If you’re like at least 50% of Americans, you probably hate paying your taxes, generally because we believe they’re unfair or aimed at the wrong people. Gallup conducted a poll that found more than half of us feel we paid too much in taxes in 2014.
Taxes aren’t all bad … some taxes have exemptions that could work in your favor. Here are a few!
1. Tax on Required Minimum Distributions (for Retirement): Once you turn 70.5, you must start taking withdrawals from your IRA or other retirement plans, such as profit sharing, 401(k), 403(b), or 457(b) account. You also have to pay income tax on the distributions. Even if you don’t need the money for retirement, the IRS doesn’t give you a choice—and if an account owner fails to withdraw the full amount of a distribution, the amount not withdrawn is taxed at 50%. People hate it because they’re forced to pay taxes on income they don’t need yet. Our advice? Consider opening a Roth IRA, which has no required minimum distribution; but there are other important tax-impacting differences between plans, so be sure to check with Tax Alternatives.
2. The Alternative Minimum Tax (AMT): Basically this is targeted at wealthier Americans to prevent them from avoiding taxes through loopholes and deductions. You’re subject to this tax if your bill, based on your AGI income is higher than your regular tax bill. Why does this particular tax make people angry? Usually because the AMT ends up taxing the upper middle class rather than the super-rich. People with income upwards of seven figures are less likely to have an AMT bill higher than their federal income tax bill because their income rate is so high (the maximum AMT rate is 28 percent). If you’re subject to the AMT, the best way to minimize it’s impact is to carefully manage deductions and income to reduce your AMT exposure.
3. Social Security Tax: The IRS collects this tax on behalf of the Social Security Administration to pay current beneficiaries. Those on corporate payrolls split the cost with their employers. Employees give up 6.2% of their paycheck to social security every month up to the annual wage ceiling ($117,000 in 2014), while employers pay the other 6.2%. Individuals who are self-employed particularly despise this tax. Self-employed Americans have to foot 100% of this bill, opposed to splitting it with their employer. If you’re self-employed, you can deduct half of the Social Security tax you paid in 2014.
4. Taxes on Social Security Benefits: As we discussed in #3, you’ve been required to pay into SS your entire working life but now, when it’s time to receive your benefits, you’re taxes on them. The only real way out of it is if your only income is your social security check or your income is extremely low.
Look for our next blog on 3 more taxes Americans hate and what you can do to save some money! If you’re looking for a tax professional, call Tax Alternatives at 615-742-1099. Tax Alternatives provides bookkeeping, accounting and tax services for individuals as well as small business owners and companies desiring the advantages of accurate, well-organized records but without the complexities or costs involved in employing a full or part time bookkeeper.
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