Effective Tax Rate: Not As Simple As It Seems
Posted on | January 22, 2012 | No Comments
Mitt Romney recently expressed the belief that his effective tax rate is roughly 15 percent. Most people become incredulous upon hearing this claim.
Their initial thought is that most people pay a much higher rate than that.
The reality is that they really don’t, however.
In fact, based on the specific calculation methodology, Mr. Romney’s effective rate is significantly higher than that of most Americans’.
Comprehending why this is true requires understanding that “effective tax rate” does not equate to your maximum income tax bracket. Those rates range between 10 and 35 percent, depending upon gross annual income.
This figure can be calculated in various ways, however, as no single means of defining tax liability exists. For instance, one might consider only federal income taxes or all federal taxes. Income may likewise be measured in more ways than one. It may be expressed in terms of “gross,” “taxable,” or “adjusted gross.”
In truth, it is impossible to arbitrarily ascertain Romney’s true effective tax rate to any degree of certainty. That can only be accomplished with a detailed review of his reported income and deductions as reflected within his tax returns.
Even if Romney is right, however, a very simple explanation exists for why his effective rate is most likely much higher than most others’: Effective tax rate is invariably lower than maximum income tax bracket. Moreover, about 80 percent of US taxpayers’ maximum top rate is 15%. This figure is according to Tax Policy Center Senior Fellow Roberton Williams.
Per Williams, four-fifths of all Americans’ effective tax rate is already less than 15 percent.
When income tax liability is considered by itself, taxpayers whose gross annual income is between $40k and $50k per year is only 3.2 percent, per estimates of the Tax Policy Center.
Even households with gross annual incomes that exceed $1,000,000 can expect to pay only 18.9 percent of this amount in 2012 taxes.
This is due to the fact that many high-income households earn much of their money via tax-advantaged investment vehicles like bonds or other sheletered capital gains.
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Tags: income tax > Mitt Romney > Romney > tax > Tax bracket > Tax Policy Center > Tax rate > TurboTax > United States
Would You Like To Have the IRS Do Your Taxes?
Posted on | January 16, 2012 | No Comments
To paraphrase Will Rogers, more liars were made of the American people from income tax than from golf.
But if the IRS made it easy and almost impossible to lie on a tax return, would anyone be interested?
Doug Shulman, the IRS Commissioner, recently hinted that if the IRS would prepare taxpayers’ returns the potential for tax fraud would be reduced. No-one would have to prepare their own returns at tax time because the IRS would do it for them.
The common name for this idea is a “ready return” or “simple return.” The IRS would complete the taxpayer’s wage information and identification under this plan and send out the completed returns. Taxpayers would sign them after checking them for accuracy and correcting any mistakes, and return them.
It is already the responsibility of employers and other parties to provide income information to the IRS, so they already have most of our information at their disposal.
Completing the returns for taxpayers would be expensive, however, and the IRS does not presently have the budget nor the manpower to carry out the plan. It would mean a major undertaking to add preparing returns to the collections and enforcement they are already obligated to do. However, Shulman apparently thinks it is worth discussing.
California already has a similar, if limited, plan for their state taxpayers. Not many have signed on, though, because of limits such as no more than five dependents, income from wages only and mandatory standard deduction. Those who do use the system reported they like it. Nobody knows if the IRS will ever implement such a plan.
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Tags: Accounting > Douglas Shulman > income tax > internalrevenueservice > irs > standard deduction > tax > tax 2010 > TurboTax > United States > Will Rogers
How to Choose Your IRA CD Investment
Posted on | January 10, 2012 | No Comments
Many IRA account holders who want to increase their retirement funds in a risk free way look into certificate of deposits. Certificate of deposits are one of the best investments for conservative investors. CDs are considered as money in the bank and there is no way that you will lose your investments as long as you wait for the maturity date. Most CDs are insured by FDIC and CDIC so no matter what happens to the financial institution, you can still get your money back. But despite the fact that CDs are safe, you must still be careful in choosing your CD investments. Here are some of the things that you need to consider in choosing your CDs.
The first thing that you need to consider in choosing your CDs is the rate. The IRA CD rates usually depend on the amount that you deposit and the maturity date. The bigger your deposit the higher your CD rate is. If you want to get the best IRA rates, you should consider investing in jumbo CDs. Jumbo CDs usually have the highest interest rates but you should also have to make a large deposit. Usually large companies invest in jumbo CD to make their funds grow without the risk of losing their money. Jumbo CDs usually require a $1 million deposit or more. However, some financial institutions require lower deposits.
Aside from IRA CD rates, you should also ay particular attention to the term of your CDs. Take note that once you have deposited your money, you have to wait for the term to expire before you cash out your funds. If you take out your funds before the term expires, you will be charged with hefty penalties and other fees that may apply. To avoid early withdrawals, it is important to tuck away enough money in the bank for emergency purposes.
Lastly, you should make sure that the financial institution where you plan to purchase your CDs is insured. Some financial institutions are not insured and even though they provide higher IRA CD rates, it is not worth the risk. The best IRA rates do not only offer high returns but are also safe.
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Tags: Business > Certificate of deposit > Compact Disc > Credit card > Federal Deposit Insurance Corporation > Individual Retirement Account > Invest > Investment > Money > Mutual fund > Roth IRA > TurboTax
Changes For 2011 Tax Filing
Posted on | January 9, 2012 | 1 Comment
Tax season is upon us and even though the filing deadline is months away we all need to be prepared ahead of time. The required documents for each of us will arrive in the mail in the month of January so everyone who plans to file taxes needs to start preparing files and documents that have tax implications.
New for 2012 is the fact that the The Internal Revenue Service (IRS) gave taxpayers an extra two days to file taxes this year. April 15th falls on a Sunday and the 16th is Emancipation Day (an observed District of Colombia holiday) so April 17 is the last day that regular tax forms will be received as “on time”. Individuls who are unable or unwilling to file by April 17th may file for an extension and in that case the deadline is October 15th. This extension date is for filing purposes ONLY and is not applicable for individuals who must PAY taxes. If one does not meet the respective deadline then penalties and interest may result as a consequence.
Some people elect to pay their taxes quarterly and in this case the next payment is due on January 16th. The remaining dates for quarterly payments are April 17, June 15 and September 17.
Brokerage firms are now required to report proceeds from the sale of stocks and mutual funds as well as the complete cost basis of investments that have been sold. Individuals and businesses who need to report capital gains should use the new Form 8949 to file such reports.
The rates for calculating business mileage has also changed due to gas prices and inflation. Use a rate of 51 cents per mile up to June 30, 2011 and change to a rate of 55.5 cents per mile from July 1 through December 31. This is the business rate alone; moving and medical mileage is 23 cents per mile and charities can deduct 14 cents per mile.
Individuals making a 2011 tax filing should be aware that the tax credit for first-time home buyers has expired for everyone except those who serve in the military or Foreign Service. The Making Work Pay credit has been eliminated as well, so the $400 single/$800 joint credit against liabilities is no longer valid. For a full list of changes visit irs.gov.
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Tags: April > Computer file > Emancipation Day > Internal Revenue Service > irs > Sunday > tax > Washington D.C
4 Ways to Get the Most out of Your Retirement Budget
Posted on | January 9, 2012 | 1 Comment
As medical technology advances, society becomes safer and health knowledge becomes more mainstream, the life expectancy of humans tends to increase. In 1950, the average lifespan was 68 years. Today, that figure has risen to 78. While people are excited about living longer, quality of life is also an important part of retiring comfortably. Finding ways to stretch your retirement budget will allow you to retire at a normal age without having to sacrifice the hobbies and adventures you enjoy. Here are 4 ways to get the most out of your retirement budget:
1. Create a Financial Strategy
Getting the most out of your retirement starts with knowing the limits of your finances. Start by breaking down your current annual expenses and how those will change as the years progress. For example, each year your expenses will grow roughly 3% due to inflation alone. Although you may pay off a mortgage, or save money on business clothes and transportation, the cost of medicine and treatment may replace those expenses. Mapping out your financial obligations year by year will help you determine your financial readiness and how much flexibility you have.
Once you have a budget, every decision you make can be justified by working within the confines of that budget. For example, you can fund a more luxurious lifestyle by downsizing your home, or moving to a more tax friendly region. If you want to spend a particular year traveling, you can eschew another vice such as eating at restaurants for that specific year. There are plenty of creative ways to do what you want without having to blow up your initial projections by tacking on an additional expense.
2. Diversify Your Portfolio
Just as inflation can eat into your retirement portfolio, earning interest can replenish your coffers. The problem is that many high interest products come with the caveat of increased risk, something older investors are generally less likely to tolerate. However, many financial experts are shifting away from the traditional model and are recommending a more diverse model of risk for their retired customers. As much of your nest egg is not intended to be utilized for decades, there is no reason that a small portion of your funds can’t be invested in higher risk products, if you are willing to ride out the occasional bear market.
3. Determine Your Strategy for Social Security and Pension Payments
The government allows you to take out Social Security benefits starting at age 62. However, doing so will permanently reduce the amount of your benefits. This amounts to a 25 to 30 percent drop in benefits as opposed to waiting until age 66. On the other hand, if you have no other income, or suffer from health issues, it may be wiser to take a reduced check now than wait for a bigger check down the line.
Another decision many workers must consider is whether to take their pension via a lump sum or an annuity payment. As the advantages vary depending on your personal finances, it is best to consult a financial planner about which choice is right for you. Traditional annuities have the advantage of guaranteeing a steady income throughout the life of you and your spouse, whereas a lump sum provides more flexibility and purchasing power.
4. Start Slow
The first five years are the most critical when it comes to retirement. Unfortunately, it is common for many couples to overextend themselves during these years, depleting their savings and compromising their ability to spend in the future. Being conservative early in your retirement has two advantages. First, it allows the bulk of your nest egg to earn interest for another five years. Second, it gives you a realistic portrait of how sustainable your budget is over the breadth of your retirement. From there you can gradually take a more aggressive approach and spend your retirement without worry of outliving it.
Carl Edwards writes for EquityRelease.net covering a wide range of retirement finance topics.
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Tags: Budget > Carl Edwards > Finance > Lump sum > Pension > Personal Finance > retirement > Social security > TurboTax
Keeping track of your business mileage
Posted on | November 23, 2011 | 1 Comment
The guidelines that are in place from the IRS enable workers and business owners to claim for mileage as a business deduction if you are using your vehicle for business purposes. Some people who are employed are able to deduct business mileage if it is not reimbursed by employers or is only partially reimbursed at a rate that is lower than the official business mileage rate.
Owners of small businesses also often use their vehicles for business related purposes and in this event they too can claim their mileage as a business expense. However, it is important that no matter why or how you are claiming for your business mileage you are able to differentiate between business and personal use mileage and that you do not end up claiming for mileage clocked up when using your vehicle for personal use, as this could be classed as a fraudulent claim. On the other hand you don’t want to miss out and end up claiming for less mileage than you have actually done for business. For these reasons it is vital to ensure that you keep track of your business mileage.
The easiest way to keep track of your business mileage is to use your odometer, which will enable you to see how many miles you do from the start of your journey until the end, each time you go out for business purposes in your vehicle. You simply need to record the number of miles that you do either on a spreadsheet or even in a notebook that you use specifically for logging mileage. It is also advisable to make a note on your spreadsheet or notebook about why you had to make this trip, as this is information that the IRS may ask for. Write or log down where you traveled from and where you traveled to, detailing any detours that you may have made en-route for business purposes.
Of course, many people forget to check their odometer before they head out and therefore, unless they have made the same trip many times and already have a record of the number of miles done, it can become difficult to estimate your business mileage for that particular trip. However, you can simply use an online map and enter details of where you travelled from and to in order to get a good idea of the number of miles that you have done.
Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from savings to mortgages to
Auto insurance car insurance.
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Tags: Business > Business and Economy > Employment > Internal Revenue Service > irs > Small business > tax > Vehicle
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