than AT&T, Time Warner, and Walt Disney combined. • Who picks up the slack?