MONEY 20 - TAXES

THIS IS MY 20TH POST ON UNDERSTANDING MONEY TOOLS

We are back to Money, Money, Money on this tutorial blog.  Let’s discuss taxation.

No doubt about it the wealthy pay less a percentage in taxes, although the total amount paid is quite great.  Today, the wealthy have moved their total assets owned in the US from about 14% ownership 15 years ago to about 50% today.  No wonder the dollar amount has gone up! They also have the ability to do this legally as they hire the best law and accounting firms for tax planning and asset preservation.  God bless the wealthy, however the middle class cannot afford these financial services and the poor have no money, perhaps they are the luckiest!

I will have to admit that I am not the smartest individual, so unlike other blogs I have written I needed to look up current income tax percentages to relay them to you.  Hope you find this of interest and help.

First, let’s talk about tax avoidance for long term and off shore accounts which has been common for a long time, however in recent years there has been attention drawn to the usage.  In my varied history I was involved with a very wealthy family and our law firm had the following scenario to minimize taxation and then shuffle money to various currencies.  In the US we invested in mortgages via a partnership. These mortgage packages had lives of over 12 months to take advantage of long-term capital gains.  As previously discussed the long term Federal capital gains tax rate is 15%. Then, state tax is paid depending on which state you reside in.  Several states do not have state income taxes, like Texas, Nevada and Florida. 

When we established this partnership we structured a corporation in the Cayman Islands that owned the partnership, thus as income came into the partnership we paid taxes on that entity and then the money was transferred to an offshore account. All legal.  Large US corporations are doing similar today.  They have offshore accounts, book the income and assets here however keep the money outside the US to avoid taxation.  I don’t see this changing much even if out corporate tax rate is decreased. Most large corporations are already paying very low rates and not 35-39% at the high end.  There are many world wide tax havens including the Isle of Mann and Isle of Jersey off England.

How are partnerships taxed?  The income is a pass-through to each individual’s income tax rate and reported on their Form 1040 and Schedule E.  The partnership itself needs to file a Form 1065 to inform the IRS that the partners are reporting the proper amount on their tax returns.  The partnership supplies each partner with a Schedule K-1.

Let’s address Federal tax percentages for individuals, head of household, for 2012.  In October the IRS looks at inflation rates and may adjust the tax rate accordingly for the following year.

If you make up to:     Tax rate:

-$12,400.                      10%

-$47,350.                      15%

-$122,300.                    25%

-$388,350.                    33%

-more than $388,351,   35%

If you are filing as single, (not head of household) or married filing separately the rates will differ from above. The income level can be adjusted by some personal expenses and giving, including donations to non-profit organizations like churches and charities.  Also, contributions to ERISA plans like 401-K’s and IRA’s.  Best to talk with your human resource director or accountant for planning.

Now, let’s look at FICA.  If you are an employee of a corporation the employer pays a portion and you pay a portion.  If you are an independent contractor, as is common today, you pay all of the FICA.  FICA is broken into two parts, 1) Medical/Hospital Insurance and, 2) Old Age, Survivors and Disability Insurance.

Through December 31, 2012 employees pay 4.2% (a 2% Holiday temporary cut) and the employer pays 6.2% to the Old Age, Survivors and Disability Insurance portion of FICA.  Both the employee and the employer contributes 1.45% to the Medical portion. Self employed individuals pay 10.4% to “OSASD” and 2.9% to the Medical part. In 2012 at $110,100 of income contributions are not required. The max is adjusted on an annual basis by the government and is indexed.

Let’s look at corporate income taxation.

If the corporation made up to or between:       Tax rate:

-Up to $25,000.                                          15%

-Between $100,000-$335,000.                   39%

-Between $335,000-10 million                   34%

-Between  $10-15 million                           35%

-Between $15-18,333,333.                          38%

Is this percentage weird, or what?  To account for the differences there has to be more companies falling into different adjusted income ranges to vary percentages paid.

These income levels are after expense adjustment, and again this is where  good tax law firms and accounting firms add great value.

I hope you enjoyed this informational blog and found the stats of interest.