Income
Tax
Federal
income tax is due on most types of income, including
wages and salaries, pensions, bonuses, commissions,
business income, dividends, interest, capital
gains, rent and royalties.
The
main channels for payment of income tax are:
- For
employees, withholding tax deducted from income
by their employers;
- For
self-employed people, 3-monthly payments of
estimated tax;
- For
non-working people with sufficient earnings,
3-monthly payments of estimated tax;
- Alternative
minimum tax, for people who have been clever
enough to reduce their tax to a low proportion
of total income, also payable on an estimated
basis.
There
are many possible deductions from gross income
which reduce the amount of taxable income on which
tax is calculated. Employees give their employers
information about their deductions using Form
W-4.
The
annual tax return form that must be filed by all
taxpayers as individuals is the 1040; there are
some different versions of it.
Versions
1040EZ and 1040A can be used only by those with
taxable income under US$100,000. The EZ form can
be used subject to a number of conditions, some
of which are: filing status is "married filing
jointly" or "single"; no dependents
are claimed; no adjustments to income are made;
the only tax credit claimed is the earned income
credit. The A form can be used subject to a number
of conditions, some of which are:
income is only from wages, salaries, tips, unemployment
compensation, interest and dividend income, capital
gain distributions, social security benefits,
taxable scholarships, pension and IRA distributions,
or Alaska Permanent Fund dividends; the only adjustments
made to income are educator expenses, IRA deduction,
student loan interest deduction, or tuition and
fees deduction; deductions are not itemized; the
only tax credits claimed are the child tax credit,
additional child tax credit, education credit,
earned income credit, child and dependent care
credit, elderly credit, or retirement savings
contributions credit.
There
are a variety of additional forms that may need
to accompany the 1040 form, for instance the 1099
(dealing with non-emplyment income) and the 1098
(dealing with various types of deduction).
The 1040 form also has a number of schedules,
which may need to be completed, eg Schedule D
for capital gains, Schedule E for rental real
estate income, royalty income and S Corporation
income, and Schedule A for deductible taxes medical
expenses.
Banks, brokerages and other financial institutions
that pay interest or dividends mail a 1099-INT,
1099-OID or 1099-DIV at the end of every tax year.
Such receipts are reported on Schedule B.
There
is a wide variety of possible tax deductions,
including (according to circumstances) education
expenses, home mortgage interest, student loan
interest, IRA deduction, educator expenses, moving
expenses, alimony paid, job expenses and tax preparation
fees. Possible tax credits include child and dependent
care credit, child tax credit, additional child
tax credit, education credits, lifetime learning
credits, earned income credit, retirement savings
contribution credit, and elderly credit. There
are many other deductions and credits.
Most
of these deductions have their own forms or Schedules.
It will be seen that filling in a tax return is
often a non-trivial affair, and many people use
tax preparation software, on- or off-line, or
pay an adviser to compile their tax returns.
In
2008 and 2009 there was a USD8,000 first-time
homebuyer credit aimed at the moribund housing
market. It is due to expire at the end of November,
2009, but Senate Banking Committee Chairman Chris
Dodd joined Senator Johnny Isakson in calling
for an extension of the credit at a hearing on
the state of the US housing market on October
20.
According
to Dodd, a Connecticut Democrat, the tax credit
has already been used by nearly two million first-time
homebuyers and has helped to arrest the fall in
house prices and stabilize the nation's housing
market in general.
The
first-time homebuyer credit was included in the
Housing and Economic Recovery Act of 2008. For
homes purchased in 2008, the credit operates like
an interest-free loan because it must be repaid
over a 15-year period. However, the credit was
expanded in 2009 for homes purchased in 2009,
increasing the amount of the credit and eliminating
the requirement to repay the credit, unless the
home ceases to be the buyer's principal residence
within a 36-month period. The credit is 10% of
the purchase price of the home, with a maximum
available credit of USD7,500 (USD8,000 if the
home was purchased in 2009) for either a single
taxpayer or a married couple filing a joint return,
but only half of that amount for married persons
filing separate returns. The full credit is available
for homes costing USD75,000 or more (USD80,000
if purchased after December 31, 2008, and before
December 1, 2009).
Isakson
plans to introduce an amendment to legislation
extending unemployment benefits that would extend
and expand the current homebuyer tax credit. Isakson’s
amendment would keep the amount of the credit
at USD8,000, but would remove the first-time homebuyer
requirement, extend the tax credit until June
30, 2010, and raise the income limits to USD150,000
for an individual or USD300,000 for a couple.
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