Monday, December 24, 2012
The Tax Man Cometh!
Hello folks, first I want to welcome everybody to the inception of our blog site. It has been a long time coming, but we took out time because we wanted to make sure that when we got started, we would get it right. Now, that doesn't mean we're going to be perfect here in everything we do, especially at this very beginning; far from that. Rather, it means that we've taken our time to prepare as best as we could and can therefore hope to deliver a much better quality "product" than we could have if we had rushed to get started. So now that we're here, we invite you to come on board and join hands with us to embark on what we hope to be a great blogging experience. We'll do our very best to deliver on that.
Second, I want to take this opportunity to wish all our readers – and especially those who have supported us and kept our business going over the past couple of tough, turbulent years: OUR CLIENTS – a very happy and blessed holiday season. We know that 2012 has been a very eventful, momentous year with a lot of unique experiences for everyone that would probably never be topped in our life-times (in reality, some of us may not necessarily want those experiences to be topped – or even equaled, ever; especially those that happen to be unpleasant, if not downright bad) and the distinct memories of which we’re sure to carry with us for a long time –possibly even to our graves. Well, my wish for everybody is that the new year that we’re about to usher in would give us all the opportunity to have much better and more meaningful experiences of which we would have even fonder memories than those of 2012, always bringing warmth to our hearts and smiles to our faces.
And now to business.
The year is about to end, and as usual, the new year will announce itself with a bang – in the form of a subject that has different meanings for different people: TAXES! For those who have reason to expect a tax refund check (or rather direct deposit, for the most part) from “Uncle Sam”, the new year couldn’t come soon enough, and they simply can’t wait for the clock to chime at midnight on New Year’s Eve so they can finish the night’s partying (or praying?), go get a few hours of sleep, and hurry out of bed the next morning to begin the search – even before they receive their W-2s – for that “skillful” tax return preparer who would ensure that their “pay-day” from the IRS this year is fatter than it has ever been.
On the other hand, for those from whom an additional (and often sizable) contribution to Uncle Sam’s seemingly avaricious, infinitely deep and never-to-be-filled-up “pockets” may be required, the beginning of a new year may not necessarily be such a welcome occurrence at all! For such folks, naturally (if only so they wouldn’t have to deal with that very “unpleasant business” of writing a check to the government), they would rather a new year didn’t start at all – or that the old year didn’t end, depending on which way you look at it. Too bad there’s no such luck for them, and so like it or not, the old year must end, a new one must begin, and The Tax Man Cometh to collect what is due him.
And let it be known that when the Tax Man comes, he collects not only from those who end up writing a check to him, but also from those who receive a check (or direct deposit) from him. Because as everybody knows (or should know), the fact that you’re getting a check from Uncle Sam does not mean that you’re not paying taxes; for most people, all it means is that you made “advance” (can I call it “lay-away”?)payments to the Tax Man during the year that just ended (through the pay-roll withholding system) that exceeded what he was required to collect from you. And the Tax Man being the extremely fair – mark it well: fair, not generous –person that he is, he is only giving you back what you overpaid him (via the refund that you receive; too bad that that refund doesn’t come with interest, but that will be the subject of a future discussion on this forum).
Now, since we’re on the subject of taxes, I want to take the opportunity – before we end today’s piece – to provide some perspective on the need for everybody to do everything they can to minimize – through perfectly legal means – the amount of pocket-change they fork over to the Tax Man when he makes his annual, beginning-of-the-year visit (although it is actually more like a continuous, never-ending, inescapable presence, than it is a once-in-a-year visit) to collect his “dues”. The truth is that you, my dear reader, pay taxes in a lot more varied ways than you may even realize.
Yes, everyone knows about the taxes that are talked about everyday (especially in the media), including income taxes (federal, state and local), property taxes (the most well-known one of which is the real estate taxes on people’s homes), FICA tax, and sales taxes. However, there is a whole lot more different kinds of taxes that people pay than those just listed, and even these “common” taxes can be made up of a combination of two or more tax items that are less common.
For instance, the FICA (Federal Insurance Contributions Act) tax is actually made up of 2 items, a tax to fund Social Security (the correct technical name is Old-Age, Survivors, and Disability Insurance or OASDI for short) and another tax to fund Medicare (Hospital Insurance or HI). Another thing that most people might not know is that while FICA is only typically seen on the pay-stub of wage-earning employees, the underlying tax itself is also actually paid by self-employed folks, except that in their case it is called self-employment tax (or more commonly, SE tax). The other difference between FICA and SE taxes is that employees get 50% of their FICA tax paid by their employers, whereas self-employed persons foot the whole bill themselves out of their net self-employment income, at a rate of 15.3% – meaning employees pay a 7.65% FICA tax rate while employers pay the other 7.65%. (Note: Since the beginning of 2011, the rate for the OASDI portion of FICA – only the employee part – and SE taxes have been reduced temporarily by 2%, resulting in a 4.2 percent effective tax rate for employees and a 10.4 percent effective tax rate for the self-employed worker. This was done as a part of measures taken by the Obama administration and Congress to give taxpayers some relief and help to stimulate the economy, but the tax relief package of which that rate cut is an integral part is set to expire at the end of this year, so the rate would go back up to their original levels of 6.2% for employees and 12.4% for self-employed folks unless the President and Congress can come to an agreement to extend that package. That package expiration is part of the “fiscal cliff” that everybody is talking about.)
Other taxes that people pay (and we will wait to talk about these in more detail another time to avoid making this piece much longer than it already is) include school taxes, alternative minimum tax (AMT), taxes on electricity and natural gas, taxes on cable TV, taxes on telephone usage (both land-lines and cell phones), state-levied taxes on gasoline, and taxes on alcoholic beverages and cigarettes (these last two are often referred to as “sin” taxes).
One may ask: why are we talking about all these various kinds of taxes anyway? Whether we know we’re paying them or not, we don’t have a choice but to pay them, so what is the point? Well, the answer is simple: we pay enough in these "unknown" taxes and can’t do much about most of them – short of stopping the use of the things (products or services) to which they’re attached, and that is not always a practical solution. (How do you, for instance, avoid paying the gasoline tax? Give up driving altogether? Well, good luck with that because the tax is priced into the fare that you pay for commercial transportation!)
But when it comes to at least one kind of tax, the income tax (which is the one that most people know – and worry – about, we have a host of ways that can be used to legally ensure that we pay as little of it as possible (without having to stop earning income by quitting your work, I might add). And finding out – let alone learning – about those ways typically begins with finding and talking to a tax professional. So go on, shoot us an email at email@example.com or call us at 513-638-0112 and let’s begin together to explore ways that could help you to minimize the one kind of tax that you do have control over – with regards to how much of it you pay to the Tax Man when he comes calling.
AcknowledgementThanks to Dr. Wayne Essex (of Essex & Associates, Dayton, OH), a good friend of mine and a renowned tax professional (much better than I can ever aspire to be) for some of the information used in this write-up.