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Overview of the Income Tax System

By David Luhman on Mon, 05/11/2009 - 23:58

Overview of the Income Tax System

Who pays the taxes?

What happened to Willie Nelson?

Why learning about taxes is a good investment

Who pays the taxes?

Taxes are one of your biggest expenses - about 25 percent of your entire budget

Where the federal government gets its money

  • 50 percent from income taxes
  • 35 percent from Social Security and Medicare taxes
  • 11 percent from corporate income taxes
  • 4 percent other

The US has a multi-bracket tax system

You should know your tax bracket

If you're in the 15 percent bracket, you shouldn't worry about taxes too much

You've got other things to worry about

A multi-bracket (sometimes called "progressive") system tax system may seem "fair" but it makes for a complicated and invasive system

Even with large exemption you'd have a progressive system

Who pays income taxes?

Top 10 percent pay nearly half of all income taxes

Bottom half pays 5 percent of all income taxes

But note that lower income people pay a stiff Social Security tax

Most lower income people pay more in Social Security taxes than they do in income taxes

Percentile ranked by income Adjusted gross income Percentage of total income taxes paid
Top 1% above $169,000 25%
Top 10 above $81,000 44
Top 50 above $20,000 95
Bottom 50 below $20,000 5

What happened to Willie Nelson?

Got involved in tax shelters that greatly reduced his reported income

IRS later disallowed losses from these shelters

Willie wound up owing a lot in back taxes

Don't use questionable tax shelters

Why learning about taxes is a good investment

Learning about our tax system is the best way to reduce your taxes!

Most people don't understand taxes

Learning a little can save you a lot

There are plenty of perfectly legal ways to reduce your tax bill

But you have to put some time into learning about the tax system

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