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2004.04.15 It's Taxing Time in Tennessee

posted Nov 4, 2009, 4:34 AM by Troy Cheek   [ updated Nov 4, 2009, 4:37 AM ]

Death, taxes, and people complaining about same...

If you're a US citizen, and you're reading this, and you haven't started doing your taxes yet, it's too late. You might as well move to Canada and pretend to be a moose for the next seven years.

For those of you who don't live in the United States of America, hear and know that April 15 is the deadline for filing various forms and schedules which declare how much money you made last year, how much you pre-paid against your projected federal income tax burden, and how much your actual tax burden turned out to be.

One would think that one wouldn't have to do this at all. After all, when you get a paycheck, you know exactly how much money you made that pay period. There should be no guessing as to what the taxes on that income will turn out to be. Oh, but there is.

Everyone pays a certain percentage of their income in federal income taxes. At least, that's what they like to teach us in school. It turns out that's not the case at all.

First of all, you don't pay a tax based on your total income. There are deductions. You total up how much money you spent on charities, state income tax, some sales taxes, interest and late payments on certain types of debts, and any number of other items, and then you deduct it from your total income to get your adjusted income. Keeping track of where all that money goes (also known as "itemizing") is a full-time job in and of itself. Some people who can afford it hire accountants to do that full-time job. The accoutants take care of everything and, because all possible deductions are itemized, the client pays less in taxes.

People who can't afford it try to do it themselves and miss lots of items, meaning they pay more taxes than they would otherwise. Rather than deal with the hassle, most just take their standard deduction, which usually comes out to be more than you'd be able to itemize for, anyway. Unless you hire an accountant, which is hardly worth it for most people because the accountant will cost more than you'll save on taxes.

Secondly is the sliding scale of percentages. A person who makes $X after deductions will pay $Y in personal income tax. So, it only seems fair that another person who makes $2X after deductions would pay $2Y in personal income tax. Right? Wrong! Depending on your exact X, a person making $2X may pay $10Y in taxes.

You may complain that you have to write a check for big bucks to pay the taxes on your income, but rest assured, somewhere out there is a paying more in taxes that you just declared in income.

Kind of kills your incentive to work all that overtime next year, doesn't it?

Heck, it even takes the incentive out of playing the lottery. As my grandfather used to say, "You couldn't pay me to take that money."

"But, Popaw, it's $200,000!"

"Do you have any idea how much I'd have to pay in taxes on that much money?"

He wasn't too wrong on that. I've read of several cases where someone has won a car or house or other expensive item and ended up selling off said item just to pay the taxes on it.

I worked a summer job in another state once. They have a state income tax, whereas my home state doesn't. I was a little worried about how that would turn out. I didn't have to worry, though. The company I worked for paid me as an out of state contractor and I didn't have to pay any of their state income taxes. That was good.

As an out of state contractor, the company I worked for didn't have to withold federal income taxes. And didn't mention to me that they weren't. That was bad.

Always check your paychecks.

Thirdly is my favorite. It's a little thing called the Earned Income Tax Credit. It's designed to encourage people to work. It does this by paying them to quit their jobs and stay at home.

The Earned Income Credit gives you credit for working, and this credit counts as money pre-paid against your eventual tax burden. So, the more you work, the more marked as pre-paid, and the less you have to pay out of your own pocket at the end of the year, right? Well, not really. The amount of credit peters out as you make more income, eventually disappearing altogether.

In other words, if you want your Earned Income Credit, you have to stop earning at a certain point.

Case in point, last October I pulled into the local Stop-N-Rob gas station and noticed the sign in the window saying they were hiring for second shift. I inquired within, thinking I might want a second job to pay all the taxes on all the money I was making on my first job. Yes, they needed people right away. The entire 2nd shift (both of them) had just quit. Unfortunately, the job was only temporary. They'd be hiring them back at the start of the year.

"It's that damned earning incoming taxing thing," the manager explained. "Those girls have it figured out that if they stop working now, they'll make just enough to get the maximum possible credit on their income taxes next year."

"Wait a second," I said. "You're telling me that if they quit they'll make more money than they'd earn if they worked out the rest of the year?"

"No," she replied. "They'll make more money, even after taxes, if they keep working. But not a whole lot more. And they'd actually have to come in and do their jobs during that time, instead of sitting at home watching TV."

I decided to pry. "Not to pry, but why are you hiring them back at the start of the year?"

"They pulled the same crap last year. I told they I wouldn't hire them back, but they got a lawyer to file an injunction. He claimed it was discrimination not to hire low income families."

I thought about that for a minute. "Even if the reason they're a low income family is because they just quit the very job they're applying for?"

Apparently so. That ranks right up there with the guy who killed both his parents, then pleaded for mercy from the jury because he was an orphan. And, according to some versions of that little Urban Legend, he got it.

Why go to all that trouble just to pay a little less on your income taxes? Well, as the manager explained, it's not just that you get to pay a little less. The Earned Income Credit is a refundable credit. If you play your cards right, your credit plus the money actually pre-paid towards your taxes can end up much larger than your actual tax burden. This means you can get a refund check for money that you never paid in to start with. This is roughly akin to you buying a new car and your neighbor getting the rebate check.

But setting all that aside, I've got to confess that I waited until almost the last minute to file my taxes this year. I'm usually very good at filing early. But most years I either severely underpay and want to send in my check for the balance good in early so I don't get those hefty fines and fees for being late, or I greatly overpay and want to get that money back as soon as possible. This year, I estimated I was within $50 one way or the other, so there was no great incentive to be in a hurry.

Of course, that's with the standard deduction. I've still got a few more hours. Where are those receipts?