Tax Information

"Never before have so many been taken for so much and left with so little." – Van Panopoulos

The word tax has two meanings: first, the financial duty or levy contributed to the entity (be it a government or any other organization) a person or group of persons (say, a business) is part of. The second definition is "a very heavy burden" and can essentially summarize the first definition. It is easy to maintain the idea that tax—the cumbersome, "unrequited" payment made periodically, that is, and not the abstract idea of burden—is something people would rather do without. After all, governments can spend as much as 3.6 billion euros for income tax collection (the German government, with the most complex taxation system as well).

While there are opposing views on imposing tax, the general idea is that taxes are used to fund projects that can benefit society as a whole, or at least the majority of it. Businesses are taxed by the state because they use government-owned infrastructures and services. Individuals are taxed as part of their social contract, i.e., their rights and responsibilities as citizens of the state. Tax is what John F. Kennedy called "the annual price of citizenship."

April 15 usually marks tax day, but if that day is on a Saturday or Sunday, the deadline falls on the soonest business day. Tax returns must be sent in by that day.

According to US law, it is the Congress who has the power to impose and collect taxes from the citizens of the state; however, the task of collecting has been delegated to another body—the Internal Revenue Service (IRS) in the United States.

Taxes are typically spent on public works, military defense, protection of property, economic infrastructures, and public services—education, health care, pensions, energy/water/waste management, and public transport. The government uses different types of taxes to redistribute wealth and resources especially to the poor, to improve the economy (although there are arguments on this that it distorts the market, resulting in inefficiency instead), or alter consumer behavior or employment (i.e., making some transactions or purchases less attractive).

Who Pays Taxes?

Individuals

Anybody who's been earning something (from one's income or some other means) gains the responsibility of paying taxes. To be a little more accurate, however, people who earn below a certain income are tax-exempt. For more details, check the 2006 Federal Tax Rate Schedules [link]. If you are unmarried and under 65, with a gross income of at least $8,200, or you are 65 and above and earn at least $9,450, you have to pay taxes. This applies to citizens/residents of the United States as well as residents of Puerto Rico.

Remember to find out all the forms that are applicable to you so you can calculate the total amount you'll be paying. For more information, check out our related article, Tax Forms.

Businesses

Whether you're running a corporation or an independent business where you're self-employed, taxes have to be paid. "The form of business you operate determines what taxes you pay and how you pay them," says the IRS. It also mentions the general types of business taxes, namely: income tax, self-employment tax, employment tax, and excise tax. Learn more at the IRS website [link].

What about tax exemption? Interested organizations, such as charities, can apply for tax exemption by obtaining relevant forms: Form 1023, Form 1024, form instructions, and Tax-Exempt Organizations Tax Kit [link]. (For more information about tax forms, visit our related article, Tax Forms)

It is worth mentioning here, however, that a tax-exempt organization must pay taxes for unrelated business taxable income (UTBI) it is generating. The income generated from activities spearheaded by the organization is taxable if and only if: 1) the income comes from trade/business activities; 2) such activities are regularly held; and 3) such activities are not related to original exemption purpose of the organization.

If you're really sensitive about the money you'll be giving up to taxes, don't resort to a sneaky exemption, or even a tax evasion—they're both punishable by law. It's much better to take advantage of the all the tax deductions that have been decreed. Have a look at our Tips for some good ideas.

For more information about who are supposed to file taxes, view Topic 351 – Who Must File? [link]

Types of Taxes

What are the different types of taxes you'll be encountering? Taxes can be characterized as proportional (constant rate of percentage of income for all income levels), progressive (percentage of income increases as income increases), or regressive (percentage of income increases as income decreases). Taxes can also be either direct or indirect, and their meanings vary depending on which field you're using them.

Here are the most common types of taxes:

Income Tax – designed to be characteristically progressive (the amount of tax you pay is proportional to the income you earn). Direct withholding (automatic deduction from salary by the employer) is currently used in most countries for more efficient tax collection.
Retirement Tax – used to fund social security systems, which in turn give income to retired workers.
Capital Gains Tax – levied on the profit gained for an asset sold.
Corporation Tax – taxed on corporate earnings, including capital gains, of a company.
Poll Tax – collected at a fixed amount per individual. Also called per capita tax/capitation tax.
Excise – computed independently of the value of the product being taxed, and instead are based on the quantity of the product that is being purchased. Gasoline is a prime example, which has about 8-28 excise tax cents per gallon. Sales tax is a kind of excise tax.
Tariff – collected for goods that cross a political border, either during import or export. Percentages of tariffs can be allocated to the protective bodies that manage those borders.
Value Added Tax – historically used when sales and excise taxes could not be collected.
Property Tax – applied to property owned, like real estate. Includes stamp duty, inheritance tax, which are event-driven property taxes.
Wealth Tax – exacted from the percentage of one's net worth (computed by subtracting one's liabilities from the assets).
Personal Property Tax – collected periodically from residents who own property in a certain area. Examples include vehicle and boat fees, as well as artworks that may have been lent in other areas.

The Organisation for Economic Co-Operation and Development (OECD) has categorized the different types of taxes into a scheme which applied to all its member countries. Numbers ranging from 1000 to 6200 are used to describe which tax is being referred to:

1000 covers taxes on income, profits, and capital gains
2000 covers social security contributions
3000 covers taxes on payroll and workforce
4000 covers taxes on property
5000 covers taxes on goods and services
6000 covers taxes of other types

6100 – paid solely by business
6200 – paid by other than business/unidentifiable

For each type of tax there are a number of forms associated with it. It can get a bit intimidating to find out which one is for which purpose, but this guide will let you sort things out: Tax Forms.

Your Rights as a Taxpayer

While tax-paying is inherently "involuntary" as it is imposed by the law, that does not mean the IRS is entitled to take over your finances and you have nothing to say about that for the rest of your life. What if something goes wrong in your payments? What should you do?

The IRS lists your rights as a taxpayer in this online document [link]. The page includes an outline of your rights, namely:

Automatic protection of your rights
Privacy and confidentiality
Professional and courteous service
Representation (during interviews)
Payment of only the correct amount of tax
Help with unresolved tax problems
Appeals and judicial review
Relief from certain penalties and interest

You can also find information on audits/examination/repeat examination, appeals, collections, innocent spouse relief, refunds (read our article, Tax Refunds).

Are You Ready?

It's okay to feel a little queasy at the thought of sorting through all your tax forms—whether all by yourself, with a trained professional, or with the help of tax preparation software. Several articles have been lined up just for that, including:

Tax Filing. Filing your tax return is easy and pain-free. Find out how.
Tax Professionals. Don't worry. They're here to help.
Tax Preparation Software. Finish tax prep quicker than ever.