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GET YOUR TAXES DONE FOR ONLY $20.00
History of
the Income Tax in
the United States
The nation had few taxes in its early history.
From 1791 to 1802, the United States government was
supported by internal taxes on distilled spirits,
carriages, refined sugar, tobacco and snuff,
property sold at auction, corporate bonds, and
slaves. The high cost of the War of 1812 brought
about the nation's first sales taxes on gold,
silverware, jewelry, and watches. In 1817, however,
Congress did away with all internal taxes, relying
on tariffs on imported goods to provide sufficient
funds for running the government.
In 1862, in order to support the Civil War
effort, Congress enacted the nation's first income tax law.
It was a forerunner of our modern income tax in
that it was based on the principles of graduated, or
progressive, taxation and of withholdingincome at
the source. During the Civil War, a person earning
from $600 to $10,000 per year paid tax at
the rate of 3%. Those with incomes of more than
$10,000 paid taxes at a higher rate. Additional
sales and excise taxes were added, and an
“inheritance” tax also
made its debut. In 1866, internal revenue
collections reached their highest point in the
nation's 90-yearhistory—more
than $310 million, an amount not reached again until
1911.
The Act of 1862 established the office of
Commissioner of Internal Revenue. The Commissioner
was given the power to assess, levy, and collect
taxes, and the right to enforce the taxlaws
through seizure of property and income and
through prosecution. The powers and authority remain
very much the same today.
In 1868, Congress again focused its taxation
efforts on tobacco and distilled spirits and
eliminated the income tax in
1872. It had a short-lived revival in 1894 and 1895.
In the latter year, the U.S. Supreme Court decided
that the income tax was
unconstitutional because it was not apportioned
among the states in conformity with the
Constitution.
In 1913, the 16th Amendment to the Constitution
made the income tax a
permanent fixture in the U.S. tax system.
The amendment gave Congress legal authority to tax income and
resulted in a revenue law that taxed incomes of both
individuals and corporations. In fiscal year 1918,
annual internal revenue collections for the first
time passed the billion-dollar mark, rising to $5.4
billion by 1920. With the advent of World War II,
employment increased, as did tax collections—to
$7.3 billion. The withholding tax on
wages was introduced in 1943 and was instrumental in
increasing the number of taxpayers to 60 million and tax collections
to $43 billion by 1945.
In 1981, Congress enacted the largest tax cut
in U.S. history,
approximately $750 billion over six years. The tax reduction,
however, was partially offset by two tax acts,
in 1982 and 1984, that attempted to raise
approximately $265 billion.
On Oct. 22, 1986, President Reagan signed into
law the TaxReform
Act of 1986, one of the most far-reaching reforms of
the United States tax system
since the adoption of the incometax.
The top tax rate
on individual income was
lowered from 50% to 28%, the lowest it had been
since 1916. Taxpreferences
were eliminated to make up most of the revenue. In
an attempt to remain revenue neutral, the act called
for a $120 billion increase in business taxation and
a corresponding decrease in individual taxation over
a five-year period.
Following what seemed to be a yearly tradition of
new tax acts
that began in 1986, the Revenue Reconciliation Act
of 1990 was signed into law on Nov. 5, 1990. As with
the '87, '88, and '89 acts, the 1990 act, while
providing a number of substantive provisions, was
small in comparison with the 1986 act. The emphasis
of the 1990 act was increased taxes on the wealthy.
On Aug. 10, 1993, President Clinton signed the
Revenue Reconciliation Act of 1993 into law. The
act's purpose was to reduce by approximately $496
billion the federal deficit that would otherwise
accumulate in fiscal years 1994 through 1998. In
1997, Clinton signed another tax act.
The act, which cut taxes by $152 billion, included a
cut in capital-gains tax for
individuals, a $500 per child tax credit,
and tax incentives
for education.
President George W. Bush signed a series of tax cuts
into law. The largest was the Economic Growth and Tax Relief
Reconciliation Act of 2001. It was estimated to save
taxpayers $1.3 trillion over ten years, making it
the third largest tax cut
since World War II. The Bush tax cut
created a new lowest rate, 10% for the first several
thousand dollars earned. It also established a slow
schedule of incremental tax cuts
that would eventually double the child tax credit
from $500 to $1,000, adjust brackets so that middle-income couples
owed the sametax as
comparable singles, cut the top four tax rates
(28% to 25%; 31% to 28%; 36% to 33%; and 39.6% to
35%).
The Jobs and Growth Tax Relief
and Reconciliation Act of 2003 accelerated the tax rate
cuts that had been enacted in 2001, and temporarily
reduced the tax rate
on capital gains and dividends to 15%. In 2004, the
U.S. was forced to eliminate a corporate tax provision
that had been ruled illegal by the World Trade
Organization. Along with that tax hike,
Congress passed a cornucopia of tax breaks,
which for individuals included an option to deduct
the payment of whichever state taxes were higher,
sales or income taxes.
Two tax bills
signed in 2005 and 2006 extended through 2010 the
favorable rates on capital gains and dividends that
had been enacted in 2003, raised the exemption
levels for the Alternative Minimum Tax,
and enacted new tax incentives
designed to persuade individuals to save more for
retirement.
The
sooner you get your money back from the IRS
The sooner you get your money back from the IRS, the
better, so start now. Get your taxes done faster and
more accurately with these seven strategies
from Jeff Schnepper, author of the best-selling "How
to Pay Zero Taxes" and a tax expert
for MSN Money.
1. Get started
The first step
is the hardest. Stop thinking about it and get
moving. Until you actually start your return, you'll
never get to finish it.
If you don't
have all your numbers, just put your name and
address on the form. It will get you in the mindset
to move forward. Your first step is to break the
inertia.
2. Accumulate
the data
By the end of
January, make sure you've gotten W-2s and any
statements from your brokers and banks. You'll
receive 1099 Forms for any interest, dividends, and
sales of stock. Your mortgage company will send you
a Form 1098 for any interest and real-estate taxes
paid. Get those statements together and review the
numbers. They're not always right.
3. Put the
numbers in IRS categories
Neither the
IRS nor your CPA is going to add up those numbers
for you.
You're going
to want to have totals for the income and deduction
categories the IRS provides. You'll need that final
"number" if you're doing your own return, whether by
hand or by computer. If you're having your return
prepared, you'll want to give that number to your
CPA to minimize his or her bill.
A good way to
get organized is to use the "envelope" system.
Create an envelope for each of the IRS
income/deduction categories. There'll be an envelope
for medical expenses, charitable contributions, job
expenses, interest paid, etc. Find all the receipts,
all the checks, all the invoices and put them in the
appropriate envelope.
You can use
this simple system all year. Throw all of your
receipts into a file or even a shoebox. When you
reconcile your checking account, on a monthly or at
least a quarterly basis, you break down the checks
and receipts according to the categories you
selected.
By the end of
January, you should have had all your checks and
receipts broken down in each envelope by deduction
category. You add up the receipts and checks (don't
double count!), and that's the number you use on
your return or give to your preparer.
That's how
much you've spent in each deduction category. And,
with this system, you never have to fear an audit.
An audit is
nothing more than the IRS asking you to prove the
numbers you put on your return. You've already done
that. Just hand over the deduction-category envelope
with the receipts and checks. After a series of
matches, it's going to be a quick audit.
4. Analyze the
numbers
Sometimes, the
raw data you have is going to be wrong.
On the income
side, you're required to report any and all interest
and dividends received, even if you don't receive a
Form 1099.
You'll have to
match up the sales of stock with the cost of those
shares. The number shown by your broker on Form 1099
B is only the sale price. You're not taxed on 100
percent of that number. You reduce it, on Schedule D
of your return, by your cost, including broker's
fees. You're only taxed on the net profit. (To
automatically generate a Schedule D based on your
investments, visit MSN Money at money.msn.com and
check out the GainsKeeper service).
If you don't
sell 100 percent of your position, you'll have to
allocate your costs on a per-share basis.
On the
deduction side, you may have deductions not
reflected by the raw data. Say you made your Jan.1,
2004, mortgage payment on Dec. 31, 2003. The
interest you paid won't be reflected on the Form
1098 sent by your mortgage company. That's because
they didn't get the check until 2004.
But it's a
2003 deduction, and you should run an amortization
schedule to compute the additional interest. That
additional interest would be shown on line 11 of
your Schedule A.
5. Call your
accountant
If you're
going to have your return professionally prepared,
call your accountant now for an appointment.
Just make sure
you've got the numbers in order when you show up.
Your wallet will appreciate it.
6. Put ink to
paper
Or, at least open the tax program
on your computer. You've got your numbers. If you're
doing your own return, put ink to paper. Go to your
quiet place and actually do your return.
You've done the real work. Now you're just putting
numbers in boxes. Relax; this is really the easy part.
7. Mail your
return
A completed return on your desk that calls for a refund is
the IRS's idea of heaven. It's your money. Don't
leave it with the IRS. It's bad enough that they've
held it all year without paying you any interest on
your excess payment. Don't compound the pain by
delaying the mailing.
Of course, the best way to speed up your return is
to e-file -- available at Web sites such as MSN
Money. The IRS appreciates the cost savings and
claims it expedites your refund.
Electing a direct deposit of your refund will
always get it into your hands faster than
snail mail. More than 41 million taxpayers used
direct deposit for their 2002 refunds, up from 39
million a year earlier.
Complete lines 70(b), (c), and (d) of your Form
1040, and, coupled with an e-filed return, in theory
you could have yourrefund in
your bank account in as little as 24 hours.
Alternately, the IRS now has a new refund assistance
line, (800) 829-1954 .
It also has a new Web tool called "Where's My Refund?"
that can tell you whether the IRS received your
return and whether your refund was
processed and sent to you
YORK (MONEY Magazine) - When you gather up your
W-2s, 1099s and crumpled receipts to figure out your taxes this
time of year, you're probably hoping for some shreds
of good news. How's this: Because April 15 falls on
a Saturday in 2006, you have two extra days to file.
Okay, enough already. You get the picture. The best
tax news you can get this year is the good news you
make for yourself, by avoiding costly mistakes and
unearthing the many opportunities to save money
that are buried in your return. Follow our guide to
find them -- and make sending less to the IRS the
nicest news of all.
1. Embrace your computer
Why file electronically? How about a refund
within two weeks and fewer errors? Your tax preparer
can e-file for you (and likely will). If you're a
do-it-yourselfer, you need to do your taxeswith
software or online.
Software Popular
programs like TurboTax ( turbotax.com),
TaxAct (taxact.com)
and H&R Block's TaxCut (taxcut.com)
all support e-filing. Using them on the Web often
costs less than buying the software.
You'll pay less than $10 for an easy federal
return, or as much as $70 for a complex state and
federal one, including e-filing.
Free file The
IRS has partnered with a few dozen commercial
preparers to offer free online tax prep as well as
e-filing (go to irs.gov).
The program is limited to those with an adjusted
gross income (AGI) of $50,000 or less. To find out
if your state has free online filing, check the list
at taxadmin.org.
Plus, there are 22 states with free online tax prep.
2. Retirees: Save money
and save
You still have time to plump up your nest egg.
The IRA limit for 2005 is $1,000 higher than it was
in '04.
If you qualify for a deduction (income limits
apply), funding an IRA will lower your tax bill. You
can make Roth or traditional IRA deposits as late as
April 17.
3. Hurricane relief for all
After the devastating fall hurricanes, Congress
passed a tax bill that benefits those who live in
the affected areas -- and all Americans who helped.
For hurricane victims only You
can fully deduct your casualty losses, which
normally must exceed 10 percent of your AGI and $100
per loss to qualify. You can also make penalty-free
IRA withdrawals, and you have more time -- three
years -- to pay tax on the earnings.
For everyone Hurricane
volunteers who drove can deduct 34 cents a mile (vs.
the typical 14 cents); if you housed victims for at
least 60 days in a row, you can deduct $500 per
person (four-person max); and gifts made to any
charity after Aug. 28, 2005 are fully deductible,
even if they exceed 50 percent of your AGI.
4. Kids count more than you
think
What's a child? Any parent would consider that an
easy question. Now the IRS thinks so too. This year
there's finally a single (but still technical)
definition of who qualifies as a child on your tax
return.
Even if the new rule doesn't affect you -- it
could if you're divorced, for instance, or the
parent of an adopted child -- all the old benefits
of parenthood still apply.
Child tax credit You
can take the full $1,000 credit for a child under
age 17 as long as your AGI is under $110,000 for a
married couple or $75,000 for a single parent.
Child- and dependent-care credit If
you pay someone to watch children under age 13 -- at
home, in day care, at camp -- you may qualify. This
credit is for as much as 35 percent of $3,000 in
such costs, or $6,000 for two or more kids, making
it worth up to $1,050 for one kid, $2,100 for two or
more.
Sleepaway camp, alas, is seen as a luxury by the
IRS (if not by some parents), so those fees don't
qualify.
5. Help with college costs
If you have a student in college, a valuable tax
perk is scheduled to disappear after this year: the
ability to deduct up to $4,000 in tuition and fees.
To qualify for the entire deduction, your AGI
can't exceed $130,000 if you're married, $65,000 if
you're single. You can take a partial deduction with
an AGI up to $160,000 (for married couples) or
$80,000 (singles).
Fortunately, two potentially more precious breaks
will stick around, and higher-income cutoffs this
year increase the chance that you'll qualify for
them. You can use the HOPE credit to recoup up to
$1,500 in tuition during the first two years of
college (a credit reduces your tax bill dollar for
dollar); the lifetime learning credit is worth as
much as $2,000 during college or graduate school (up
to 20 percent of $10,000 in costs).
You cannot take both credits in the same year for
the same student. You don't qualify for the full
credits when your AGI hits $87,000 if you're
married, $43,000 if single. You lose them entirely
when your AGI hits $107,000 ($53,000 for singles).
6. When the sales tax pays
Also due to expire: the option to write off
either your state and local income or sales tax. Use
the IRS tables to figure your deduction (Publication
600, available at irs.gov).
If you bought a car, boat or plane last year,you
can add the tax you paid to the IRS figure.
7. Profit from self-improvement
Think how much you spend trying to stay healthy,
not to mention getting well once you're sick. If a
sounder mind and body aren't reward enough, see if
your good intentions can win you a break on your taxes too.
Qualified medical costs that exceed 7.5 percent
of your AGI are deductible. That's a high hurdle,
but consider what could put you over the top:
prescribed weight-loss programs, stop-smoking
classes, acupuncture, chiropractic care, therapy,
braces, eyeglasses and lead-paint removal if you
have a kid at home. See IRS Publication 502 for a
full list.
8. Missing a write-off is like
donating money to Uncle Sam. Don't overlook these.
Leftover losses Each
year you can offset investment gains with losses. If
your losers add up to more than your winners, you
can deduct up to $3,000 from your regular income and
carry forward the rest. Pull out last year's return
and look for capital losses that you couldn't use.
Too much tax If
you switched jobs last year, you might have had too
much Social Security tax withheld. Check your W-2s.
If more than $5,580 was docked from your paychecks,
claim a credit for the overpayment.
Miscellany Certain
costs that top 2 percent of your AGI are deductible.
That includes what you pay to manage your money:
safe-deposit box fees, calls to your broker,
tax-prep fees and subscriptions to investment
journals.
Old college costs It's
easy to think that only mortgage interest is
deductible. Not so. Student loan interest is
deductible, even if you don't itemize.
9. New loan? Deduct this.
Last year was the third busiest ever for home
loans. If you bought, borrowed or refinanced, don't
forget to deduct your origination fees and discount
points. When you refinance, you must spread the
deduction over the life of the loan; on a second
refi, though, you can deduct all remaining points
from the first.
10. Home work, not homework
Work at home and you may be able to write off
your home office. Tread carefully. This deduction is
not only one of the trickiest breaks around, it's
also one that could get you audited.
The rules For
starters, your home office must be your principal
place of business, not a backup for the cubicle your
boss provides, and you generally can't use the room
for anything else. So it can't be half TV room, half
office. It's all office, all the time.
The math To
calculate the size of the deduction, first determine
what percentage of your home your office takes up --
by square footage or number of rooms. Apply that
percentage to your housing costs (including mortgage
interest, utilities and upkeep) to arrive at your
deduction.
The downside What
makes this deduction such a gold mine is that every
year you can also write off a portion of what you
paid for your house. But when you sell, all that
depreciation is treated as a taxable gain.
Bonus: What's new
Two more months to do your taxes,
a way to preview your AMT, and help with higher gas
prices
More time to file Can't
finish by April 17? Previously, you could
automatically get four more months -- until smack in
the middle of your August beach vacation. This year
the IRS extended the extension to six months. File
Form 4868 by mail or at irs.gov/efile.
Stingier rules for car gifts As
of 2005, if a charity sells the car you donate (as
most do), you can deduct only the proceeds from the
sale, not the full fair market value.
An AMT fast forecaster An
estimated 4 million taxpayers will owe the
alternative minimum tax this year, so the least the
IRS can do is help you find out if you're one of
them. Its new AMT Assistant is a boon if you do taxes by
hand -- the agency estimates that the calculator
will take five to 10 minutes vs. an hour or more for
the paper worksheet. Find it atapps.irs.gov/app/amt.
Gas relief If
you drive your car for business, you're hurting at
the gas pump. The IRS, it appears, feels your pain.
It raised the standard mileage deduction from 40.5
cents to 48.5 cents a mile as of Sept. 1. For 2006,
it'll be 44.5 cents.
Made out in the U.S.A.? Do
you run a business that makes widgets, builds homes
or develops software on these shores? Then you'll
love the new domestic-production deduction: It's
worth up to 3 percent of your net income.
Please feel free to contact a manager at
(718)-282-2574
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