Paying income tax in the USA

The tax forms are not all that difficult to fill out if one can read and can do simple arithmetic. Even with one of us being self employed, requiring more forms and additional addition and subtraction, I’ve always filled out my own tax form and I’m by no means the brightest marble in the deck.

The last time I did it myself (without Turbo Tax) the things that got me were the worksheets that netted to 0 but which still needed to be done. The software doing that was great.

How do you handle taxes on interest or on capital gains?

It doesn’t help that the Congress uses the tax code to enact all sorts of temporary social policy sorts of things. Which may well be good ideas, but they further complicate things.

For example, after hurricane Katrina, there was a special tax credit (or maybe deduction) anyone who took in someone who was displaced by the hurricane. They put this on the 1040… the form that by default everyone has to fill out. I don’t know how many people took in hurricane victims, but everyone had their tax forms complicated by that possibility. Repeat by a half-dozen different changes every year for some reason or another and you can see why it’s complicated.

In addition, while the IRS does a pretty incredible job of providing clear and unambiguous instructions for the math worksheets, there’s a reason that algebra isn’t specified in English. It’s a major hassle and hard to understand that way.

A humorous example: The IRS discovers the Quadratic Formula.

Hey, that’s pretty much how they did algebra in olden times. There’s a reason why 99% of mathematics was only figured out after they invented more useful notation.

Conclusion: Clearly we need a special symbolic language just for taxes, that we teach all our children from their first day of school.

The statement in the OP about only self-employed people filling in tax returns (as far as s/he knows) is not right. The UK tax system is built around withholding at source at the basic rate of taxation, i.e. the tax rate that most people pay. There are fewer brackets than in the US. Most people pay the “basic rate”, which is currently 20% People who earn enough to pay at the “higher rate” (40%) or the relatively new “additional rate” (50%) will generally have to complete a tax return.

Interest and dividends are taxed as ordinary income and have the basic rate deducted at source. If you are a higher rate taxpayer, you will need to pay the additional tax owed.

Capital gains tax is different, having its own rates. However, each individual has an allowance each year (currently £10,600, I think) on which no tax is due. Hence few people pay any capital gains tax. Those that do will need to file a tax return.

For many people, their employers send part of their paycheck to the IRS, which counts against their total tax obligation. There is standard form you fill out that authorizes this, and there is a standard formula for figuring out how much to withhold. You only owe money to the IRS if the amount withheld isn’t enough. Many people actually get a refund from the IRS when they file their taxes.

And at the local level, you might be dealing with agencies that are much more limited in their accessibility. My city of 10,000 has no e-filing capability whatsoever, and since Ohio doesn’t require employers to withhold out-of-town local income tax, many people who work in other cities have to file quarterly by snail mail or in person.

And if your income is above a certain level, there is something called the Alternative Minimum Tax. You have to calculate your taxes again using a completely different set of rules and pay according to which method gives the higher answer.

It is also possible to have to file tax returns to more than one state. I have to do two. People who work in many states, e.g. athletes and entertainers, may have to file in every state in which they worked in the year.

The form that you fill out to let your employer withold the right amount of tax for your particular situation is the W-4. The goal being to have the correct amount withheld during the year to break even at the end of the year when you file your taxes. Maybe owe a little money, maybe get a little refund. But the responsibility for claiming the proper number of deductions on the W-4 is the employee’s not the employer’s.

For instance if you are married and have 3 kids and your spouse doesn’t work, you would file as Married, 5 deductions. Many people under claim on the W4 and have more than is needed withheld during the year and get a large refund. Essentially using the tax system as a no interest savings account. It’s stupid but it is also common.

It works the other way too. A single guy who should be claiming 1 deduction for himself can claim 9 and have virtually no, or little tax withheld. Of course he will owe a whopper of a tax payment at the end of the year, but that is his problem.

Some people change their W4 withholding rate on a weekly or monthly basis, typically in jobs that pay a lot of overtime. If you are going to get a large pay check due to overtime pay and a big chunk will go to taxes, you can up your deductions temporarily and keep more. This may catch up with you at the end of the year, but this too is often done.

It is the responsiblity of the wage earner to cover the amount of taxes due at the end of the year. As long as the employer has withheld at the proper rate for the W4 the employee signed, and sent the money to the IRS, the employer is covered. Even if you end up owing a huge amount of taxes at the end of the year.