Home -> Columnists -> The Parental is Political |
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Tax information and strategies to help ease your family's financial burden.
By Julie Marsh |
April 3, 2007
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Read more: parental is political, politics, taxes, tax advice, financial advice
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Taxation has long been a hot topic of debate in the United States. In fact, one of the most well-known demonstrations was held in opposition to taxes levied on our colonists – the Boston Tea Party.
People generally view taxation as a fait accompli – after all, “in this world nothing is certain but death and taxes” (Benjamin Franklin). If you earn, if you spend, if you own – you will inevitably pay taxes in one form or another.
But most people don’t understand how their individual tax burden is determined (and how it changes over time) or how to reduce it. You don’t necessarily need an accountant, but you do need to conduct research and exercise fiscal discipline and consider your long-range plans.
First and foremost, let’s get one fact straight: Our government itself does not have any money. Federal, state, and local budgets are based upon taxation. When politicians propose spending increases and new government programs, their intent is to either collect more money in taxes or to take money away from another program – or both. Likewise, when politicians propose tax cuts, their intent is to reduce the amount of money collected, which reduces spending on new or existing programs.
In short, there’s no such thing as a free lunch. Whatever money is spent by the government – on war, on welfare, or on research grants – comes from us, the citizens and taxpayers.
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Before leaping to the conclusion that all taxation is evil and coercive, bear in mind the various infrastructure requirements of a sovereign nation such as ours: defense, law enforcement, economic infrastructure, public works and public utilities. Requirements such as these have become essential in modern civilization, with all citizens reaping their benefits at some point.
Granted, each citizen prioritizes these requirements differently. Therefore, it makes sense that voters would gain an understanding of the public policy views of political candidates and cast their ballots accordingly.
Many different types of taxes are levied on both individuals and businesses. Income tax and sales tax are probably the best known taxes, as they typically affect the most people. Homeowners and/or landowners also pay property taxes. Investors - anyone who buys and sells capital assets – pay capital gains taxes (also viewed as income). Excise taxes are built into the cost of certain items – such as gasoline, alcohol, and cigarettes – as a means of discouraging consumption and/or paying for the effects of consumption. Estate taxes are imposed upon property left behind when a person dies.
Income tax – the amount of money you are required to pay in taxes – is based upon where your taxable income (wages, capital gains, other income) falls within established tax brackets (ranges of income taxed at a given percentage) each year. That’s the easy part. The difficult part is accurately determining your taxable income – complying with the tax code while exercising all of your legal opportunities to minimize your taxes.
Taxable income can be lowered by itemizing deductions – that is, listing specific payments you’ve made (such as mortgage interest, property taxes, and charitable donations) that are classified as tax-deductible. Such deductions do not reduce your tax burden dollar-for-dollar, only your taxable income (and therefore, the percentage at which you are taxed). However, tax credits – such as the Child Tax Credit – do reduce your tax burden dollar-for-dollar, as they are treated as tax payments you’ve made.
Longer-term strategies for lowering taxable income include contributing to retirement plans – 401(k)s and IRAs (Individual Retirement Accounts). Pre-tax 401(k) contributions – where your contributions are deducted from your wages before taxes are calculated – allow you to direct a portion of your wages into an investment account, and only the remainder of your wages are subject to taxation. But when you draw income from your investment account – presumably when you have retired – you’ll be responsible for paying income taxes on it.
IRAs are another means of reducing your tax burden – either now or later. With a traditional IRA, you may deduct your annual contributions from your taxable income – even if you don’t itemize other deductions (rather, you opt for the standard deduction). However, this deduction is phased out once you reach a certain income level, and these contributions will be taxed as income once you are retired and begin drawing from your traditional IRA.
With a Roth IRA, you are responsible for paying income tax on your annual contributions, but when you are retired and draw income from your Roth IRA, it will NOT be subject to income tax. Even though it can be difficult to pay the income tax now (or to subject yourself to a giant tax bill by converting a traditional IRA to a Roth IRA), this is a tremendous opportunity to reduce your future tax burden.
Finally, 529 Educational Savings Plans are another effective way to set aside money for a specific purpose (tuition, room and board, fees, books and supplies) without being subject to federal or (in most cases) state taxes. While comparison shopping among the various states’ plans is highly advised, resources are widely available and opening a plan does NOT necessitate the services of an investment advisor.
Even though 2006 is over and the tax deadline (typically April 15, but in 2007 it is April 17) is rapidly approaching, you can still open an IRA and make a contribution for 2006 (if you’ve not yet filed your taxes). And even if that’s no longer an option, you can start making plans for your 2007 return by doing your homework now and documenting accordingly.
While tax revenue is necessary to provide a minimum level of infrastructure and public services, the government undoubtedly engages in a great deal of discretionary spending. Whether you believe such expenditures – and the taxes that are levied to fund them – are right or wrong depends on your personal philosophies and priorities. But having a clear and accurate understanding of public policy and the views espoused by the candidates is the way to ensure that your votes line up with your priorities. And having a clear and accurate understanding of your opportunities and obligations is the way to ensure that your money management strategies are effective and in compliance with the law.
Stay even more informed about politics and parenting issues
by visiting our Parental is Political resources.
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| Julie is a former Air Force officer and professional project manager turned web writer. She spent four years at the Pentagon and five years in New York City, and her suburban life in Colorado seems pastoral by comparison. She's no political pundit, but she is a rational thinker determined to chart her own course whether the other parents approve or not. She writes for Cool Mom Picks, The Soccer Mom Vote, mothergoosemouse, and is co-founder of The Parent Bloggers Network. |
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