How Income Tax Works
How Income Tax Works
During World War I the top rate rose to 77 percent; following the war, the top rate was scaled down (to a low of 25 percent).During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964. In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA). The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets). During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.
If you want to initiate a heated debate anywhere in the United States, all you have to do is mention income taxes. Everyone has an opinion ranging from one extreme to another: the Socialist wants to tax the wealthy and middle class until they are as poor as everyone else; the Capitalist says no, we need a simple flat tax; and the Libertarian says you're all wrong; if we eliminate all inefficient government programs, we won't need any income tax. In spite of this diversity in opinion, nearly everyone thinks the tax code is far too complex and must be simplified no matter the cost. Regardless of political ideology, finding someone who is truly satisfied with our current income tax laws is extremely rare. However, a realistic look at the facts indicates we do need some type of tax system to fund necessary government services and a progressive income tax is the fairest and least complex method to raise the required funds.
The higher your income and the larger your net worth, the less likely you are to have earned your wealth from the sweat of your brow and by only your own labor: enormous net worth is most likely earned through confiscating a piece of the labor of many others through economic profit. A progressive income tax simply returns some of that unearned wealth back to its rightful owners through government benefits and services.
Contact a tax attorney to make sure you have structured your business correctly. If you haven't gotten tax help from a tax attorney yet, there is still time to structure your business to get the maximum income tax relief before the year end. (After that you're stuck with your mistakes. Well, mostly. A good tax attorney or tax resolution specialist can still get you out of back tax trouble, but the best approach is to avoid owing back taxes in the first place.)
Year-End Income Tax Relief Tip #7: Make your stock market losses work to your advantage. If your personal portfolio has taken a nose dive, realize your tax losses before New Year's Eve. Long term capital losses can be used to offset long term capital gains, and up to $3,000 of ordinary income, with any remainder carried forward for use in future years. This is about getting income tax relief not whether you made the right investment choices. If you still believe those stocks will go up again, buy them back on January 1st. Keep in mind that some mutual funds can have high capital gains distributions even as they lose money. The best income tax relief advice is to ditch these first because they are hitting you with a double whammy. As a self-employed independent contractor you have access to some of the best retirement accounts out there like a SEP-IRA. To understand which investing should be done as part of a retirement account, and which should be in your personal portfolio and when to take losses for maximum income tax relief, get tax help from an experience CPA or tax attorney.
Since I have an office in my house I can also claim a portion of my mortgage, taxes, heat, lighting, maintenance, etc. My office is in the basement and that constitute a large percentage of my house. The percentage of house expenses I can claim as deductions is close to 30%. This means 30% from the mortgage, taxes, water bill, heat and house maintenance. This can add up to a few thousand dollars in income tax deductions each year.
The truth is, no matter what percentage, income tax is a tax on one's life. The more tax, the more a person's life is enslaved.
The last time this debate was resolved, it happened through the Supreme Court. They ruled that a direct tax on income was unconstitutional, so Congress amended the constitution to make it viable. During the 1930's, increases in government spending and decreases in other revenue forced income tax rates higher, to the point that taxes reached a high of 91%.
Tax preparation services are another useful option for tax preparation. Tax preparation services can often be found in kiosks in shopping centers or malls as well as in stand-alone offices. Tax preparation services work for a fee, but they hire highly skilled accountants and tax specialists who will know exactly how to most effectively prepare your taxes to get the maximum amount of deductions. The person who prepares your taxes will walk you through a series of questions and will possibly ask to see certain types of documentation. This process will assist them in developing the most thorough and accurate tax return possible.
The exceptions are Alaska and Nevada. Alaska collects most of its taxes from oil royalties and taxes on the oil companies. Nevada generates most of its revenues from the gaming business.
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