Taxes 101: Misperceptions on tax rebates and other important info on taxes
After the dreaded date of April 15th, tax payers look forward to receiving their long awaited tax refund. Many people greet this check from the government with excitement, myself included.
But my views changed on the tax rebate the government sends to us each year when I read the chapter on taxes of my Personal Finance for Dummies book:
“Some people feel lucky when they get a refund, but all a refund really indicates is that you overpaid in taxes during the year. You should have had this money in your own account all along.”
Some people will find this information eye opening, like I did. I never realized that tax refund wasn’t a gift from the government, nor did I realize the government was just giving me the money I should have had in the first place. Furthermore, I didn’t know a government tax rebate isn’t applicable to every taxpayer.
Although I just turned twenty and am starting to learn more about the financial world, I’m wondering how many other people thought the same thing I did about taxes. That is why I’m dedicating this post to those who had that same misperception on tax rebates as I did.
What I learned yesterday: Marginal tax rate and the AMT
Another misperception I had on the government taxes we file every year was that every dollar I earned was taxed the same.
WRONG.
[This comes straight from my Personal Finance for Dummies book]:
“When it comes to taxes, not all income is treated equally…If you work for an employer and earn a constant salary doing the course of a year, a steady and equal amount of federal and state taxes is deducted from each paycheck. Thus, it appears as though all that earned income is being taxed equally. In reality, however, you pay less tax on your first dollars of earnings and more tax on your last dollars of earnings. For example, if you’re single and your taxable income totals $45,000 during 2006, you pay federal tax at the rate of 10 percent on the first $7,550 of taxable income, 15 percent on income between $7,550 and $30,650, and 25 percent on income from $40,650 up to $45,000. Your marginal tax rate is the rate of tax you pay on your last, or so-called highest, dollars of income. In the example of a single person with taxable income of $45,000, that person’s federal marginal tax rate is 25 percent. In other words, she effectively pays 25 percent federal tax on her last dollars of income – those dollars in excess of $30,650… ”
I just learned about all of this yesterday and it’s still sinking in (and it’ll probably a long while before this all sinks in…) and I’m not sure I really understand all of it quite yet...But I'm glad I'm aware of it even though it is very shocking to read.
AMT (Alternative Minimum Tax)
Just to warn the readers, this was probably the most disturbing concept I came across yesterday on taxes.
"over the years, as the government grew hungry for more revenue, taxpayers who slashed their taxes by claiming lots of deductions or exclusions from taxable income came under greater scrutiny. So the government created a second tax system - the alternative minimum tax (AMT) to - to ensure that those with high deductions or exclusions pay at least a certain percentage of taxes on their incomes...if you have a lot of deductions or exclusions from state income taxes, real estate taxes, certain types of mortgage interest, and passive investments, you may fall prey to AMT...AMT restricts you from claiming certain deductions and requires you to add back in income that is normally tax free (like certain municipal bond interest)."
I'm not too sure how many people are aware of this, but I'm hoping this post helped spread the word, not just on AMT, but the other info on tax.
Note: All quotes are from Personal Finance for Dummies by Eric Tyson. I really enjoy this book because it's very simple and has helped me improve my financial knowledge and literacy. I recommend this book for those who are just starting out to learn about money and want to gain a better understanding of things.
