“The only thing certain is death and taxes”
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Taxes suck.
Taxes are certainly used for good things, but also for shady reasons. They’re taken to provide for key public services, like infrastructure, but our local and federal governments also take our money to fund pet programs, political campaigns and their friends and family businesses.* First, let’s talk about dates.
Tax day has fallen on April 15th since 1955 as the timing “gives the government more time to hold on to the money.” Of course, filing for tax year 2020 was moved from April 15 to May 17, 2021 due to the COVID-19 pandemic.
Here are 15 things to know when filing your taxes:
1. How are taxes used and where does our money end up?
States: Taxes vary by state, but local taxes primarily go to schools, health care, and transportation programs. Some states spend more on education; Vermont tops the list spending 48% of tax dollars on education. States like California, whose residents are among the highest taxed nationwide, will collect more than a billion dollars in taxes to spend on corrections and prison improvements, only to see that money redirected for other purposes. That’s not the case everywhere, but it’s still scandalous and illegal depending on who’s asking.
Federal: Income security, Social security, defense, health programs are the primary destinations for your tax dollars (per datalab) as recently as 2021.
Income security (like unemployment and food and nutrition assistance): 24% or $1.6 Trillion
Social security: 17% or $1.1 Trillion. Created in 1935 and now “over 65 million people, or more than 1 in every 6 U.S. residents, collected Social Security benefits in January 2022.” Per Investopedia: In 2021, for every $1,470 earned, one credit is granted until $5,880, or four credits, has been achieved
Health programs (like Medicare and Medicaid): 12% or $796 Billion
Defense (our military and national security): 11% or $754 Billion
And, of course, there are millions of dollars lost in earmarks, bureaucracy and pork for special interest.
2. On State Taxes…
States generate revenue through taxes, fees, and licenses. The most common state taxes are income tax, sales tax and property tax. The difference between federal and state income tax is nuanced.
Per investopedia: “Federal taxes are progressive, with higher rates of tax on higher levels of income. Some states have a progressive tax system, while others impose a flat tax rate on all income.”
States without an income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. These are motivators for businesses to relocate or to draw key talent to these states.
Nine states use the flat tax system which uses one rate for all income levels. Most states assign a progressive tax rate, which increases the tax rate by brackets as an individual’s income amount increases.
Property taxes are unique to states. Some are just crazy, like Hawaii’s “exceptional tree” deduction.
Sales taxes are wildly important for states. In 2017, states collected $300 billion from general sales taxes. $157 billion came from “selective sales taxes (or excise taxes, or “sin tax”) on specific purchases like tobacco and alcohol.” California has the highest sales tax (7.25%) while Alaska, Delaware, Montana, New Hampshire, and Oregon do not have sales tax at all.
Currently, “marketplace facilitators” are being set up to handle web sales across state borders. Amazon and others that allow third-party retailers to sell items on their platform will be able to collect state sales taxes on those sales. As of January 2020, 38 states and the District of Columbia had marketplace facilitator collection provisions.
3. On Federal Taxes…
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” (Amendment 16). The states and federal government battled over the legality for the federal government to levy a national income tax. The supreme court rejected a nationwide income tax in 1895, and the16th amendment was ratified 18 years later in 1913. Congress was charged with determining and setting tax rates for the nation. Tax law requires sign off by multiple branches and POTUS gets the majority of attention around taxes while in office.
Our tax system is progressive. There are seven tax brackets, each based on household income. Tax rates will change as household income changes. For example, as income increases, taxpayers will be bumped up to a higher tax bracket.
Democrat and Republican presidents have raised taxes throughout time, most recently from Reagan to Bush (who famously stated “Read my lips: no new taxes” before raising them in his first year in office) to Clinton to G.W. to Obama. Trump made the biggest cuts in 30+ years. Biden increased taxes, particularly on the rich, to bring his programs to life , namely the massive infrastructure plan.
The IRS (Internal Revenue Service) is in charge of enforcing taxes and receiving payments from citizens. The government agency also reviews all tax forms received and edits and updates the forms as necessary. For example, they recently updated to include questions about bitcoin.
The IRS has recently shared that the government is losing more than $1 Trillion in revenue due to tax fraud and avoidance. Talk more about this
4. Child Tax Credit
As a father, you should take advantage the child tax credit. Under the American Rescue Plan Act, qualifying individuals can earn up to $3,600 for each child under 6 and to $3,000 for each kid 6-17 years old. If you received half of this payment (which came through monthly last July – December) then you will likely get less in your return. You should have received a Letter 6419 that lists the amount you received in 2021, and the number of children used to calculate those payments.
5. Breaks for parents
Married couples who have kids get a tax break. Which is stupid and discriminatory. But, it’s still their and you can take advantage of it.
6. Breaks for children
Parents can apply for the earned income tax credit (EITC) (look into this) that “helps low- to moderate-income workers and families get a tax break.” Parents get tax breaks for the number of their dependents, which can be a child, but also a parent or other relative who requires your support. Basically, the “tax deduction lowers your taxable income, so you owe less tax”.
7. Dependents
A dependent can only be claimed on one tax return per year. Because of this, divorced parents need to accurately gauge and coordinate their returns. A single parent who is filing may claim as much as $8,000 for one dependent in a return if they meet qualifications through the child and dependent care credit.
8. Filing jointly vs. Filing separately vs. Head of household
Jointly: Married couples that have wed before December 31 of the tax year can record their respective incomes, deductions, credits, and exemptions on the same tax return.
Separately: This can be beneficial if a couple has no children and one spouse is reporting much more income, and the other is taking more deductions, such as a married couple of a doctor and a teacher (per Investopedia). It is also the beneficial route if divorce is imminent.
Head of Household: Must be single, divorced, legally separated, and providing half the cost of supporting and housing a dependent. The HOH designation puts the particular taxpayer in a more advantageous tax bracket than filing as a single. On this, more than 75% of people claiming HOH designation are Female; less than 25% are Male. This tax filing status is crucial to women who are raising families by themselves! Fathers in similar situations can understand the need for HOH status too.
How it breaks down (per Investopedia):
Filing as an HOH:
10% x $14,100 = $1,410 + 12% x Amount > $14,100 ($35,900 x 12% = $4,308) = $5,718.6 total tax
Filing single or married filing separately:
10% of the first $9,875, or $987.50, plus 12% of $40,125 – $9,875, or $3,630, plus 22% of $50,000 – $40,125, or $2,172.50. This brings the total tax to $987.50 + $3,630 + $2,172.50 = $6,790.7
Thus, filing as an HOH saved this hypothetical taxpayer $1,072.
For the 2021 tax year, the standard deduction is increasing to $12,550 for single taxpayers and those married filing separately, $18,800 for head of household, and $25,100 for married filing jointly.
9. Accountant vs. DIY (Quickbooks or H&R Block)
DIY: You can save money upfront, but possibly lose out on tax breaks (only 10% of the US population files their own taxes)
Hire: When you pay a professional you will have their fee subtracted from your return, but you may earn more because they know how to file in a way that will get you a higher return and negate their fees (90% population does this). Wondering how much it costs to hire a pro? Check out this piece by Investopedia on how much it will cost for an accountant.
10. Filing an extension
You can get an extension to October 15th if you pay part or all of your tax bill by April 15th. Also, you must file your extension request no later than the regular due date of your return.
11. Moves to make in December & the January effect
The tax calendar year runs January 1st through December 31st. And like so much of our lives, we procrastinate in taking advantage of our tax breaks. Because of this, many taxpayers look to give money away in the form of donations before the end of the calendar year in order to take advantage of the tax breaks.
There are many ways to shed your tax burden, and selling stocks to take losses before the end of the calendar year is pretty common amongst shareholders. Then, they’ll get back in the market in January – the start of the new taxable calendar year. This is known as the January Effect. The stock market typically realizes a nice bump at the start of the year because of it.
12. Quarterly filing
Technically, we can pay taxes quarterly (January, April, June, September). This would be annoying to do every three months, so the Government set the annual filing deadline on April 15. Still, if families filed quarterly (and you can!) they could avoid potential problems paying taxes in April, while receiving refunds and adding cash to their pockets four times per year, instead of just once.
One major irk (among so many) with taxes: Shouldn’t the government pay us interest for taking a portion of our paycheck to fund their projects? The government admits they borrowed too much from us in the first place by giving us a tax return. We’re allowing them to take our money and use it with zero interest, which is unheard of in our capitalist nation.
13. Why and how corporations don’t pay taxes
- Double Irish with a Dutch Sandwich: Sending funds from the Irish subsidiary to a Dutch company and back to an Irish company to avoid taxes. This is no longer legal.
- Planned losses (or tax-loss harvesting): “…sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you.”
14. How to make your voice heard on how your tax dollars are spent on fed and state levels
Ballot box: Put your vote where your wallet is. Vote in the politicians who align with your goals, whether that be enhancing social benefits or decreasing taxes on the top 1%.
Know your reps (find them here) and contact them.
15. If the forefathers could see us now
I think they’d be amazed and horrified. Obviously, new things like crypto currency would baffle them. Even the IRS is slowing down due to questions around crypto.
The United States was founded under the mantle of “no taxation without representation.” Yet, we have Washington, D.C. and Puerto Rico who pay taxes yet have no representation in our legislature.
* What kills me is the disparity between those who do and don’t pay taxes, and how our taxes kick off profits to tax-dodging corporations because of misuse in DC.
