TAXES 101
“In the world, nothing is certain except Death and TAXES”- Benjamin Franklin.
Since we are going to die and continue to pay Taxes, might as well dive into the scary world of it. Taxes is a very complicated subject, and I will try my best to write just one summary page about Federal Income Tax because it is hard to make sense of it and we are taxed in so many ways that I will just start here.
I graduated from Rutgers with a degree in Accounting and I almost failed the Tax class. I hated with my whole being (Right Gaby?). The rules are so crazy and so many that can drive a normal person insane. The problem is that I have to do my taxes every year and every year I see the need of an accountant that can explain taxes in its simplest form to people. My goal this year is Taxes to become my best friend while I help you get a little bit more knowledge in the subject (hey knowledge is power). Specially in the business world.
Every year that goes by, I feel the urgency to help more people in the subject because I feel like Taxes are not explained by your accountant and even though I’m still learning, I believe I can put mi granito de arena here. What I have learn all this years is that most of us think that the only time we need to deal with Taxes is this time of the year. Find someone to do our Taxes and get the maximum return possible. Let me tell you something, wealthy people do not think this way. They have tax specialist that help them with Tax Planning, so they don’t pay Taxes (Hello Amazon!).
So, what are Taxes? In its simplest form, Taxes are mandatory payments that ALL of us (Individuals and companies) have the obligation to pay the Government in any income we receive. If we don’t pay or evade Taxes, the government goes after everything we have and eventually, we can go to jail. The Government then decides what to fund with that money. Albert Bushnell once said: “Taxation is the price which civilized communities pay for the opportunity of remaining civilized”. In short, if we want to live in a country with opportunities, we must pay the price. I personally believe that the most heavily taxed are the middle class. If we are employees, half of our money goes to the IRS. Taxes are made for the wealthy and our goal is to become one of them.
Let me give you some numbers in how the United States Tax System works (based on 2023 numbers):
You have the option to file Individual Taxes as follows:
Single
Married Filing Jointly-MFJ (This option offer the most favorable rates)
Married Filing Separate
Head of Household
Qualifying Surviving Spouse
Each filing status has its own set of rules and your accountant should ask you a bunch of questions in order to determine what status you should file.
Next, we will look what are the Tax brackets for the following Filing Status
If you make between $0.00 to $11,000.00 and single or $0.00- $22,000 if MFJ You are taxed @10%
If you make between $11,001 to $44,725 and single or $22,001 to $89,450 if MFJ You are taxed @12%
If you make between $44,726 to $95,375 and single or $89,451 to $190,750 if MFJ You are taxed @22%
If you make between $95,376 to $182,100 and single or $190,751 to $364,200 if MFJ You are taxed @24%
If you make between $182,101 to $231,250 and single or $364,201 to $462,500 if MFJ ou are taxed @32%
If you make between $231,251 to $578,125 and single or $462,501 to $693,750 if MFJ You are taxed @35%
If you make between $578,126 or more and single or $693,751 or more, if MFJ You are taxed @37%
As you can see, The U.S Federal Income Tax is progressive, which means that the Tax rate we pay increases as our income rises.
And finally we have the Tax Formula. Each line has a bunch of rules that can take me into a rabbit hole but lets stick to only the formula.
INCOME BROADLY DEFINED $XXX,XXX
Less: Exclusions ($XX,XXX)
= Gross Income $XXX,XXX
Less: Deductions FOR Adjusted Gross Income ($XX,XXX)
=Adjusted Gross Income $XXX,XXX
Less :Deductions FROM Adjusted Gross Income
which is the Greater than the standard deduction
or itemized deductions ($XX, XXX)
Less: Qualified Income deduction ($X,XXX)
= TAXABLE INCOME $XXX,XXX
Thanks God that the software makes all these calculations for us, and we don’t have to pay attention to it but I think we all should be aware of how the IRS is taking the money from us so we can plan accordingly for our future. I hope you are still awake!
Until next time.
