Electronic Filing Services

(Continued from previous post) So: we have come to establish that one of the most important means of gathering federal funding involves income taxation, the taxing of individuals by means of requiring them to allot a portion of their annual earnings for the sake of the central or federal government. We have also come to establish that in trying to be fair, the current federal tax code has adopted a progressive income tax system that taxes larger percentages of income on larger incomes. But we also mention that in this very same attempt at fairness, the code has created several tax provisions that create tax deductions and credits that an individual (who has full understanding of how the current taxation of the United States of America works) may use as a loophole, granting him or her little to no responsibility in paying taxes. An excellent means of understanding this is by taking a look at tax withholding in the United States (which is pretty much part of income taxation).

Before we begin to explain how a person can take advantage of social status in manipulating provisions for his or her own benefit, withholding tax should be explained. Withholding tax is essentially one of the ways by which we are directly taxed by the Internal Revenue Service or IRS. Through withholding tax, tax is collected by the federal government via the employers of individuals. That is to say, a person receiving his bimonthly wage will have automatic deductions put on the amount of money he or she receives at that moment; the employers directly withhold part of the income of their employees, and in that way, income taxes are being paid. The amount of cash being withheld in this case is based on what they expect the employee’s annual salary would be, modified by certain social factors: whether the individual is single or married, whether he or she is the head of the household (or breadwinner, if one prefers), the number of people (or children) dependent on the individual’s wages, and other factors that would imply the need for more tax credits and deductions.

So remember the tax rates of the single individual? Well married individuals filing jointly, or widowed individuals who fall under certain qualifications, get relatively lower tax rates than single individuals. The ten percent tax levy, for example, while applied to individual incomes up to eight thousand and twenty-five dollars among the singles, apply to incomes up to sixteen thousand and fifty for the married and qualified widows and widowers (according to the 2008 income bracket and tax rates charts). Something similar is applicable for the heads of the household or breadwinners: the ten percent tax levied on the taxpayer’s annual income would be payed by individuals earning up to eleven thousand four hundred and fifty dollars per year. All of this is taken into account in the withholding tax system of the United States of America, albeit imperfectly.

There are other, further deductions that apply to a person, as long as they know how to reduce his or her tax liability. The number of children or dependents is definitely a factor in this case, although certain cheats like donating to a charitable organization (thereby allowing an increase in the individual’s tax deduction) or claiming certain allowable itemized deductions (such as payments for prescription drugs or compensations for medical conditions) are utilized as a means of paying less taxes in a legal manner. If a person plays his or her cards right, they he or she may actually get enough deductions to warrant tax refunds from the government (where one literally gets his or her money back from the government).

There are other means by which a person can take advantage of tax deductions and tax credits, and these may be discussed in a different article. But for now, we speak in general terms and move on.

But before we do, it must be mentioned that federal income in the United States of America, is as much about citizenship as it is about residence. That is to say, even if an American citizen is not currently residing in the territory of the United States of America, he or she is still subject to the federal income tax laws of that country – a very unique feature of the system indeed, as it seems to only be true for America at the moment. What this means is that any income that these American citizens may procure world-wide would be taxed by the American government.

Now back to where we came from: we have mentioned withholding tax, which is applied to an individual employee’s payroll every pay day. Again, this is a method of direct taxation which the person need no longer file at the end of the taxpayer’s year (because the company he or she works for has effectively filed this fraction of tax levied for them). From here, we can most easily transition to the subject of payroll taxes – because these are taxes that are also taken from an individual’s payroll, but are not exactly considered income tax. There are two main payroll taxes: the Social Security Tax and the Medicare Tax. Both of these are part of the Federal Insurance Contributions Act tax (also known as FICA), a tax imposed on employers and employees to support federal programs that benefit retired personnel, orphans of personnel, and the disabled.

The Social Security Tax, used to fund the federal program that supports the aged, the survivors and the disabled, requires a contribution not only from the employer, but also the employee. It could only be paid via earned income (that is to say, wages – the definition of which may be tackled in another article) and the amount is pretty much determined by the Social Security Wage Base or SSWB. That is to say, the Social Security Tax could not be taxed from income like bonds, stocks and dividends.

The Medicare Tax, on the other hand, is used to fund the federal program that provides hospital and health insurance for the elderly and for those suffering from disabilities. One point forty-five percent of the employee’s income is devoted to paying this tax, and another one point forty-five percent is contributed by the employer. Unlike the Social Security Tax, the Medicare Tax is not so fluidly subject to change. Like the Social Security Tax, however, the Medicare Tax cannot be taxed from income like bonds, stocks and dividends.

Apart from the Social Security Tax and the Medicare Tax, there are other payroll taxes that are payed for by the employee. One such tax is used for unemployment insurance – it’s comprised of one point two percent of the first seven thousand dollars, and this is organized in such a way that an individual need be concerned by the risk of possibly being double-taxed (that is, taxed for the same thing).

The above-mentioned payroll taxes, unlike the regular withheld income taxes, are pretty much more focused in terms of purpose – taxpayers know exactly what their paying for when it comes to payroll taxes. If the federal programs funded by these taxes happen to go broke, they will be unable to provide the support that they were meant to provide. And unfortunately, their only source of income would be the payroll taxes. (To be continued in next article)