Tuesday, March 1, 2011

Tax Tips for Tea Time

Ah, the joys of spring. Snow melting. Birds nesting. Flowers blooming. Warmth & sunshine. The promise of renewal, growth, and better times.

And getting your income tax refund.

The average refund is about $3,000.  Last year the total was $328 billion paid to 109,376,000 taxpayers, well over 50% of those filing. Note that this is more than 5 times the total budget cuts recently proposed by the Republican/Tea Party controlled House of Representatives. I find it a smidge interesting that those who regard themselves as fiscally astute and critical of government spending would be willing to give the government a $328 billion interest-free loan. As Roberton Williams, a senior fellow at the Tax Policy Center puts it,

"While the majority of Americans receive refunds and many taxpayers look forward to getting that check in the mail, it's sometimes easy to forget that it's your own money to begin with. All you did was overpay the government during the year. In one sense people like to get a refund because it's nice to know that refund is eventually coming -- they can file their taxes and not think about it again. But really, it's just an interest free loan to the government."

So tip number one if you're upset about taxes is don't overpay them by $328 billion! During the year that the Fed has your money interest free you could better use it to, say, pay your mortgage, buy food, or reduce your high-interest credit card debt.   By paying just the taxes actually owed and no more, the average taxpayer would have an extra  $250 available per month ($3000/12).  Of course, there would be no pseudo-windfall in April. But instead of giving the Fed an interest free loan, you could be avoiding paying  a high-interest loan yourself.

Tip #2: Become a CEO. Most have negotiated their contracts so that their taxes are paid by the company.

Tip#3: Become a witch. Actually, for some Tea Party members, like Christine O'Donnell, this wouldn't be much of a stretch. Although O'Donnell hasn't engaged in witchcraft since high school (according to Fox News), she could probably brush up in short order. Those tax-and-spenders in Congress could then be cursed and hexed into line, as witches in Romania did last January: "Everyone curses the taxman, but Romanian witches, angry about having to pay up for the first time, hurled poisonous mandrake into the Danube River on Thursday to cast spells on the president and government" (NYT).

Tip #4: Calculate your effective tax rate. This is very simple. Take your total income and divide it into your total tax bill.  You may find this is much lower than the marginal rate which gets higher as you have more income. People often forget that the higher rates don't apply to all of your income, only the portion that exceeds certain limits -- for most of us only a small chunk, if any, gets taxed at the higher rates. It is true, of course, that for CEO's in the U.S., who receive an average of $4 million per year in compensation, a much higher portion falls into the upper brackets. But see Tip #2.

Tip # 5: As you steam and burn at having to pay taxes that go to fund programs "X" and "Y," remember that there are some people who are quite happy to pay for those, but who don't want to pay for "W" and "Z," which just happen to be the only things you think government ought to be providing.....

2 comments:

PaddleDoc said...

I have been doing it right for several years. I end up paying much more tax at the end of the year, but I figure, even with a little penalty, it's better than giving it early to Uncle Sam. This year, I hope to come closer to 0, but probably won't hit it.

RS said...

Yah, well after giving my sagely advice I just figured this year's taxes and found I get a *big* refund.

This isn't too often the case. Usually I wind up owing more, which is of course a good thing, but psychologically it sucks.... and even worse (emotionally) for me is having a penalty, even though it can probably be argued that the cost of the penalty is offset by the earning power of the money you don't give the Fed during the year.