Thursday, January 29, 2009

Taxes, Guns, & Furniture Part I

No, this is not a new federal agency under the Obama administration (although that would be humorous) this is about how screwed up our tax system is in this country and what my wife and I plan on doing to stimulate the economy. To preface this, while my wife and I didn't vote for Obama during the election, we fully agree that more spending is needed to get us out of this slump, albeit we believe it is spending by individuals that will help. Most of last year and the year before when the economy was skating on thin ice we were spending thousands of dollars to remodel our home. This is money that was staying in the USA. We were using cash, not credit so our debt load hasn't increased. Several businesses (big box and mom & pop) benefited from our spending spree. Unfortunately, our remodeling came to an end in September, and if you were following the news that is when the economy really went to the crapper. We have held off on major purchases until the new year, but seeing that the rest of America is not following our lead, we have decided we need to inject our own stimulus package into the local and national economy.

To begin with where would we get the money? While the government can print their $800+ billion and then spend it, when individuals do that they call it counterfeiting. We could go into debt and rack up a large credit card bill but that hasn't worked for the government or individuals so far. Let's face some facts, in eight years of President Bush we doubled the national debt to $10 trillion. It is very possible with all of the bailout and stimulus bills in congress that we could double that again in 4 years of Obama. So we had to get the money from somewhere.

Since it is the beginning of the year, it is tax refund time. Let me be clear about one thing. I hate tax refunds. I despise them. Getting a tax refund means that you have lent someone (in this case the government) X thousands of dollars at no interest. I'll do that for family in need but not for anyone else. That being said, there are some funny rules that almost make it inevitable that I will always get a refund. Let me go over some of these:

1) Bonus withholding - While regular income is withheld at a marginal rate based on the number of exemptions claimed and the amount of money you make, Bonuses are withheld (not taxed) at the rate of 25% (plus an additional 6.35% for payroll taxes). So even if you are in a tax bracket of 10%, your bonus is withheld at 25% necessitating a refund of the 15% the next year.

2) Social Security Cap - There is a cap on the amount of wages that you pay SS tax on. It is around $106,000. If you ever switch jobs and say one pays you $60,000 for half the year and the other pays you $60,000 for half the year, then both will take out the SS on all of your pay, necessitating a refund of the $14,000*6% that was taxed over the SS Cap.

3) Tax credits count as if you made payments. (Unlike adjustments or deductions or exemptions which only lower your total taxable income). So by having enough tax credits, you can effectively pay no income taxes (and if you are really good, they you can have enough to get the amount of your payroll taxes refunded too).

So now I have a confession to make. Ever since I started working, I have made enough money to pay income taxes (not just have them withheld). However with our current system, I have now made enough money (and have enough credits) to pay no income taxes and get back some of my payroll taxes. All of this, without the earned income tax credit.

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