Media Monday: History of the United States Income Tax

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Hope everyone is having a good Memorial Day.  To Celebrate today I thought I would share this video I found on YouTube dealing with the history of the United State Income Tax

Standard Deduction Spreadsheet

The other day I realized that even though the name of this blog is The Balanced Spreadsheet, I have not actually posted any of my spreadsheets that I have developed.  With the deadline for filing your 2009 Federal income taxes being less than 2 months away I thought I would share a spreadsheet that helps calculate your taxes for those who take the standard deduction.

To access the spreadsheet simply click on the link below, then in the browser click on download in the top left corner and then you will have the option to save or open the spreadsheet.  It contains three tabs for each filing status:  single, married, and head of household.  Simply fill in your dependents, W-2’s, interest income, and other information in the yellow cells and your total tax will be shown in cell F12.

Standard Deduction Spreadsheet

Remember that this spreadsheet is not an official IRS spreadsheet so results could vary.  This is to be used simply as a guide.  I have checked this spreadsheet but that does not mean there are any errors, if you do find any please let me know.  It is greatly appreciated.

I hope to keep adding more spreadsheets here and there and will eventually put them all on one page.  So if you file your taxes with the standard deduction, please try it out and let me know what you think.

The Ohio Marriage Penalty

With 2009 quickly coming to a close, it is that special time of the year again. No, not Thanksgiving. No, not “Black Friday”, but time for year end tax planning! I know tax planning is not the most exciting thing in the world but I do feel it is important to keep an eye on it to make sure you are legally minimizing your tax bill as I have written before on how much you really pay in taxes.

Since I got married in May I was going ahead and running the numbers for Ohio’s income tax to see what the tax difference is between married filing separately and married filling jointly. I knew that there would be some difference, but I was a little surprised to find out that it will cost us about $460 more to file married instead of separately!

As you can see from the chart here, Ohio’s state income table is the same under any circumstance unlike the federal incomes rates which changes depending on whether you are single, married filing separately, married filing jointly, or head of household. For example that means if you are married filing jointly and you both make $40,000 Spouse #1 pays the same tax as if they were single. However, spouse #2’s $40,000 would get taxed at 4.109% instead of starting at .587% and moving up in $5,000 increment until the final $20,000 gets taxed at 3.521%. Ohio does get a 5% tax credit for filing jointly but does not come close to covering the gap.

Now we could file separately and avoid the marriage penalty. However in Ohio you have to file whatever you file on your federal income taxes and filing separately would make us ineligible to fund ROTH IRA’s for 2009 and the tax free growth of ROTH IRA’s is more valuable then the $460 long term. IT is disappointing though to pay more tax simply because you committed the “sin” of marriage. J

Overall the $460 is not going to change our life either way, but perhaps this why Ohio’s growth rate is among one of the lowest in the nation.

The Mortgage Interest Myth

Those of you who have visited The Balanced Spreadsheet for a while now, know that one of our financial goals is to pay off the mortgage as soon as possible.  As I wrote in “To pay or not to pay” some people cite the mortgage interest tax deduction as a reason to not pay down the mortgage.  Today I am going to explain why this reason is a complete myth. 

For our example, let us assume you have a mortgage balance of $200,000 at 6.0%.    That means you will pay $12,000 of interest during the year.  If you itemize your deductions you will be able to deduct the $12,000 off of your income.  If your income for the year was $100,000 you would then pay taxes on $88,000.  This would put you in the 25% federal tax bracket if you are married filing jointly.  This means you would have a tax savings of $3,000 ($12,000 x .25).  So basically you are paying the bank $12,000 so you do not have to pay the IRS $3,000.  That is definitely not a winning game plan.  If you really want the tax deduction just give $12,000 to a charity of your choice, that way you still get the deduction but you do not have to go into debt to get it. 

Bottom line is this:  If you have a mortgage and are able to deduct the interest on your income taxes then do it!  It is a nice benefit to have come tax time.  However there is absolutely no reason to keep the mortgage just for the tax deduction.  Sadly there are some financial and tax advisers, who are other wise good, that will advise you to keep the tax deduction.  If my advisers give me that advice then I am getting a new one.  🙂

How much do I pay in taxes?

Have you ever wondered how much you really pay in taxes each year?  I was curious and decided to see what my real income tax rate is.  I took what my wife and I had made so far this year and projected our earnings for the fourth quarter of 2009 and came up with our gross income.  I then did a tax projection and came up with the following:

 

 We are in the 15% Federal tax bracket, but due to itemized deductions, 401(K) contributions and the Making work pay tax credit, we will pay about 7.5% of our gross in federal income taxes.  Our Social Security and Medicare taxes are blow their rates of 6.2% and 1.45% respectively due to health insurance premium deductions.  Even though property taxes are not tied to income, I included them anyways because they are a tax.  Unfortunately I do not keep all my receipts (I am not that much of a nerd. :)) though out the year to add sales tax in my calculations. 

The 22.45% tax means we worked until March 23^rd to pay all our taxes for the year.  According to research done by the Tax Foundation, we beat Ohio’s average by 19 days (April 11^th) and the national average by 21 days (April 13^th)!

This post is not mean to be a pro-tax or anti-tax post.  It is just meant to be fun to see how much you really pay in taxes each year.  If you work for an employer most of your taxes are already taken out of your paycheck before it even gets to you and it is easy to forget to check how much you pay each year.