Is the IRS Getting Too Much?
Tax and Financial News
Is the IRS Getting Too Much?
Just for the fun of it, in preparing this article, we went to the IRSs Website and downloaded a few statistics on tax collections, which you might find interesting.
In the fiscal year, which ended September 30, 1987, the first year for which we have statistics, total tax collections were $886 billion dollars. Of this, individual income taxes were $465 billion and social security and other employment taxes were $277 billion. In the fiscal year, which ended September 30, 1999, total tax collections were $1,918 billion or almost $2 trillion. Individual income taxes were $1.02 trillion and social security and other employment taxes were $599 billion. The remainder of the taxes in these years consisted of corporate income, excise, estate and gift taxes.
At the same time, the taxes we pay as individuals, excluding death taxes, increased 115.6%, the nations Gross National Product for the calendar year which ended December 31, 1999 increased 95.3% over 1987. Working the numbers out, one might argue that our tax burdens have increased since 1987, and they would be right. Whether that is too much or too little is a philosophical and political debate we wont get into here. The point is we pay a lot to the IRS each year.
That being the case, why would anyone want to send more in withholding to the government than necessary? Some people do it on the mistaken theory that not taking all available deductions will cushion them if they are ever audited, or might lessen their chances for an audit. Some people simply dont realize what they are doing. For the next several paragraphs, we want to talk to those who dont realize what they are doing. More specifically, we want to talk about withholdings from your paycheck.
Many people dont realize that with every paycheck, the taxes withheld are actually prepayments on a bill coming fully due on April 15 of the following year. Unfortunately, the IRS makes us do this, so we really dont have much choice, but we really are paying a bill ahead of time.
Because we pay only a little at a time, somehow it doesnt feel as bad as if we had to pay one large bill on April 15. Come on, you can admit it to us it feels good to get a refund on April 15 or at least pay only a small amount, doesnt it?
How would you feel if I told you that every time you get a refund, you have essentially made a tax-free loan to the IRS? Do you think MasterCard, Visa or any of your other credit card companies would be so kind as to loan you money for free? Its a pretty safe bet that neither they nor the IRS are quite as generous as many taxpayers. So, how can you get out of the interest free loan business? One thing you can do is review your withholdings at least once a year, or if your tax status or situation changes. What follows are some things to look out for.
Are you about to live the American dream own your own home? If you are, we are sure you know that the interest paid on the home mortgage is deductible. This holds true for the property taxes also. Each additional $2,800 in interest and tax payments (assuming you already exceed the standard deduction) will generally result in one additional personal exemption you can show on your form W-4, Employees Withholding Allowance Certificate. The more deductions you show, the less tax is withheld.
You can take a similar approach for other itemized deductions, and major life events marriage, divorce, children, etc. We generally counsel our clients, those with mainly wage income, to take a look at what they expect their income and deductions to be. Based on those estimates, then they can guess at what the tax will be and match their withholdings more closely to the actual tax. Sometimes, this may mean withholdings will increase, but many times the opposite is true.
There is no reason to give the IRS more than it should have before your tax bill comes due. That is one of our prime goals in life; help minimize what you pay to the IRS and when you pay it. If you are uncertain as to what exemptions to take, or what filing status you should show on the form W-4, give us a call. Theres no doubt we will be able to help.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.