Here we are in October. I know what you’re thinking… already?! Yes, already.
And with the way time seems to race by in the last few months of the year with Orange County, California holiday celebrations and gift buying and all the other little tasks, you’ll be thinking the same thing when the end of the year arrives, too.
So, start thinking about some great end-of-year tax moves you can make now, like:
- maximizing your retirement contributions
- harvesting your losses
- prepaying certain deductible expenses (state and local taxes, mortgage interest)
- deferring income that will change your tax bracket (e.g. delaying bonus payments)
- maximizing your charitable contributions
Let’s carve out some time and talk about these for you.
And… while we’re at it, let’s also discuss if there have been any changes to your situation this year like a marriage or a new baby or adding a side hustle. These life changes will affect what your tax filing looks like, too:
Now, if you’re saying “already?!” because the extension filing deadline is very close (October 16) and you still haven’t gotten on filing your 2022 taxes, here’s your reminder alert to get. that. done.
Because not filing can get you into some trouble (especially if you owed and didn’t file). But even if you know you won’t end up owing anything, you could miss out on a refund.
More than that, not filing can get you into a habit of not taking income taxes seriously, which, if your situation changes and you do end up owing, will be problematic.
Read on to see why paying federal income tax is a good thing…
Ameritax’s Case for Paying Federal Income Tax
“Even if you’re on the right track, you’ll get run over if you just sit there.” – Will Rogers
Now … would it surprise you if I said 57% of American households in 2021 and around 40% in 2022 didn’t end up paying federal income tax?
The insanely rocky economy and subsequent federal relief efforts led to “an extraordinary increase” in the number of U.S. households that owed absolutely no federal individual income tax in 2021.
How did so many people get a year off from paying federal income tax? In 2020, millions of workers lost their jobs, many of them low-wage employees who were paying very little income tax before the pandemic. Plus, federal economic stimulus checks and expanded tax credits.
In 2021, that meant that over half of American middle-income households paid no federal income tax. However, that number significantly dropped to about one in five households in 2022.
The share of Americans who pay no federal income taxes has been hovering around 44% for most of the last decade, according to the Tax Policy Center of the Urban Institute & Brookings Institution.
Lucky them? Maybe. Maybe not.
For starters, nobody completely escapes taxes. Income tax is just one tax (though it seems like the most direct one) we pay. There are also the obvious sales taxes and then the less-than-obvious taxes baked invisibly into purchase prices (like the taxes for a gallon of gas).
The Policy Center estimated in 2021 that while the number of households paying neither payroll nor income taxes also rose significantly, roughly four out of five did pay one of these two taxes. (“Payroll taxes” usually show up on paychecks under “FICA” — Federal Insurance Contributions Act.)
Also, nearly everyone in the country paid state and local sales taxes, excise taxes, property taxes, and/or state income taxes, among others.
Many who went from paying some federal income tax to paying none might’ve experienced only a small reduction in taxes – in other words, they didn’t pay much income tax to begin with because their income was so low.
But as unemployment dropped, that did not continue to be the case.
In short, conditions that produced the pay no taxes dream in 2020 and 2021 didn’t continue into 2022 – which means it’s better not to depend on that happening in the future.
Best to pay as you go
First, let’s get rid of that popular fallacy “rich people pay no income tax.” According to the Policy Center, the top quintile of U.S. taxpayers (those earning above 189K annually) paid 67% of federal income taxes in 2022. The top 1% of taxpayers paid 26% of taxes in 2022.
Now, for the other Costa Mesa taxpayers, the *not paying* income tax will most likely catch up with you. For one, it can give you an inflated sense of income – not to mention the IRS generally expects you’ll have paid most of your total tax bill prior to filing your return.
So, here’s how to keep ahead on your tax bill:
- Remember, most income is taxable, including unemployment income, refund interest, income from the gig economy, and virtual currencies.
- Use the IRS withholding calculator to figure the right amount of tax to have withheld from your wages.
- Make quarterly payments of your estimated tax if you get a lot of your income from non-wage sources like self-employment, investments, taxable Social Security benefits, and some pension and annuity income.
- Don’t bank on getting your federal refund by a certain date. The IRS is known for delays in processing returns and getting taxpayers their money.
- Use a smart Orange County, California professional. (Ahem.)
The way we arrive at fallacies like “the rich pay no income tax” is that we don’t think about the “rich” having smart people on their team who know the tax code inside and out — and who know how to leverage it proactively (not just reactively, i.e. simple return preparation). These “people” are professionally trained to find fully legal and ethical ways to arrange for income and cash flow to be taxed at lower rates than other kinds of income.
And believe me — this isn’t something done through simple software, A.I., etc — but rather alongside actual humans who’ll listen to you and help you make decisions according to your goals. And… save you on your taxes as you do.
And the very good news? That’s exactly who’s in YOUR corner.
Helping you be proactive with paying federal income tax,
Tom Bass