Taxes

I don’t feel like addressing death today, so I figured taxes would be the next most interesting thing.  The 2013 Federal Tax Code can’t be summarized in 500 words, so I will just hit a few highlights.  I will also not address the Alternative Minimum Tax, which is affecting more and more taxpayers who could otherwise use legal deduction to bring their effective tax rate to an embarrassingly low rate.  The rule for a taxpayer is to pay as little as possible as late as possible.  The tax brackets for 2013 per Forbes are as follows:

As an example, if you are married and have a combined income of $50,000, you will owe $1785 on the first $17,850 and $6,608 on the next $32,150.  Your marginal tax bracket is 15%.  As your income goes up, the tax on your last taxable dollar earned is your marginal tax bracket.  The highest tax bracket, reserved for those making over $400,000 per year is 39.6%.

What is my gross income?  That is your wages, interest, dividends, business income, and capital gains less expenses during the year.  For those with a job and a checking account this is pretty easy.  If you sell handicrafts on Etsy, then it gets more complicated with business income and expenses.  Read through the 1040 forms to see other types of income and income adjustments.

What about deductions?  Your taxable income is less than your adjusted gross income.  Most everybody has exemptions.  This is $3800 x 1 for a single filer or $3800 x 4 for a married family with two children.  Itemized deductions get a little more complicated.  You can either choose the standard deduction or itemized deduction.  The standard deduction is $6100 for individuals or $12,200 for married taxpayers filing jointly.
 

If you itemize, you can deduct taxes you already paid, either state or general sales tax, but not both.  You can deduct mortgage interest.  You can deduct charitable contributions.  If you have a mortgage, you will usually be better off itemizing.

Deductions are not a dollar for dollar reduction in your taxes.  They are a dollar for dollar reduction in your taxable income.  If you are in the 25% marginal tax bracket, every dollar you spend on your mortgage still leaves your pocket, but you pay 25 cents less to the Federal government for every dollar in interest you pay the mortgage company.

What can I do to delay my taxes?  If you qualify for a traditional IRA, you would not pay taxes on what you contribute, but would pay when you start withdrawing from your IRA when you retire.

How could a person make over $500,000 and owe no taxes?  One example would be to invest $10M in tax exempt municipal bonds paying 5% a year in interest.  You could make $500,000 per year and none of it is taxable.