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Your Income Taxes

A tax is a charge imposed by the government to raise money for public purposes. Citizens should expect to pay their fair share for the services they receive from the government. The good news is the government does not expect you pay more than your fair share (whatever that is). What is your fair share? That can be the subject of debate and our tax system has seen many changes over the years to allow for various deductions and credits to help you get at what your fair share of taxes should be. It is up to you to use all of those deductions and credits to reduce your taxes to the lowest “fair” share possible.

The Basics of Tax Planning

Our federal income tax system is progressive in nature, which means the more you earn the more Uncle Sam expects as his share. It is not the purpose of this book or this chapter to debated the merits or fairness of the various tax codes, but I do find this quote interesting: “If you tax people who work, and you pay people who don’t work, don’t be surprised if you find a lot of people not working. I have never heard of a poor person spending himself or herself to prosperity. It doesn’t work.” - Econo­mist Arthur Laffer.

Suffice it to say the tax code is extremely complex, so much so that there is an army of tax preparers available every tax-filing season available to assist you.

The percentage rate at which you are taxed is referred to as your “tax bracket”. This percentage rate can change each year, if Congress passes new tax laws.

You may be aware of the tax cuts enacted in 2001 and 2003 (commonly called the “Bush Tax Cuts”) have been extended into 2012, but Congress may act on a new tax code, so you should keep up with the changes, or retain a qualified professional to help you.

The 10%, 15%, 25%, 28%, 33% and 35% tax brackets that we’ve seen may be replaced with a simple fair tax rate, but don’t count on it. Congress seems to like making the tax code complex. At least it keeps the tax accountants and lawyers employed.

Tax planning requires finding out where you stand now with regard to your tax liability and how that will change as a result of your financial transactions. Then you need a plan of action to reduce, eliminate or postpone that tax liability. Knowing the effects of taxable events beforehand enables you to make better decisions regarding timing of purchases or sales as well as whether or to defer income or accelerate deductions in any given year.