Would the government distribute "I'm a low-earner" identity cards, to be shown sheepishly to cashiers? And how would the government prevent card holders from buying things for other people? Putting those little problems aside, there are two other issues from the current tax system: housing and medical care. View all New York Times newsletters. At the moment, homeowners can deduct interest they pay on their mortgages from their income taxes.
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Without an income tax, this subsidy, long seen as part of what made the American dream come true, would disappear. Bringing it back, perhaps through direct grants, would require raising the national sales tax rate to 21 percent. In addition, the current tax system subsidizes medical spending by allowing businesses to buy insurance for their employees out of pretax dollars. Many medical expenses paid out of pocket are also deductible from personal income tax. Would we want to eliminate these subsidies? Quite a few health economists would say yes, because it would discourage people from demanding care they didn't need.
To keep the subsidies, the sales tax rate might have to climb to 25 percent. Slapping a 25 percent tax on all the remaining purchases in the economy, by consumers and companies alike, might well affect spending. When the sales tax burden rises, prices at the checkout counter climb, but typically not by the complete amount of the tax; buyers and sellers share the burden. For example, a 25 percent tax might lead to prices that are about 15 percent higher. The flip side, of course, is that businesses would receive less revenue. Yet its costs would be the same, and it would still be paying the same corporate income tax.
That business might react by recognizing that its employees had just received a big increase in their take-home pay, from the abolition of the income tax. The business could actually cut salaries and still leave its employees with part of that raise from Uncle Sam. In fact, doing so might be the only way to make ends meet.
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High-wage workers might find that any increase in the take-home price of goods and services would still be offset by their bigger take-home pay. But low-earners, who paid no income tax to start with, would find their budgets squeezed. Indexing allows you to stay in the same tax bracket, despite a slightly higher income level. The change is part of the Tax Cuts and Jobs Act of Indexing applies not only to tax brackets, but also to other relevant tax numbers, like the standard deduction and the alternative minimum tax AMT.
Federal income tax brackets and rates for are shown below. Capital gains are taxed at different rates from ordinary income. This is a major advantage for anyone who has substantial capital gains income. The capital gains tax rate is substantially lower than the tax rate on a comparable amount of ordinary income. Just as is the case with the income brackets for ordinary income, the income brackets for capital gains have also been increased slightly from As you probably know — or you'll find out when you file your tax return — personal exemptions have been eliminated under the new tax law.
In its place, the standard deduction has been roughly doubled. That will work out well for singles and couples, but it will be a definite negative for anyone with dependents. And like other numbers in the tax code, the standard deduction will be increasing slightly for Here's how that will look:. Qualified Business Income Deduction.
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There are income limits against which that deduction can be taken. The income thresholds for both and are as follows:. The AMT was created in the s to impose taxes on taxpayers who claim an excessive amount of tax breaks. It provides a second set of tax rates that will be imposed if they exceed taxes as their taxable income is normally calculated. The IRS sees things differently. Sauce for the goose, isn't necessarily sauce for the gander.
While the IRS can step in and reclassify a transaction based upon its substance, rather than its form, taxpayers often find that they have to live with the consequences of their initial choices. This means that if you choose a particular form for a transaction, you may have a difficult time trying to convince the IRS that the substance of the transaction differs from the form you chose. The reasoning is that you freely chose how to set up the transaction, so it's only fair to require you to live with its tax consequences.
The IRS sometimes uses what is known as the "step transaction" doctrine to argue that the substance of a particular transaction is different from its form. When it relies on this doctrine, the IRS will treat a multi-stage transaction as a single, unified transaction. It will not break up a single transaction into two or more steps for income tax purposes.
So, the intermediate steps in an integrated transaction will not be assigned separate tax consequences. A transfer of property from Able to Baker, followed by Baker's transfer of the same property to Charlie, may, if the transfers are interdependent, be treated for tax purposes as a transfer from Able to Charlie. This is not to say that there aren't valid transactions that take place in a series of steps.
Many sales and exchanges of property have multiple steps and, if the rules are followed, these are perfectly valid. It is to say that you can't impose an artificial step to change the impact of the transaction. The IRS pays close attention to transactions that involve taxpayers who have close business or family relationships. In fact, the tax laws have given the IRS special powers to deal with specific areas where related taxpayers have historically used their relationships to unfairly reduce their taxes.
Examples of this include the denial of interest-paid deductions to businesses that borrow money to purchase life insurance contracts benefiting their officers and employees, and the special accounting rules that apply to interest and expense payments between related parties. You can expect that IRS agents will closely scrutinize business dealings that you have with family members or other related parties. Often, the IRS will combine its audit of returns for a closely held corporation with an audit of returns of the corporation's owners or principal officers, in order to discover any attempts to shift personal expenses to the corporation.
Among the items that IRS agents are likely to scrutinize carefully are vacation trips disguised as business trips, purchases of household furnishings or payments for household expenses such as repairs and mortgage payments charged off as corporate expenses, and excessive salaries paid to stockholders and relatives.
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Tax planning evaluates various tax options to determine how to conduct business and personal transactions in order to reduce or eliminate your tax liability. Here are some of the most common criminal activities in violations of the tax law: Deliberately under-reporting or omitting income. This is self-explanatory: concealing income is fraudulent. Examples include a business owner's failure to report a portion of the day's receipts or a landlord failing to report rent payments. Keeping two sets of books and making false entries in books and records.
Engaging in accounting irregularities, such as a business's failure to keep adequate records, or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements, generally demonstrates fraudulent intent.
Increasing GST to cut income tax would be a zero sum game
Claiming false or overstated deductions on a return. These range from claiming unsubstantiated charitable deductions to overstating travel expenses. It can also include paying your children or spouse for work that they did not perform. The IRS is always vigilant when it comes to inflated deductions from pass-through entities.
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Claiming personal expenses as business expenses. This is an easy trap to fall into because often assets, such as a car or a computer, will have both business and personal use. Proper record-keeping will go a long way in preventing a finding of tax fraud.
Hiding or transferring assets or income. This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers. For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder's children, is likely to be considered tax fraud. Engaging in a "sham transaction.
For example, if payments by a corporation to its stockholders are in fact dividends, calling them "interest" or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction. As discussed below, it is the substance, not the form, of the transaction that determines its taxability. Example Example. Think Ahead When you want to reduce the amount of tax that you owe, you will find that tax credits are nearly always better than tax deductions.
Warning Know the rules regarding which expenses are deductible and make sure to document them properly. Work Smart A dollar's worth of tax credit reduces your tax bill by a dollar. Warning Delaying when your liability for tax occurs is not the same as delaying payment of tax! Warning Controlling the timing of income recognition and deductions is generally possible only if you use the cash method of accounting.
Example Mike Appleton, the manager and principal stockholder of a Plasti-Cast, Inc , a regular corporation, lands a lucrative contract to supply components to a multi-national corporation. Example A transfer of property from Able to Baker, followed by Baker's transfer of the same property to Charlie, may, if the transfers are interdependent, be treated for tax purposes as a transfer from Able to Charlie. Tags : Federal Tax Tax Planning.
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