Today is the Sunday before April 15th.
The Sunday before April 15 is a well-known day of mad-scrambling among self-preparing tax-returners. It's a busy day if you're in the business. If you're not in the business, well, then you can just smile with relief. And if you're married to someone who is in the business, like Megan H, I'm sorry for your loss. I'm also real sorry for the crabbiness you get to live with. For example, just before crashing last night, I mumbled to Spouse, "Sorry I was so bitchy today." He'll prolly get the same apology tonight. But maybe not. We'll see. So far the day is going well. I might even say that I'm enjoying myself.
On the Sunday before April 15, I usually block out the whole day and dedicate it to working. I take a break here 'n there for an undefined few moments, but then I go right back. Right now, I'm taking one of those breaks. I've taken a break to write something. But what do I decide to do? Write about work.
That doesn't sound much like a break, does it? Nope. Today is different, however. Today is different because I like my job. Being as most of my employment editorials turn into B&M sessions, I figured it was time to say something nice.
As an aside, have you noticed the fun and whatnot that B&M represents? There's Bitch and Moan (as referenced above), Bill Murray, Bowel Movement, Butt Munch, Big Mouth, Baby Mama, Black Male, Bayerische Motoren, etc. B&M has so many possibilities.
As an aside to the previous aside, I started reading this blog called Watching The World Wake Up. It's a blog mostly about nature and science and cycling. But this Watcher guy has this clever method of funneling facts and schlepping stories. He'll write up some stuff, go on a tangent, then go on a nested tangent. It's quite entertaining. Especially for people like me who get more joy out of life's tangents, or asides, than life's meaty matters.
Preparing a tax return is similar to eating a bowl of soup. When eating soup, you spoon up a bite and taste. Often times you'll think, "That was good. Good enough, I suppose. But I wonder what's in it... I sure hope there isn't any goat in there. I don't like goat." Not knowing the contents of that spoon-full of soup, the partaker of the soup still swallows.
For most people, the tax return is the same. They prepare that return the best that they know how, but have no idea what is in it. The self-prepared tax-preparer will think, "That seems right. Right enough, I suppose. But I wonder what's in it... I sure hope I'm not paying more than I should. I hope I'm doing something I'll get in trouble for. And I sure hope there's no audit in there. I don't like audits." Not knowing the contents of that prepared tax return, the preparer still sends it.
When it comes to the tax return, there are five important elements (actually, there's more than five elements. I'm choosing to elaborate on a simple (yeah, right) concept of the tax return that has five elements.) These elements are: additions, adjustments, exemptions, deductions, and credits.
At first glance, additions, adjustments, exemptions, deductions and credits all seem similar. But as you look at them closer, they are very different. Additions, adjustments, exemptions, deductions and credits are the potatoes in your soup. At first glance all the potatoes in your soup seem similar. But as you look closer, you notice they are different. You have russet, white, round red, new and fingerling.
So when you're eating that soup, how do you tell the difference between all of the potatoes species in your soup? It's simple. You must have a basic understanding of potatoes; their color, consistency and taste. The same goes for additions, adjustments, exemptions, deductions and credits. You must have a basic understanding of additions, adjustments, exemptions, deductions and credits.
There's a problem, however, with getting this basic understanding of additions, adjustments, exemptions, deductions and credits. It's not as simple as googling "types of potatoes" and "additions, adjustments, exemptions, deductions and credits." (You could try that now -- you know, to compare 'n contrast the difference between googling "types of potatoes" and "additions, adjustments, exemptions, deductions and credits.")
The point of this exercise is not to entangle tax matters with soup ingredient metaphors. The point of this exercise is to display the blatant and unecessary complexity that lies within the U.S. tax code. I will do this by trying to simplify, to the best of my ability, the definitions assigned to additions, adjustments, exemptions, deductions and credits.
(I say "the best of my ability," because simplifying this stuff is part of my job description. I spend a fair amount of time trying to explain the difference between additions, adjustments, exemptions, deductions and credits to Great Granny Fillmore who can't afford an accountant. Although it might sound easy to you, it ain't. It just ain't.)
First, we must define Taxable Income. Your Taxable Income is the amount of your earned income in which you must pay tax. Your Taxable Income can be increased or decreased by additions, adjustments, exemptions, deductions and credits.
Next we'll move on to additions. An addition can be defined (simply) as income. Wages, alimony received, retirement income, investment gains, social security benefits, business earnings and unemployment are all considered additions.
Adjustments are subtractions from your income. Specifically, they are subtractions that result in your Adjusted Gross Income or AGI. Your Adjusted Gross Income is important because many tax credits and deductions for both your federal and state returns are determined by the amount of your Adjusted Gross Income. Examples of adjustments include Health Savings Accounts, educator expenses, 1/2 of your self-employment tax, Traditional IRA contributions, student loan interest, and deductions for college tuition and fees (not to be confused with the credits available for college tuition and fees.)
Exemptions are subtractions to your income that are based on the number of humans you have on your return. Each human in your return gets an exemption. If you are single, you get one exemption. If you are married, there are two humans in your return, therefore you get two exemptions. If you are married with two kids, you get four exemptions. If you are married with two kids, and claim Uncle Fester, then you get five exemptions.
Now, here's the complicated part. To calculate your total exemption amount, multiply the number of humans in your return by $3650 (that is, if your AGI, not income, is less than 125,100. If your AGI is above 125,100 then this part gets even more complicated.) So, in the above scenario with Uncle Fester, the total exemption is 18,250.
(Exemptions apply only to humans. Not your dog or your cat or your horse or your fancy bicycle. Veterinary expenses and chain lube are not deductible either. That right there was a tangent by the way.)
And now we move on to Deductions. There are two types of Deductions: The Standard Deduction and Itemized Deductions.
First we'll start with the Standard Deduction. Each tax return is guaranteed a Standard Deduction. The amount of the deduction is based on your filing status. The Married Joint filing status provides the highest Standard Deduction. Married filing Separate and Single provide the least (usually, this is the tax return you know, there are no black 'n whites.) The other filing statuses, Widow(er), and Head of Household all range in between.
Your Standard Deduction, however, can be increased if you are blind, over 65, or if you pay real estate taxes. And, just for 2009, if you paid sales tax on a new (not used) vehicle (with a motor, not that fancy bicycle), you can add that to your Standard Deduction. (But that was way confusing, because adding something to your Standard ultimately subtracts. 'Nother tangent!)
Itemized Deductions are various deductions that can be used instead of the Standard Deduction. Most tax preparation software is designed to take the higher of the two. Meaning, you enter all of your deductions that qualify as Itemized. If the stuff you entered as Itemized is greater than the Standard, the Itemized is used. If your Standard is greater than the Itemized you entered, then the Standard is used.
Itemized Deductions are filed on a form called Schedule A. Itemized Deductions include stuff like Medical expenses, state and local taxes paid or sales taxes, property taxes, mortgage interest, charity contributions and job expenses. All those things mentioned have their own nested rules within their own nested rules. Just so you know.
Additions, adjustments, exemptions, and deductions all form your taxable income. Once all of that stuff is entered and figured, you now have your taxable income. Based on that taxable income, your tax bill for the year is figured. Note that the amount of money you have withheld from your paychecks is not your tax bill for the year. Your tax due for the year is reported on line 46 of your federal 1040 form.
Are you still with me? You should get an award. In fact, I've got two ski passes to a ski resort located in the Wasatch range o' Utah. Leave a comment if you want 'em. If more than one of you make it this far, and leave a comment, I'll raffle 'em off. Or something.
Once the tax bill for the year is figured, you can now apply credits to your tax bill. Credits are subtracted directly from your tax bill. Generally speaking, a credit gives you more bang for the buck than any of the other aforementioned items (exemptions, deductions, adjustments). Examples of credits include child care, child tax, education, first time home buyer, earned income, and many more.
When it comes to credits, there are two types: Non-Refundable and Refundable. Non-Refundable credits are credits that can only be used equal to or less than the amount of tax you owe for the year. For example, if you owe $1200 in tax for the year, the most you can take in non-refundable credits is $1200. Examples include the child tax, child care, education, retirement savings contribution, and foreign tax paid.
Refundable credits can be taken regardless of how much tax you owe for the year. Refundable credits are considered a payment. If you have a tax bill of $1200 for the year, you can take all of the refundable credits you qualify for, even if our combined credits are greater than $1200. Examples include the tax you had withheld during the year, additional child tax, earned income and first time home buyer/repeat home buyer credits.
Now. Does that seem overly complicated to you? Hell yeah! Note the addition of these complications are not partisan. Both Republicans and Democrats, while serving in their perspective and dominating factions, added equal complication.
I want a flat tax. Seriously. Even though the added complexity of the tax code means job security for me, I'd go without a job to do so.
We're all making sacrifices....