Big Refund? Awesome! Or Is It? The Truth About 10 Common Tax Beliefs

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Taxes are a huge part of our lives as American citizens. However, there’s a lot of confusion when it comes to taxes. After all, the Federal Tax Code has about 3 million more words than the Bible. There are a lot of myths floating around regarding taxes, and it can be hard to separate fact from fiction. Here are some common beliefs regarding taxes and the truth behind them:

 

Our tax system favors singles over married couples.

True. A single person is 1 person and a married couple is 2 people. So, you’d think the IRS would just double all of the single numbers for married couples, right? Nope. For single filers, the 28% tax bracket goes up to $191,650 of income. If you were to double that for couples, the 28% bracket would go up to $383,300. However, for married couples that bracket only goes up to $233,350 of income. Above that, they pay 33%. The amount of income it takes to get into the highest tax bracket is almost exactly the same for singles and couples.

 

Basically, married people pay more taxes, especially wealthier ones. (Both the House Republicans’ and Trumps’ tax reform proposals would do away with this bias.) 

 

It’s good to have a large refund.

False. The amount of your refund has nothing to do with the amount of taxes you pay. If one person pays $50,000 in taxes and has a $3,000 refund and another person pays $10,000 and has a $50 refund, who was better off?

 

Having a large refund just means that your employer withheld too much from each of your paychecks. It is like a forced savings plan where you get absolutely nothing back for loaning the government your money all year. At least in a savings account you would earn interest.

 

It is better to have no refund and have your money at your disposal throughout the year. If you typically get a large refund, you need to adjust your W-4 exemptions with your employer.

 

Tax returns are due April 15.

False. Not this year! Because April 15 falls on a weekend followed by a Monday holiday (Emancipation Day, a legal holiday in DC), tax returns are due Tuesday, April 18, this year.

 

Almost half the population doesn’t pay federal income taxes.

True. Ask anyone who was around during the 2012 presidential election what number they would associate with candidate Mitt Romney and they would say 47. Why? He made a devastating comment about the 47% of Americans who don’t pay federal income taxes.

 

It’s true, in 2012, about 47% of Americans did not pay federal income tax. In 2007 when the economy was better the number was 40%. In 2015 it was 45.3%. Almost half the population doesn’t pay federal income taxes, but they do pay other kinds of taxes, like state income tax, sales tax, payroll taxes, etc.

 

If you opt out of Social Security, all your income is exempt.

False. And you want to get this one right so you don’t get into trouble with the IRS. Even after you’ve gotten your Form 4361 approved, only income that comes from ministerial duties is exempt from Social Security. If you also earn income from doing something that any non-minister can do, you have to pay payroll taxes on that. 

 

If you are a minister, read this to clarify how your different types of income are treated by the IRS.

 

You only need to include income from Form W-2 or 1099.

False. Any time you earn more than $400 for an activity you have to report it. Otherwise, you’re cheating, even if the IRS doesn’t know about it. So, if you performed a bunch of weddings last summer, you need to include the money you were given for those, even though it doesn’t show up on your W-2.

 

All professional tax preparers know how to prepare returns for ministers and church staff.

False. I wish! For the story of how H&R Block failed a good friend, read this post. Tax returns are more complicated for pastors and church staff, so you need to make sure your tax preparer actually knows what he or she is doing. Making sure things are right is your responsibility, not theirs.

 

You don’t need to file if you don’t owe any money.

False. If you know you don’t owe any money, it is still a good idea to file a tax return. If you had an employer that withheld taxes, you need to file a return to get those back. Also, some tax credits are refundable, like the additional child tax credit, earned income credit and health coverage tax credit. If you are eligible for those credits, the government will give you money even if you didn’t pay any taxes.

 

If you are in the 25% tax bracket, you pay 25% in taxes.

False. It seems logical, but it’s not true. In the US we have a progressive tax system, so the more money you make the more taxes you pay. The tax bracket you are in only tells you the highest rate you pay, different amounts of your income are taxed at different rates.

 

Let’s say you earn $50,000. You are in the 25% tax bracket, but you do not pay 25% on the entire $50,000. The first $9,325 is only taxed at 10%. Then the next $28,625 is taxed at 15%. The final $12,050 is taxed at 25%. Here’s the math:

 

$9,325*0.10=$932.50

$28,625*0.15=$4,293.75

$12,050*0.25=$3,012.50

 

Your total tax comes out to $8,238.75.

 

$932.50+$4,293.75+$3,012.50=$8,238.75

 

That is only 16.48% of $50,000. So, though your marginal tax rate is 25%, your effective tax rate is only 16.48%.

 

The wealthy don’t pay their fair share.

False. Personally, I like God’s tax system, a flat 10% for everyone. To me that is fair. In the US we have a progressive system, so the more you earn, the more you pay. Looking at the 2014 data on the chart below, you can see that those earning $250,000 or more earned 28% of the income and paid 55% of the taxes. The word “fair” is up to interpretation but this is what the numbers show.

A graph showing the distribution of AGI and the tax burden in 2014

 

 

 

Albert Einstein once said that “the hardest thing in the world to understand is the income tax.” How are you doing? Do you understand it any better now?

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