Archive for the ‘Tax rates’ Tag

Happy 100th Birthday Federal Income Tax?!

Originally published in the Cedar Street Times

October 18, 2013

On October 3rd, our nation’s federal income tax turned 100 years old.  Usually lots of people show up for anyone turning 100, but sadly, for the federal income tax, there was no grand party.  In fact, most of its closest friends – the 106,000 employees of the Internal Revenue Service were at home due to the government shutdown!  Americans celebrating the federal income tax would be lackluster at best – maybe on par with the excitement of throwing a party for your boss.  But let us at least pay some tribute to this system and perhaps gain a little more perspective

The roots of the income tax go deeper than 1913.  Abraham Lincoln set up the first income tax in 1862 in order to finance the Union efforts in the Civil War, and he established a position called “Commissioner of Internal Revenue” to handle this job.  The tax was a temporary tax and expired in 1872.  It provided about 21 percent of the cost of the war efforts, and about 10 percent of Union households were touched by the income tax.

Tariffs and excise taxes were the typical means of generating most revenue before and after the Civil War, but the country was looking for a better system.  In 1894, Congress tried to reenact the income tax but it was shot down by the Supreme Court which declared it unconstitutional.  The Constitution basically said that direct taxes had to be apportioned to the states based on relative population.  An income tax clearly violated that since it was not divided out based on population but different to each person based on each individual’s income.

During the early 1900s, there was a growing movement by the people in support of a permanent income tax that would mainly be levied on wealthy individuals.  Tariffs and excise taxes hit low and middle income people squarely on the shoulders since a much higher percentage of their total income was taxed as a result.  The only way to have an income tax, however, was by laying the groundwork to make it constitutional via an amendment.

Three main campaign issues defined the election of 1912: monopolies, women’s suffrage, and tariffs.  Woodrow Wilson wanted to break up monopolies, he dodged women’s suffrage by saying it should be decided at the state level, and he wanted revenue reform.  He was elected with nearly 82 percent of the Electoral College vote and the next year the 16th amendment was ratified which states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

I have a facsimile on my office wall of the first income tax return in 1913.  It was three pages long with one page of instructions (2012 instructions were 214 pages by comparison).  Adjusted for inflation in today’s dollars, if you made less than $70,000 as a single individual, you had no income tax liability.  If you made between 70,000 and $465,000, you were assessed a one percent income tax!  The top bracket was only seven percent, and assessed to those filers making over $11.6 million in today’s dollars.

Compare that to 2013…our bottom tax bracket is 10 percent assessed on single individuals making between $10,000 and $18,925, and our top bracket is 39.6 percent assessed on individuals making over $400,000.  In fairness to history, after the first three years tax rates started rising and they skyrocketed during World War I when the top bracket hit 77 percent on earnings over $15 million in today’s dollars.

Since 1975, there have been dozens of court cases from crafty people trying to figure out how they can get out paying income taxes.  The cases involve everything from claims that ratification procedures of the sixteenth amendment in certain states were not properly followed right down to claims that differences in punctuation and capitalization marks in versions ratified by the various states means the ratification was null and void. None of the ratification cases have ever been victorious and the courts have ruled ratification arguments are now frivolous or fraudulent.

The federal income tax is quite resilient, and has spent its entire life being pulled in many directions.   I am sure it will soon get over any hurt feelings from not having a 100th birthday party as did the Department of Labor, the U.S. Forest Service, and the National Archives.  Maybe on its 200th birthday it will get a cake.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Retroactive Tax Increase on Highest Taxed State

Originally published in the Cedar Street Times

November 30, 2012

Depending on how you look at it, Californians could now consider themselves the highest taxed state in the U.S. after our recent passage of Proposition 30 on our November ballots.  Proposition 30 increased income tax rates by one to two percent on people earning over $250,000.  It also made these increase retroactive as of 1/1/2012.  If you are subject to these higher tax rates, be aware that your state withholdings are likely inadequate and you should talk to your tax professional about making an additional payment by April.  No penalties will be assessed for under withholding to the extent that it is attributable to the tax hike, and you pay it by April 15, 2013.

Our top rate on our highest earners is now 13.3%, commanding an impressive 2.3% margin over second place Hawaii (11%), and 3.4% over third place Oregon (8.9%).  Other states in the high eights include Iowa, New Jersey, Washington D.C., Vermont, and New York.

You do have to keep in mind that some places have city taxes also.  But even a penthouse occupant in New York City that has a state tax of 8.82% and a city tax of 3.876% (combined 12.696%) would not have to muster up the cash of a wealthy dessert dweller in California.

Of course, there are many ways that states bring in revenue, such as sales tax, property tax, inheritance tax, auto taxes, etc.  So you cannot really base overall tax burden on income taxes alone. If you are looking for overall low tax burden states you may wish to consider Wyoming, Alaska, Florida, the Dakotas, Montana, Texas, Tennessee, Mississippi, South Carolina, Louisiana, or Alabama.  Different states also have distinct advantages for people earning different types of income or have different types of deductions.  The more you have at stake, the more tax planning may become a factor in where you choose to reside.

If you want to know more specifically how California’s new increases may affect you, here are the details:  California taxable income over $250,000 for single filers, $500,000 for married filers, and $340,000 for Head of Household filers will be taxed at 10.3%. Taxable income over $300,000 single, $600,000 married, and $408,000 HOH will be taxed at 11.3%.  Taxable income over $500,000 single, $1,000,000 married, and $680,000 HOH will be taxed at 12.3%.  And anyone with over $1,000,000 taxable income will also be assessed an additional 1% mental health tax.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Are Tax Rates on the Rise?

Originally published in the Pacific Grove Hometown Bulletin

May 18, 2011

Earlier this week, I pulled out my crystal ball and posed a few questions about future personal federal income tax rates – strangely, it became suddenly murky.  So I pulled out my history books instead and drew some conclusions.  Let me set the stage and give you some history.  Keep in mind since 2003 our bottom tax bracket has been 10 percent and our top tax bracket has been 35 percent.

Wars have historically been fantastic reasons to raise taxes.  In fact, our first national income tax was created to raise money for the Civil War.  After the Civil War the tax was abolished.  Although income taxes were permanently revived in 1913 (some people still questioning its legitimacy from their prison cells) a logical pattern seemed to develop– when our country needed money, tax rates went up; when it did not need money, tax rates went down.

In 1913 the bottom bracket was at 1 percent and the top bracket was at 7 percent – perhaps a special introductory rate. During World War I the bottom bracket moved as high as 6 percent and the top bracket shot up to 77 percent!  Then brackets fell dramatically until the depression in the 1930s.  The government needed money so brackets shot back up flowing right into World War II where they peaked in 1944 and 1945 with the bottom bracket at 23 percent and the top bracket (income over $200K) at 94 percent!  Rates dropped after World War II, but stayed relatively high with the bottom bracket not dipping below 14 percent and the top bracket not dipping below 70 percent until after 1980.

During the Reagan and H. W. Bush years dramatic changes took place (Reaganomics).  The bottom bracket dropped as low as 11 percent and the top bracket dropped as low as 28 percent.  The brackets rose a little during the Clinton years and then dropped again when W. Bush took the reigns.

Tax brackets are not everything, but to the extent they are an indicator, it is difficult to say we are overtaxed.  With the exception of a three year period in the late 1980s, the tax rates on our bottom and top tax brackets are both at their lowest levels since before World War II.  We have maintained this course during our worst economic decline since the 1930s while simultaneously fighting a war and spending at all-time highs.  Our logical pattern seems to have been broken.  Our national debt has been rising substantially to pay for our record-low tax brackets and our loose wallet.  The longer we as Americans continue to cast our vote beyond our means the more painful it will be.

So from my perspective, tax rates only have one direction to go – up.  Next issue, I will discuss the national debt.

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA, 93950.  He can be reached at 831-333-1041.