Upcoming dates:

May 9

 - Mother's Day

May 17

 - Individual income tax returns for 2020 are due

May 31

 - Memorial Day

 

Tax day is finally here!

To celebrate getting your tax return finished, test out your knowledge of tax history with our trivia quiz.

Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.

 

Tax History Trivia!

With the IRS moving tax day back for all U.S. filers for the second time in as many years, it’s time once again for a fun diversion by looking back at tax history! Test your tax knowledge using these questions to stump your friends and family.

• In 1861, President Abraham Lincoln enacted a flat tax on wages above $800 to help pay for the Civil War. What was the tax rate?

  • 3%

  • 5%

  • 12%

  • 17%

• a. 3%. Even though Lincoln enacted this 3% tax, the Federal government didn't have an effective way to collect the tax at the time. The result? The tax fell far short of its projected revenue goals. Thankfully, the government now makes tax law changes with plenty of time to implement the change...oh, maybe not so much has changed after all!

• In what year did taxes start being withheld from paychecks?

  • 1924

  • 1937

  • 1943

  • 1951

• c. 1943. In a need to drum up some cash for a war, the government started requiring taxes to be withheld directly from paychecks rather than waiting for quarterly or annual payments.

• The estate tax, which may apply to your assets after you pass away, was originally enacted in 1797 to fund which branch of the U.S. Military?

  • Army

  • Navy

  • Air Force

  • Marines

• b. Navy. It was repealed in 1802, but later returned to help fund the Civil War.

• In 1921, which state was the first to enact a sales tax?

  • Connecticut

  • Maryland

  • Pennsylvania

  • West Virginia

• d. West Virginia. As of today, all but 5 states (Alaska, Delaware, Montana, New Hampshire and Oregon) have a sales tax. And it is as complicated as the imagination of the respective state legislatures.

• The United States has a progressive income tax system, with your first dollar of earnings being tax-free and your last dollar earned being taxed as high as 37%. What was the highest tax rate when this progressive income tax system was first introduced in 1913?

  • 5%

  • 7%

  • 12%

  • 24%

• b. 7%. Hard to believe the federal government didn't seem to need more taxes than this. The top tax rate did jump, however, to 77% five years later during World War I. The top individual income tax rate for 2021 is 37%.

• Tax day this year is May 17, pushed back one month from the traditional April 15 deadline. But the deadline wasn't always April 15. Tax day moved to April 15 in 1954. What day were taxes due prior to 1954?

  • March 15

  • February 15

  • April 1

  • May 15

• a. March 15.The deadline was moved from March 15 to April 15 in 1954 to give taxpayers more time to deal with the additional complexities being built into the tax law.

• How many pages of instructions were needed for the first Form 1040 in 1913?

  • 5

  • 21

  • 13

  • 1

• d. 1. Speaking of added complexity, the basic Form 1040 instructions for the 2020 tax year has 111 pages.

 

 

The Art of Bill Paying

Paying bills is an inevitable part of everyday life, but that doesn’t mean it has to be stressful. Here are some ways to get control of your budget and perfect the art of stress-free bill paying.

• Make a budget. Knowing what you are making and what you are spending is essential to proper bill paying. First, find out how much you are making every month and then subtract the static items such as rent or mortgage payments, credit card payments and cell phone expenses. Then, budget out how much you will need for other essentials (such as food and clothing). Once the essentials are accounted for, you can look at the money you have left and decide where to allocate the rest.

• Find a budget tool that works. One of the best ways to get a handle on your finances is to use a budgeting app such as Intuit's Mint or PocketGuard. You can securely link your bank accounts to these apps and download all your transactions in the app. Your bank may also have an app to track your spending, so also check with them. You can then choose which tools to use to make a budget and categorize the transactions to be allocated to a certain part of the budget (such as food, car, housing, etc).

• Set up autopay. Put recurring bills such as utilities, internet, and your cell phone on autopay so they will be automatically deducted from your account on their due date. If you decide to use autopay, it is still a good idea to look at the amounts being deducted every month to make sure everything is correct.

• Consider your non-regular payments. Don't forget to account for bills that come due occasionally and plan for the cash outlay. Common examples of this are property tax payments, income taxes, and annual/semi-annual insurance payments. You will need to plan to have enough cash on hand for these expenses when they come due.

• Adjust due dates. Paying bills isn’t as stressful when you know that you can afford to pay them, and what better time to pay bills than right after you get paid! The money will be there and you can pay those bills before that money has a chance to go anywhere else. Consider asking if you can change the due dates for some or all of your bills to correspond with when your paychecks are deposited into your bank account.

• Don’t forget to pay yourself! One of the best ways to start developing a savings account is making yourself part of your budget! Take however much you think you can spare and set up an automatic transfer to a separate savings account. Use this money to establish an emergency fund of approximately six to nine months of expenses. This extra cushion will come in handy if something unexpected occurs.

 

    

Taxes: These Basics are for Everyone

Understanding how our tax system works can be tricky for anyone. Whether you're an adult who never paid much attention to the taxes being withheld from your paycheck or a kid who just got his or her first job, understanding the basics can help refine and define questions you may have.

Many schools don't teach these tax lessons. This results in many people entering life with a pretty incomplete picture of how taxes work, unless someone else takes the time to explain these tax concepts. Here are some pointers to help you or someone you know navigate our tax maze.

Taxes are mandatory!

While we can have a debate about how much each person should pay, there's no debating that local, state and federal governments need tax revenue to run the country. These funds are used to build roads, support education, help those who need financial assistance, pay interest on our national debt and defend the country.

There are many types of taxes

When you think of taxes, most think of the income tax, which is a tax on business and personal income you earn from performing a job. But there are also other types of taxes. Here are some of the most common.

• Payroll taxes. While income taxes can be used to pay for pretty much anything the government needs money for, payroll taxes are earmarked to pay for Social Security and Medicare benefits.

• Property taxes. These are taxes levied on property you own. The most common example of this is the property tax on a home or vacation property.

• Sales tax. These are taxes placed on goods and services you purchase. While most of this tax is applied at the state and local levels, there are also federal sales taxes on items like gasoline.

• Capital gains taxes. If you sell an investment or an asset for a profit, you may owe capital gains taxes. The most common example of this is when you sell stock for a gain. Capital gains taxes could also come into play with other assets, such as a rental property you sell for a profit.

• Estate taxes. This tax is applied to assets in your estate after you pass away.

Not all income is subject to tax

Most, but not all, of your income is subject to tax.

• While your paycheck is subject to tax, interest earned from certain municipal bonds is not. And the government often excludes things like benefits from the tax man.

• Capital gains taxes have exclusions for gains on the sale of your home and donated stock.

• Estate taxes have an exclusion, so only estates in excess of the exclusion are taxed.

This is why having someone in the know can be really helpful in navigating these rules.

The progressive nature of income tax

When it comes to income taxes, the government gets to take the first bite. The question is how BIG of a bite the government gets to take.

For example, if you only have one chocolate chip cookie, the government's bite is really, really small. If you have 1,000 chocolate chip cookies, the government takes a small bite from the first 100 cookies, a larger bite from the next 100 cookies, and an even larger bite from the remaining 800 cookies.

This is called a progressive tax rate system. For example, if you're considered single for tax purposes in 2021, the first $9,950 of taxable money you earn gets taxed at 10%. The next $30,575 you earn gets taxed at 12%. The next $45,850 gets taxed at 22%. Money you earn above this point will get taxed at either 24%, 32%, 35% or 37%.

Understanding the progressive nature of our tax system is a key concept in managing the size of the bite the government takes. That is why tax planning is so important!

Deductions can decrease the government's tax bite

The progressive tax system is complex because it is manipulated in a big way by our elected officials. This is typically done through credits, deductions and phaseouts of tax benefits.

For example, there is a fairly complex deduction for families with children, and the earned income tax credit is an added tax cut for those in the lower end of the progressive income tax base. There are also credits and deductions for businesses, homeowners, education and many more types of taxpayers.

As you can imagine, the U.S. tax system is very complex with many nuances. Please seek help if you have further questions or are facing a complicated taxable transaction.

 

 

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

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