Federal Income Tax

As of June 2001, the income tax forms the bulk of taxes collected by the U.S. government. Depending on individual income, it ranges from nothing to 35% of one's income. The income tax is called a progressive tax because it is higher as a percentage of the income of higher-income individuals. It is also assessed on most corporations. This results in double-taxation of the dividends paid to stockholders, although individuals usually pay a preferential tax rate on dividends.

Federal payroll taxes in the United States are primarily collected by employers, for the U.S. Internal Revenue Service. The Federal income tax uses a system of direct withholding. Employers pay part of a taxpayer's income tax directly from their payrolls. The amount of withholding is calculated based on an employee's expected annual salary and the employee's living situation (married or unmarried, number of dependents, other factors). Withholding does not perfectly calculate an individual's tax each year. The difference between the amount withheld and the actual tax is either paid to the government after the end of the year, or refunded by the government.

The U.S. government rewards certain behavior with tax deductions or tax credits. The most famous reduction in taxes is that income used to pay mortgage interest on a personal home is exempted from taxes, if the taxpayer elects to itemize. Taxpayers who do not participate in an employer-sponsored pension plan may contribute up to $3,000 ($3,500 if age 50 or above) into an individual retirement account, and deduct that contribution from their gross income. The Earned Income Tax Credit benefits low- to moderate-income working families.

There are two ways to calculate income tax. The regular way is based on the gross income minus any applicable deductions and then a marginal tax percentage is applied according to the taxpayer's income bracket. From this result, any applicable tax credits are subtracted and the result is the income tax owed. If the result is a negative number due to refundable tax credits and/or if the Federal Withholding Tax was greater than the income tax that was actually owed, the taxpayer is entitled to a tax refund. A taxpayer eligible for a refundable credit (such as the earned income tax credit) may receive a refund even without paying any federal income tax.

The second way, the Alternative Minimum Tax (AMT) is based on the gross income, computed without regard to certain tax preference items (such as tax-exempt interest on certain private activity bonds) and with a reduced number of exemptions and deductions. This higher income base is taxed in two rate brackets, 26% and 28%, depending on taxpayer income. The taxpayer pays the higher of the two computed tax liabilities.

In the tax year 2000, many taxpayers in Silicon Valley were caught unprepared by the AMT due to the sudden decline in technology stock prices. Under AMT rules, unrealized gains on incentive stock options (ISOs) are taxed at the date the options are exercised. In contrast, under the regular tax rules capital gains taxes are not paid until the actual shares of stock are sold. For example, if someone exercised a 10,000 share Nortel stock option at $7 when the stock price was at $87, the bargain element was $80 per share or $800,000. Without selling the stock, the stock price dropped to $7. Although the real gain is $0, the $800,000 bargain element still becomes an AMT adjustment, and the taxpayer owes thousands of dollars in AMT.

The AMT was designed to prevent people from using loopholes in the tax law to avoid tax. However, the inclusion of unrealized gain on incentive stock options imposes difficulties for people who cannot come up with cash to pay tax on gains that they have not realized yet. As a result, Congress has taken action to modify the AMT regarding incentive stock options. In 2000 and 2001, people exercised incentive stock options and held onto the shares, hoping to pay long-term capital gains taxes instead of short-term capital gains taxes. [2] Many of these people were forced to pay the AMT on this income, and by the end of the year, the stock was no longer worth the amount of AMT tax owed, forcing some individuals into bankruptcy. In the Nortel example given above, the individual would receive a credit for the AMT paid when the individual did eventually sell the Nortel shares.

Another perceived flaw in the AMT is that it hasn't been changed at the same rate as regular income taxes. The tax cut passed in 2001 lowered regular tax rates, but did not lower AMT tax rates. As a result, certain middle-class people are affected by the AMT, even though that was not the original intent of the law. People with large deductions, particularly mortgage interest and state income tax deductions, are affected the most. The AMT also has the potential to tax families with large numbers of dependents (usually children), although in recent years, Congress has acted to keep deductions for dependents, especially children, from triggering the AMT.

IRS statistics for 2000 show that returns showing less than $15,000 in adjusted gross income amounted to 30 percent of total returns filed but accounted for less than 1 percent of tax paid. By contrast, although they made up only 2 percent of all taxpayers that year, taxpayers reporting $200,000 or more in adjusted gross income paid 45 percent of all federal income taxes.

Federal Income Tax Best Sellers from Amazon.com

FairTax: The Truth: Answering the Critics
by Neal Boortz, John Linder
Amazon Price: $10.17
Customer Review: Honest and sensible responses to myths and criticisms surrounding the FairTax. Chapter 12 brings it all home by describing what life would have been like had we been living with the FairTax all along, and how our lives would change if a new system o...

Parlay Your IRA into a Family Fortune: 3 EASY STEPS for creating a lifetime s...
by Ed Slott
Amazon Price: $10.20
Customer Review: Ed Slott is excellent in his field. I find his other books full of good information and alwasy watch when he is on PBS. The book has good informative for leaving your money to your loved ones, but, I wonder if the loved ones will leave the money in ...

Lower Your Taxes - Big Time! 2007-2008 Edition (Lower Your Taxes Big Time)
by Sandy Botkin
Amazon Price: $12.89
Customer Review: This book should really be titled "How Small Businesses can Minimize their Taxes." That is the entire focus of the book. (Note that this includes consultants and other types of small businesses.) It covers a lot of topics in an organized manner, g...

The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS
by Neal Boortz, John Linder
Amazon Price: $10.17
Customer Review: This is a GREAT idea! Do not be fooled by some false negative reviews by idiots on here, most of whom have not even read the book!


Read 'Answering the Critics' for more info and clarity.

Lets get politicians on board...

Deduct It! Lower Your Small Business Taxes
by Stephen Fishman
Amazon Price: $23.09
Customer Review: i just started (well just INCORPORATED) my catering business. i found this book to be written in an accessible and unintimidating style. Fishman goes to great lengths to give examples, cite external sources for additional information, and generally...


Newsfeed display by CaRP

Federal Income Tax News

• Nigeria: NonRemittance Of Tax May Affect Budget AllAfrica.com
The Minister of the Federal Capital Territory FCT, Dr Aliyu Moddibo Umar, has said the non remittance of the personal income tax of workers in the territory by the Federal Inland Revenue Service FIRS may have a negative impact on its 2008 budget.
• Rockford Man Gets 29 Months In Prison For Tax Scam Rockford Register Star
A 57 year old Rockford man was sentenced to 29 months in federal prison without parole and ordered to pay 100,266 in restitution to the United State Department of Treasury for filing false federal income tax returns.
• New Local Income Tax Collection System Becomes Law Pittsburgh PostGazette
HARRISBURG Gov. Ed Rendell today signed Senate Bill 1063, which will make a major consolidation of earned income tax collection in Pennsylvania
• Liberals Carbon Tax Wont Help MyKawartha.com
To the editor: The federal Liberal leader, Stephane Dion, has just announced that a major plank in his partys next election platform will be a carbon tax on all fossil fuels.
• Child Tax Credit Checks Now Out Saipan Tribune
About 3,000 families in the Commonwealth can expect to receive federal child tax credits beginning Monday. Finance Secretary Eloy Inos announced yesterday that it had begun distributing about 2.6 million in child tax credits.

IMPORTANT NOTICE: The information provided by FactsOfLaw.com does not constitute legal advice or any other type of advice and is provided for educational purposes only without warranty of any kind. FactsOfLaw.com has not reviewed the information on this page for accuracy and is not responsible for any errors, omissions or inaccuracies.  For legal advice you should consult a licensed attorney. Source: wikipedia.org