It’s a presidential election year in the US, but you probably knew that already.
A perennial issue each election is taxes.
We are subject to many different tax levies.Today we are going to talk about Federal income taxes.
The 16th amendment to the Constitution was ratified in 1913, allowing Congress to levy an income tax and the US has had an income tax ever since.
The instructions for the very first Form 1040 in 1913 took up one page.
In 2019 the instructions for Form 1040 is 108 pages long.
I believe every US taxpayer should know their Federal income tax liability.(Hint: Your tax refund is not your tax liability).
So dig up your 2019 tax return. (go ahead I’ll wait).
If your 2019 return is on extension, it’s due on October 15th! I’m certain your tax preparer would love to get the necessary information to file today.
For the rest of you, find page 2 your 2019 Form 1040, (or your Form 1040-SR). It should be toward the top of the pile of papers, or toward the beginning of the pdf.
Look at Line 16. This is your total tax liability.*
Most people pay their tax liability throughout the year via withholding from their paychecks or retirement income. Others make estimated tax payments.
If your tax liability is less than the amount you paid in throughout the year you get a refund. It’s not a great idea to get a large refund, but that’s a topic for another day.
If your tax liability is greater than the amount paid in, you have to pay the difference.
Interested in where your income and tax bill stacks up compared to everyone else in the US?
Kiplinger has created a tax burden calculator to tell you that based on IRS data from 2017, the most recently available year.
Find the calculator HERE. Read the accompanying article HERE.
It’s easy to use.
Enter your AGI (Adjusted Gross Income) in the box. You can find your 2019 AGI on Line 8b of your Form 1040 (or 1040-SR)
Let’s say your AGI is $85,000. Type that in and you see this:
An Adjusted Gross Income of $85K puts you in the top 25% of earners.
The top 25% of earners reported 69.1% of all Adjusted Gross income and paid 86.1% of total federal income taxes.
The US income tax system is a “progressive” tax system, meaning those who earn more pay more.
In fact, the bottom quintile of taxpayers has a negative Federal income tax rate, due to refundable tax credits.
What about the oft vilified 1%?
Type $516,000 AGI in the calculator and you see this:
The top 1% of earners reported 21.0% of all Adjusted Gross Income and paid 38.5% of total federal income taxes.
The next time you hear a pundit talking about taxes you’ll know where you stand.
*If you are self-employed Line 16 includes self-employment tax which is distinct from income tax.