Another tax day is behind us. Here are some interesting facts and misconceptions behind our tax code…
1) The saying “The only constant is change” applies to taxes as well. Our current federal tax policy is complex. It contains around four million words and there are over 400 tax forms on the IRS’s website. It also seems to be constantly changing. Since 2001, there have been more than 4,500 changes to it. It is no wonder that about 57% of Americans have their taxes done professionally. And, more change may be on the horizon as lawmakers debate potential tax changes as part of the upcoming federal budget. (Source: Forbes)
2) The effective tax rate means more than your marginal tax rate. There is a big difference between your effective tax rate and your marginal tax rate (i.e., tax bracket). Most people focus on the marginal tax rate since these numbers are easily found, but the effective tax rate is what we actually pay. The effective tax rate is unique to each taxpayer and is equal to the amount of taxes you paid divided by the amount of income you earned. Tax deductions and tax credits typically reduce the amount of income we earn and, therefore, the amount of taxes we owe. Additionally, remember that our tax rates are graduated, which means the higher rates in those schedules only apply to income earned within those ranges.
3) Nearly half of American households don’t pay income tax. In 2011, 46.4% of U.S. households didn’t pay income tax. (Source: Tax Policy Center)
4) The top 10% of tax payers pay nearly 50% of the income tax collected.
Why does such a huge burden fall on so few? It is reflective of income earned. The top 10% of tax payers represent 48.1% of overall tax revenue, but they also represent a little over 45% of all the income earned. While there may not be as many of these earners, they do an excellent job of generating income for themselves and the government. The top 1% of income earners actually pays one out of every five dollars collected by the U.S. (Source: ITEP)
5) Not all states have income taxes. If you are looking for a tax break, consider moving to one of these seven states where individuals pay no state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Additionally, Tennessee and New Hampshire only tax dividend and interest income. The appeal of paying no state taxes is an obvious one, but the debate on the economic and growth advantages of no-tax versus tax states is mixed. Yet, that hasn’t stopped lawmakers in states like Indiana, Louisiana, North Carolina, Oklahoma and South Carolina from considering making a switch to a no state tax policy. (Source: ITEP)