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Taxes

 


"I never did anything worth doing by accident, nor did any of
my inventions come by accident; they came by work."

Thomas Edison

 

This is always a very interesting area.  It is also a fairly misunderstood area.  I believe everyone understands that taxes are a cost of living in a civilized society.  The question becomes who pays and how much do we pay and what is it used for.  This is a very sensitive and sometimes argumentative subject.  Of course if you feel you are under taxed you can just send additional money into your local, state or federal government, they will accept it.

Do you know who really pays taxes?

You and me or individuals.  You say what about corporations?  Why not tax them more?

Well for one thing corporations don't pay taxes.  You are probably thinking I am crazy.  Bear with me.  What happens when the government raises taxes on corporations?  They obviously pass that increased cost of doing business to the consumer as higher product prices.  Who then pays - the individual.  Lets say that conditions are such that the company can't raise prices.  Well then to maintain value to the stockholder (which could be you) or prevent bankruptcy the company just "lays people off" or they may cut salaries.  This results in savings to "pay the taxes."  Who then pays the taxes?  Unfortunately the individuals who were laid off or salaries were cut among others.  You say, who cares about the stockholders?  Well if you are a stockholder (this could be an employee with a 401K or an outside person - remember the "right" side of the income quadrant) you would be very interested in the value of your investment.

Do you know how much tax you pay?  Most people don't know.  Would you believe at least 50% of your income (assuming you pay income taxes, which an increasing number of people do not)?  Check it next time you get a paycheck, look at all the withholdings.

Before about World War 2 you did not have taxes "withheld," you wrote a check to the government for you tax liability.  The government changed this (good marketing approach) during the 1940's because they felt most people would "revolt" if they really new how much tax they were paying as taxes increased (e.g. paying for the war, social programs etc.).

If you added up all the taxes you pay it will approach 75 - 80% or your income, or maybe higher.  You say that's crazy.  Well add it up:

bulletFederal Income tax (current income and when you retire if you withdraw from a tax "deferred" account, such as a 401K or IRA)
bulletFICA (social security) remember you really pay both halves, the company portion ultimately comes from your salary and the company is just the "tax collector"
bulletMedicare
bulletMedicaid
bulletState income tax
bulletSales tax
bulletProperty tax (homes, cars, real estate etc.)
bulletGas tax
bulletEstate tax
bulletOther (phone, electricity etc)

Adds up fast doesn't it?

Also, everyone loves the IRS, correct?  While they may have a bad reputation, the IRS  enforces a large group of laws (passed by Congress) that are really guides on how "NOT TO PAY TAXES."  Sound strange? Well think about it.  The tax laws basically say:  if you do "this", then you owe this tax and if you don't do "this" then you don't owe tax.   Sounds simple doesn't it.  Well generally it is not simple but if you have the correct income and expenses and advice then it is that simple.

Tax laws are mostly written for businesses and individuals have very little benefits from tax law.  Why are the laws written for businesses?  Because Congress recognizes that it is business that produces products and employs people and provides for economic growth which in turn produces taxable revenue for the government.  That is what our entire US system is built on.  As you probably know government does not (for practical purposes) manufacture, produce or sell anything, government only consumes taxpayer money and then spends it for various activities, programs etc.

As an individual you have very few tax breaks.  About the only one now is your home mortgage (you are rewarded for staying in debt).  However, think about this.  You send a "dollar" to the mortgage company and government gives you back 15 - 30 cents (depending on your tax bracket).  Does that sound like a good deal?

Many people recognize that employee income is "50% income" or you are working for half-wages (the other half, and really more goes to taxes).

So to take advantage of the tax laws one should look seriously into starting a business.  Without a business you are at the mercy of the tax law instead of being able to take advantage of it.  However, the purpose of an investment should not be to lose money, it should be to make money and then minimize taxes.  Additionally, one should not have an expense just for a deduction, but if you are going to have an expense it is good if you can deduct it as a business expense.

Of course if you feel that you are not paying enough taxes you are perfectly welcome to send additional money to the government.  They will accept it.

Below is a very simple example of how businesses benefit from tax law and individuals don't.

Tax Example:

Business Individual
   Income   Income
-  Expenses - Taxes
= Taxable Income = Spendable Income
-  Taxes  
=  Net Income  

What does this mean?  With a business, taxes are computed after expenses or costs of doing business and businesses may have expenses equal to their income and have no tax liability.  Whereas with an individual taxes are paid up front to the government and you get what is left.  Of course everyone should be legal and obtain appropriate accounting knowledge.

Estate Tax:

Another tax issue that is of considerable interest to many is the Estate Tax.  Of course if you haven't developed an estate of $1 million in 2002 this may not be of interest and if you have a large estate then you probably already know the proposed changes.

Many may have heard that estate taxes are being lowered from 55% in 2002 and will eventually reach 0% in the year 2010.  Sounds good doesn't.  Well did you know that the taxes are scheduled to go back to 55% ($1 million and above) in the year 2011.   So when the Congress says they are "doing away with" the estate tax they are correct.  However, they are not telling you "the whole story."

This may not mean much to you now but over the next 10 years you may decide to develop a large estate.  Therefore you need to know about the tax structure and you need good advice to protect the money you have earned and have "already paid taxes on" once before.

The bottom line is for most people knowing all of the tax law is impossible.  That is where good tax advice is important.  Also, as an individual you have virtually no tax breaks, unlike a business.

 

 

 

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