Taxes

Element III: Family and Personal Finance

Taxation is the imposition of a mandatory levy on the citizens of a country by their government. In almost all countries tax revenue is the major source of financing for public services. Ultimately, taxes are the price paid for publicly provided services. In a democracy a majority of citizens (or their representatives) vote to impose taxes on themselves in order to finance, through the public sector, services on which they place value but which they believe cannot be adequately provided by market processes.

The income tax is a levy based on the incomes of individuals, families, and corporations. The income tax is the largest source of tax revenue in advanced economies. In the United States over half of the federal government's tax revenue comes from income taxes, with the personal income tax accounting for about 45% and the corporate income tax for another 10% of the total tax revenue. Most individual states and some local governments also levy income taxes, but income taxes are less important than other sources of state tax revenue.

THE PERSONAL INCOME TAX

The amount of personal income tax due is computed in several steps. First, total income from all sources is added together. Certain types of income are not included in income for tax purposes; these are called exemptions. Examples include a personal exemption for the taxpayer and for individuals who are supported by the taxpayer's income, any fellowship or scholarship income used for tuition or books, and for employee business expenses such as the cost of travel for a traveling salesperson. Total income minus exemptions equals adjusted gross income. Taxpayers then subtract deductions from adjusted gross income to compute taxable income. Items that can be deducted include home-mortgage interest payments and charitable contributions. In lieu of itemizing these deductions, taxpayers can choose to take a standard deduction; exemptions, therefore, can be more valuable to taxpayers than deductions because exemptions can be taken even if other deductions are not itemized. The tax due is computed from taxable income according to the tax rate schedule.

Taxes are the single biggest expense you'll ever face in life. They outweigh home mortgages and college tuition's combined, yet for many people tax minimization is not included as part of a managed financial plan. In order to build wealth, you must get your tax life under control. In order to accomplish this, you must plan to create legally approved tax deductions which will help you save hundreds or thousands of dollars when created through correct strategies just like savings in insurance, mortgages, interest payments, autos etc. And, this is very important since taxes can eat up half your income.

Saving money on taxes requires no real sacrifice, just a few hours a year of your time. There are three elements that make up your tax plan: income, assets and expenses. The plan is to create legal deductions in each of these categories.

At first, you will have to really think about how to connect your activities to potential deductions, but like anything through practice and experience you will be able to deduct a great many things in your life. The same income, assets or expenses can be deductible or nondeductible, depending solely how you conduct your activities during the year.

Almost any form of income, assets or expenses can be made deductible. Your job is to plan your activities so that they become deductible, but without spending so much time that you must change your lifestyle. The way to do it is to plan. To succeed financially you must have the confidence to use tax strategies. Confidence and courage come from knowing how the tax system really works, and how to use the system to your best advantage within the guidelines prescribed by the law.

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