A Few Thoughts on Taxes
Income tax is a topic that is perhaps fresh on everyone's mind during this time of year. Few people, if any, look forward to the process of getting information together and the trip to the tax preparer. Dreaded even more is the trip or letter back from the preparer informing you of the results of their calculations and amount, if any, of tax you owe. If what your preparer tells you is a surprise, you might benefit from either better records, more current records, preparing a tax estimate before the end of the year, better understanding of the tax laws or maybe all of the aforementioned.
The mission of the Internal Revenue Service (IRS) is to collect the proper amount of tax revenue at the least cost to the public and in a manner that warrants the highest degree of public confidence in the Service's integrity. The IRS does not make tax laws. The United States Congress does that.
The IRS is basically only a collection service. It is each United States citizen's responsibility to pay their share of government via the correct and truthful reporting of their income and deductible expenses and calculation and payment of any tax due. A citizen is not required to pay more than what is mandated by tax law. The burden is the taxpayer's to make sure they pay only their share and not more than what the law requires.
In many instances there is a difference between what the "true" tax liability is and the amount that is voluntarily paid. The difference can be in IRS's favor if an individual or their preparer is not current on tax law. It is important for each individual to know what IRS's function is and what our obligation and rights are as taxpayers. On occasion more tax could be paid if we fail to take advantage of deductions and management opportunities allowed by the tax law.
One of the best ways to minimize the possibility of a surprise at income tax filing time is to complete a tax estimate a month or two prior to the end of your tax year. The information needed to prepare a tax estimate is an account summary of all income and expenses to date and a projection of what income and expenses you expect for the remainder of the year. It sounds rather simple.
However, the account summary of all income and expenses to date requires you to record your business transactions as they occur or at least have them all recorded by the time you prepare a tax estimate. I realize the record keeping wheel does not screech very loud during the year and therefore receives very little grease or amount of your time.
The screeching normally starts toward the end of January or the end of the next month after your tax year ends. At that time very little other than maybe an Individual Retirement Account contribution can be done to change your tax situation. This is the reason for preparing a tax estimate prior to the end of the tax year.
The tax law in 1998 will allow each family of two married filing jointly $12,500 of tax-free income. For each additional dependent add $2,700. If you do not generate or manage your business to have at least that much income you are missing out on an allowance the tax law is giving us.
Another opportunity in 1998, 1999, and 2000 available only to individuals engaged in farming is the averaging of farm income. An election is available to add one-third of the "elected farm income" (it does not have to be all the farm income) to each of the three preceding tax years.
The increase in taxes in those years are totaled and added to the tax computed on income less elected farm income for the current year. If the tax is less than the tax without averaging the election can be made and the lessor tax paid.
These are only two examples of ways to manage your taxable income. Be careful not to "over manage" to the point where we miss out on tax free income. It is not necessarily bad to pay some income tax. In most situations it requires making a profit before any tax is due. And most of us like to make a profit. With current records, some knowledge of tax laws and the preparation of a tax estimate, you can reduce the surprises from your preparer while minimizing your tax obligation over time.