Guide to Taxes and Tax Laws

Nobody likes paying taxes, but it's a necessary component to the US economy and investment in infrastructure and growth. Over the years, tax laws have become increasingly complex, and the penalties for mistakes (or intentional acts such as evasion) are significant. In an effort to help shed some light on the basics, we've put together this comprehensive introduction to US tax laws.

In the United States, individual taxpayers and couples filing jointly pay taxes based on their income. As their taxable income increases and they exceed the established thresholds for each income bracket, their taxes will increase. The tax bracket of a taxpayer indicates the amount of taxes that will be taken from their income each year. There can be variation and changes in the marginal tax rate (which is the percentage paid on the excess above the threshold) from year to year.

The income tax rates for the 2008-2009 tax year for individuals are:

Taxable Income Threshold

2008/2009

Base Tax on

Taxable Income

Marginal Tax Rate

(% on excess above threshold)

i. $6,000

N/A

15%

ii. $34,000

$4,200

30%

iii. $80,000

$18,000

40%

iv. $180,000

$58,000

45%

 

The income tax rates for the 2009-2010 tax year for individuals are forecasted at:

Taxable Income Threshold

2009/2010

Base Tax on

Taxable Income

Marginal Tax Rate

(% on excess above threshold)

i. $6,000

N/A

15%

ii. $35,000

$4,200

30%

iii. $80,000

$18,000

38%

iv. $180,000

$58,000

45%

§ Note: From the 2008-2009 schedule to the 2009-2010 schedule, the threshold in for the “ii” bracket increased from $34,000 to $35,000. The result is that for people who made $35,000 in both years, their income will be taxed 10% less in 2009-2010 than it was in 2008-2009 because they are considered in the “ii” bracket instead of the “iii” bracket. Additionally, people in the “iii” bracket will also get a break in the 2009-2010 tax year, paying a 38% marginal tax rate in 2009-2010, as opposed to 40% in 2008-2009.

The Benefits of Tax Planning

1. The benefits of tax planning are obtained when taxpayers analyze their options and plan out strategies for minimizing their current tax and their tax liability for future tax periods. 

2. Tax planning includes: 

  • Deciding whether to file income taxes jointly or individually;
  • Timing the a sale of an asset, such as a home;
  • Deciding the advantageous way and number of years over which to withdraw retirement funds;
  • Deciding the best time to receive income;
  • Assessing the best time to pay expenditures; and
  • Determining the best time and amounts of gifts to be made in order to maximize the tax benefits.

State Income Taxes

1. All states have the power to assess taxes citizens within their state and also on activities that occur within state borders. The limitation on states’ taxation power is that the state laws must not infringe on the taxation power that is reserved for use by the federal government

2. Income tax rules, regulations and liabilities vary from state to state. While the Federal Income Tax code is rather uniform, the pros and cons of each state can be drastically different from one state to the next. Understanding which states have the best tax provisions to suit individual needs can be critical to taxpayers getting the biggest available tax advantages.

3. State Income Tax regulations tend to be particularly important for individuals who are about to retire. Often times, states with lower income taxes for retired individuals provide significant incentives for people to retire in those jurisdictions.

4. To fully understand the tax burdens and benefits of each state, a taxpayer should research the laws of each perspective state in order to decide which state has the greatest possibility of providing attractive tax benefits.

Next: Introduction to the IRS

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