Happy tax filing month! To help celebrate, this month's newsletter includes a tax quiz exploring the history of taxation in the United States. Also included is a reminder to help your favorite charitable organizations retain their nonprofit status, a simple four-step household budget building process and a reminder of some popular tax breaks that are no longer available in 2017.
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2017 Tax Quiz
Here is a quiz to see how well you know your income tax history.
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Before the creation of the income tax, how did the U.S. government generate revenue to pay its expenses?
| a. | Taxes | – | on business income |
| b. | Tariffs | – | on foreign imports |
| c. | Plunder | – | from assets seized during war |
| d. | Inflation | – | printing money to pay its debts |
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b. Tariffs on foreign imports. Before the 16th Amendment that made the collection of income taxes official, the U.S. federal government was mainly funded through taxes on foreign imports, called tariffs.
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How much of the federal government's current revenue comes from individual income taxes?
| a. | Less than 10 percent |
| b. | About half |
| c. | About 90 percent |
| d. | Nearly all of it |
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b. About half. In the 2015 tax year, 47 percent of federal government revenue came from individual income taxes. Payroll taxes paid by employers and employees for Medicare and Social Security made up 33 percent and corporate income taxes made up 11 percent. The remainder was miscellaneous other taxes including excise, estate, and gift taxes.
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1987 marked the first year the IRS required taxpayers to report their dependents' Social Security numbers on their tax returns. The result was many children magically "disappeared" compared with those claimed in 1986. How many dependents evaporated into thin air after this law change?
| a. | more than 1 million | | b. | 1 to 2 million | | c. | 3 to 4 million | | d. | 5 to 6 million | | e. | more than 7 million |
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e. More than 7 million. These disappearing dependents put an exclamation point on an epidemic of tax cheating.
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Many U.S. corporations consider moving their headquarters overseas to save money on taxes. What is the highest marginal tax rate charged to corporations in the United States?
| a. | 12.5% | | b. | 20.6% | | c. | 30% | | d. | 38.9% | | e. | 55% |
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d. The 38.9% U.S. marginal corporate tax rate is the third highest in the world according to the Tax Foundation. The difference between U.S. tax rates and rates in other countries (e.g. Ireland at 12.5%) puts corporations in a no-win position. Either face shareholder wrath and potential lawsuits for overpaying income tax, or feel the wrath of consumers and political pundits for moving the corporation overseas to save money.
Bonus: Which two places have a higher corporate tax rate than the United States?
A: Puerto Rico (39%) and Saudi Arabia (55%) |
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Three Popular Tax Breaks are Gone
As you make plans for the 2017 tax year, take note that three popular tax breaks expired last year and won't be available unless Congress acts to extend them.
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 | Tuition and fees deduction. You used to be able to deduct as much as $4,000 in college tuition and fees as an adjustment to taxable income. This provision was popular because it provided an alternative to other credits and did not require you to itemize deductions to receive the tax benefit. While this tax benefit is currently expired, several tax breaks geared toward students still exist:
| • | student loan interest expense deductions |
| • | student education savings plans (529 plans) |
| • | education credits such as the American opportunity credit and the lifetime learning credit |
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 | Mortgage insurance premiums. The ability to deduct the cost of mortgage insurance premiums as an itemized deduction expired last year. This expired benefit used to phase out for taxpayers with more than $100,000 in adjusted gross income. Mortgage insurance is typically required of homeowners with a less than 20 percent down payment on their home purchase. |
 | Lower senior threshold for medical expense deductions. The threshold for deducting itemized medical expenses raises to 10 percent of adjusted gross income for all taxpayers beginning in 2017. Prior to this, those age 65 or older had a lower 7.5 percent threshold. Only unreimbursed, qualified medical expenses in excess of 10 percent of your adjusted gross income can now be taken as an itemized deduction. For example, if a 70 year old taxpayer has $50,000 in adjusted gross income, he could have deducted his medical expenses that exceeded $3,750 as an itemized deduction. This year that number rises to $5,000 with the same income, putting it that much further out of reach for seniors. |
Remember to plan for these changes. But also keep an eye on future action from Congress that could bring these dead tax deductions back to life.
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Spring into Household Budgeting
Spring is in the air! As you're wrapping up your tax filing for 2016, now is a natural time to either create a new budget or refresh your existing budget. Here's how:
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Organize your data. Gather all your bank, credit card and income statements for the last several months to a year. Calculate how much income versus spending you have for each of these months.
Using software can make these budgeting steps easier. There are several online budget applications available for free, including Mint.com and Personal Capital, as well as paid software such as Quicken and You Need a Budget (YNAB).
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Sort your expenditures. Break down your expenses for each month into categories, such as mortgage or rent, utilities, groceries, vehicle, insurance, household goods, restaurants and entertainment. As you go through the categories, you will be able to distinguish those that are set costs, such as mortgage, insurance and utility payments. You'll also see those that are flexible, such as restaurants and entertainment.
This is a revealing part of the budget exercise. You may not have realized how much you are spending at coffee shops, for example, until you lay out your spending in a budget. If you notice a particular kind of spending that is unnecessary, you could create a subcategory to track it. For example, track snacks and junk food within your grocery category, or track parking tickets within your vehicle category.
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Set financial priorities. Now that you have clear categories for how you've spent your money, write down a list of your financial priorities. These could be things like building a savings account for emergency expenses, growing your retirement savings, paying down debt, or saving for your children's education. If you're not spending enough on your priorities, resolve to shift more of your spending from the flexible categories.
Changing spending habits can be hard to do all at once and it's easy to slide back into old habits. Using a budget keeps you honest with yourself and allows you to gradually shift your spending to better reflect your priorities.
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Create your cushion. In addition to building up an emergency fund to cover three to six months of expenses, consider creating a month-to-month cushion. After you've set your budget, set aside a small percentage of your monthly income for your "cushion." Your cushion is there to give you some leeway if you make mistakes and go over budget over the course of the month. Think of it as your margin of error.
If you get to the end of the month without going over budget, give yourself a small reward or at least a pat on the back. Rewarding yourself will help reinforce positive financial habits in the months to come.
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Nonprofit Annual Filing Due
As always, should you have any questions or concerns regarding your situation please feel free to call.
