America’s Two Tax Systems

Many of us don’t have much worry when it comes to the April 15^th deadline. We fill out the papers or pay to have someone else fill them out just so we can see how much our tax return is going to be. Other don’t care for the date and all the work that surround it, but either way, as the saying goes, taxes are as certain as death. So wouldn’t it be helpful to understand more about how are taxes work and how to get them to work in our advantage, beginning with understand there is not one system, but two systems for taxes.

The first system we are fairly familiar with known as Marginal Tax Rates. With marginal tax rates, we know that a certain income, such as $40,000 will have a rate of 25% for those who are single and 15% for those who are married. Although about the same amount comes out every paycheck, taxes are not that equal in income. These marginal tax rates begin at the beginning of the year with your beginning income at only 10%. As your total yearly income increases during the year so does the percentage rate.

The second system is the Alternative minimum tax. This tax system was created because of those people, which you can’t blame, who decreases the amount of taxes they had to pay by claiming a lot of deductions and exclusions. This system was to insure that these people where pay at least a certain percentage. This system does this to prevent you from claiming all deductions and add back to your taxable income. If you do fall into this second system, your taxes will then be figured under both systems leaving you to pay the amount that is higher.

Taxes can be confusing and overwhelming generally leading most people to seek out individuals who figure there taxes for them, but understanding taxes, or at least the basics, will help you to plan all year long including choosing the right retirement plans, college savings plans, and many other tax advantages.