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List: US States Income Tax and US States with No Income Tax July 26, 2006

List: US States Income Tax and US States with No Income Tax
The following states levy no income tax on earned income and no income tax on unearned income (interest and dividends):

The following states levy no income tax on earned income however they do levy income tax on unearned income (interest and dividends):

The following states levy the following MAXIMUM income tax as of January 2005:

Taxes Triple for Teenagers May 22, 2006

Tripling tax rates for teenagers with college savings funds is outrageous:

Under the new law, teenagers age 14 to 17 with investment income will now be taxed at the same rate as their parents, not at their own rates. Long-term capital gains and dividends that had been taxed at 5 percent will now be taxed at 15 percent. Interest that had been taxed at 10 percent will now be taxed at as much as 35 percent.

Because I believe savings for college is becoming more and more difficult because of increasing education costs and tuition, and higher interest rates for borrowing, I’d be willing to pay higher taxes either with a consumption tax, gas tax, or income tax. I think this country has enough obstacles for young Americans to go to college for a higher education. How are we to compete with other countries that are educating more PhDs, MDs, and MBAs than in the US? We don’t need taxes on teens to reduce money that would otherwise have gone to pay for tuition.

Add Taxes to the Teen Triple Threat:

According to the NY Times article, Mr. Bush pledged in 1999 to veto any bill that raised taxes. I hope Mr. Bush rescinds his tax increase for teens so we can feel more secure about this country’s future.

Source:
Despite Pledge, Taxes Increase for Teenagers
By DAVID CAY JOHNSTON
Published: May 21, 2006

Info: Tax Bracket and Marginal Tax Rate May 11, 2006

I’ve mentioned before that in some cases the added tax you pay when your income goes up isn’t the same as your tax bracket. Some don’t realize that your tax bracket is the rate you pay on the “last dollar” you earn. As a percentage of your income, your tax rate is generally less than that.

For example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2005 and your status was Married filing separately; then your tax would be calculated like this:

( $ 7,300   -   0 )   x .10 :       $   730
( 29,700   -   7,300 )   x .15 : 3,360
( 59,975   -   29,700 )   x .25 : 7,568.75
( 91,400   -   59,975 )   x .28 : 8,799
( 100,000   -   91,400 )   x .33 : 2,838
    Total:   $ 23,295.75

This puts you in the 33% tax bracket; but as a percentage of your income, your tax is about 23.3%.

Yesterday’s announcement on the tax cuts in the US extends to 2010 the 15% tax rate on most dividends and capital gains, which benefits the wealthier tax payers, who would otherwise pay the 35%, which is the tax bracket for married earners of over $168,275 or single earner making over $336,550.

Related:
Common Tax Bracket Mistakes

Tax Bill Agreement Possible - Will It Help Us? May 10, 2006

Tax writers in Washington D.C. reached an agreement that would extend lower rates for investors and shield middle class (see entry on economic classes) taxpayers from the alternative minimum tax (AMT) for another year.

Here are the highlights:

With high earning taxpayers being allowed to convert their IRAs to Roth IRAs, the gains earned in those accounts would grow tax free, whereas in a traditional IRA they would have been taxed as income upon withdrawal. This will probably create some initial revenue for the government as people convert IRAs to Roth IRAs.

Source:
House GOP ready with $70B tax cut
By William L. Watts, MarketWatch

Tax Due Today! What Now? April 17, 2006

Tax day is here for the US. So if you owe money to the IRS, you’ll need to send payment along with your request for an extension. Otherwise, you will be subject to interest and penalties on the amount owed. I went for quick peek at the post office this morning, and saw a long line to mail out tax forms. Hope you weren’t one of those people! If you’ve already sent in your tax forms, congratulations. But there are some things you can do to start preparing for next year. Here are some suggestions:

7 Days Until US Tax Due…Do You Owe Money? April 10, 2006

There’s one week left to file your income tax return and contribute to your IRA (April 15 falls on a Saturday, so you have until April 17 to mail your returns this year). I know, I state the obvious, since you probably have an interest in personal finance and are visiting this site. But I have a story about one of my ex-coworkers. I had a conversation about taxes one time a few years ago, and I asked him a question about deductions. He told me that he has no idea and that he didn’t file his tax in the previous years, so what does he know? Here’s how our conversation went:


Me: Do you know if our computer purchases are tax deductible?
Co-worker: I don’t know, I don’t pay tax.
Me: You didn’t pay tax for your computer purchases?
Co-worker: No, no, I don’t pay income tax.
Me: You didn’t pay income tax? Do you have some tax shelter?
Co-worker:No, I just don’t believe in it. I read that income tax is optional, so I don’t bother with it.
Me: So how do you know if you owe money? Or better, if Uncle Sam owes you money?
Co-worker:It’s not worth it. I don’t owe any anyway. I haven’t paid in 4 years.
Me: Sorry to break it to you, but income tax is not optional, but if you don’t owe money…

I was shocked that someone actually believed that tax is optional and didn’t pay tax for four years. I tried to contain my shock, but how could I? This co-worker is pretty smart, but who does this??

In any case, if I know that someone owes me money (US Government), I’m going to file taxes on time. This year, most of my deductions were from my mortgage interest, so I got a return of over $5000. Since we’re moving this summer, I can’t put that into savings but at least I’ll have enough to cover for moving expenses. So do you owe money? Either way, there’s 7 days left to file!

States: Fewer Businesses Creates Fewer Jobs and Collects Fewer Taxes March 1, 2006

The Wall Street Journal’s opinion piece yesterday wrote about how some US states, namely California have driven away families and businesses by treating the most productive businesses and workers as if they were ATM machines and people like Rob Reiner is playing the part of “Meathead economist”. What I found interesting is not about Rob Reiner, but the economics of the taxation and migration patterns.

…in 2005, 239,416 more native-born Americans left the state than moved in. California is also on pace to lose domestic population (not counting immigrants) this year. The outmigration is such that the cost to rent a U-Haul trailer to move from Los Angeles to Boise, Idaho is $2,090 - or some eight times more than the cost of moving in the opposite direction.

California’s tax system isn’t helping. The business tax rate of 8.8% is the highest in the West, and is the second highest to New York when it comes to marginal income-tax rate at 12.0%. According to WSJ, this has contributed to the trend of wealthy taxpayers disappearing from the state and has cost the state $9 billion a year in uncollected revenues due to a loss of almost 20,000 million-dollar income earners from 2000 to 2003. Migration out of CA is seen in the map from Next Bracket’s previous entry on migration patters in the US. Since many of these millionaires are small business owners who create jobs, there must be more incentives for business owners to keep their businesses there and in other high taxed states such as New York (12.15% state income tax rate) and New Jersey (9.0% state income tax). This on top of the Federal tax rate and local taxes.

Source:
The Wall Street Journal, Page A16
February 28, 2006

Common Tax Bracket Mistakes February 9, 2006

I’ve talked about saving to get to the next income bracket, but I’ve been asked about how we can lower our tax bracket in order to pay less to our government. It’s true that for most of us, we try to make more money by getting a raise, working longer hours, or supplementing our income with another job. But there are strategies to increase your deductions to lower your taxable income. What many people incorrectly believe that in a graduated income tax structure, like the USA has, your tax will suddenly increase by a huge amount when you move into a higher tax bracket. This thinking is what the mortgage industry is taking advantage of…that borrowers will take on larger mortgage interest obligations under the “you’ll pay less tax” theory.

Congress establishes tax rates that apply to different levels of taxable income. Currently the rates vary from 10% to 35%. The higher your income, the higher your tax rate. The range of income where you stay at any particular rate is known as a tax bracket. For a single person in 2005 the rate on taxable income between $29,700 and $71,950 is 25%, so those numbers establish the 25% bracket.

Common Mistakes (from Fairmark.com)

There are several points of confusion that often come up in connection with tax brackets.

Tax brackets and earnings: Some people have in mind the general notion that their tax bracket depends on how much they earn. That’s roughly true. But it doesn’t mean you can hold onto the same tax bracket as long as your earned income stays the same. Your tax bracket depends on your taxable income, regardless of the source of that income. For example, you can move into a higher tax bracket because of increased investment income or a distribution from a pension plan — or even because of a decrease in your deductions.

Sudden change in tax: Another misconception is the notion that your tax will suddenly increase by a huge amount when you move into a higher tax bracket. For example, if your taxable income is in the 15% bracket, but just a few dollars below the 25% bracket, you might be concerned that earning a few dollars more will cause you to pay a lot more in tax. Relax. The first $100 dollars you earn in the 25% bracket will cause your tax to increase by $25. You still pay only 15% on all the money you earned below the 25% bracket.

Tax brackets and withholding: Don’t confuse tax brackets and withholding rates. The relationship between your tax bracket and the amount of tax your employer withholds is very indirect. Withholding rates are based on averages, not specific tax brackets. For example, your withholding rate may be about 20%, even though there’s no tax bracket between 15% and 25%.

Borders between tax brackets: Your taxable income may happen to fall very close to the border between two tax brackets. If it does, you can make a mistake when you use your tax bracket to estimate your tax consequences.

Example: You’re single and your 2005 taxable income is $29,600. That puts you in the 15% tax bracket. But if you have an additional $1,000 of taxable income you’ll pay almost $250 more in taxes. The reason is that even though you’re in the 15% bracket, you’re very close to the 25% bracket.

Tax brackets and marginal rates: In some cases the added tax you pay when your income goes up isn’t the same as your tax bracket. That’s because the added income can cause you to lose some other tax benefit. For example, added income can mean smaller itemized deductions or a reduction in the amount you claim for your exemptions. You may find that $1,000 of added income causes your tax to go up by $292 even though you’re in the 28% bracket. Your tax bracket is just an approximation of the added tax. To be more precise, we would say you have an effective marginal rate of 29.2%. In most cases, the tax bracket is close enough to the effective marginal rate for purposes of making investment decisions.

So yes, we can lower our taxable income, but keep in mind that real financial freedom comes from saving more, not spending less on taxes.

Source:
Fairmark.com Tax Guide for Investors
Thank you for the information!

How will Bush’s budget proposal affect your taxes? February 7, 2006

Despite heated protest from the US Congress, it’s good to see Bush creating incentives for people to save money in his budget plan for 2007. In his plan, he asks Congress to kill the estate tax and create new tax-favored savings vehicles to encourage people to increase their savings. He wants to cut the rates on long-term capital gains and dividends (15%), which are now set to expire at the end of 2008, and on personal income taxes, now set to expire after 2010 (The top federal tax rate on ordinary income is 35%.). This would protect more taxpayers from the AMT, a parallel tax system originally designed to prevent upper-income taxpayers from avoiding taxes altogether through the use of deductions and credits. But because it hasn’t been adjusted for inflation, the tax is reaching further into the middle class each year. The number of taxpayers getting hit by the AMT is expected to jump to 22.2 million people in 2006 if Congress doesn’t take action.

It will be interesting to see what gets approval in the coming weeks. Let’s hope it favors tax payers and not increasing government spending.

Source:
Bush’s Budget Seeks to Preserve Tax Cuts
By MARY DALRYMPLE, AP Tax Writer

Tax Around the World: USA January 1, 2006

To begin 2006, I’d like to start off with a series of posts titled “Tax Brackets Around the World”. Since I live in the USA, I’ll start with the US tax brackets. Every so often, I’ll post information about taxation in other parts of the world. The more we learn about our neighboring countries and other countries around the world, it will help me (and hopefully you) a little about how we live compared to others. I hope there will be readers from other countries to teach us about their personal finance strategies and how we can all benefit from ideas elsewhere.

As we know, tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). There are cutoff values for taxable income — income past a certain point will be taxed at a higher rate. In a flat tax system, everyone is in the same tax bracket, and all of their income is taxed at the same rate, no matter how high their income may be.

2006 USA Federal Tax Brackets

Marginal
Rate		 Single Married Filing
Jointly		 Head of
Household		 Married Filing
Separately
10% 0 -
7,550		 0 -
15,100		 0 -
10,750		 0 -
7,550
15% 7,550 -
30,650		 15,100 -
61,300 		10,750 -
41,050		 7,550 -
30,650
25% 30,650 - 74,200 61,300 -
123,700		 41,050 -
106,000		 30,650 -
61,850
28% 74,200 -
154,800		 123,700- 188,450 106,000 -
171,650		 61,850 -
94,225
33% 154,800 - 336,550 188,450 - 336,550 171,650 - 336,550 94,225 - 168,275
35% over 336,550 over 336,550 over 336,550 over 168,275

These rates don’t include local and state income tax. So where are you and will you be going to the next bracket this year?