Reap Lower Tax Rates With Less Income

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Forget mortgage payments, rent, car, or other extravaganzas – income tax in one biggest thing that is bothering most of the American families when financial year comes to an end. When there are changes to the tax rules, you should be prepared to get accommodated to the changes. At the same time, it can certainly impact your other loans say for example your car and mortgage loans.

Generally, you can experience tax changes when there is a change in the government or when a new government comes into power.  Otherwise, you can expect changes when there is a budget or the government releasing some tax goodies to cover up the tax ambiguities. Unless you keep your eyes and ears open, you might miss some tax changes that can impact any of your important commitments. In the worst case scenario, you could even face a reassessment or penalty from the United Stated Revenues for declining the tax changes.

Before getting deeper into exploring solutions for reducing taxes, in the first place, let us understand what exactly the tax system are and their types?

Tax And Its Different Types – A Small Overview

In the United States of America, tax is set up on both the federal level and state level. Taxes are classified into different types such as income tax, sales tax, capital gains and many more. These taxes are categorized into regressive, proportional and progressive taxes. Regressive taxes have a greater impact on low-income earner than from high-income earners.

However, proportional tax systems are quite different. It requires the same percentage of income from all taxpayers irrespective of their income. In a nutshell, it is referred to as flat tax because the percentage of the tax taken from the person’s income remains the same no matter how much income the individual earns.

Apparently progressive taxes are a solace for low-income earners because this type of taxation system imposes lower taxes on low-income earner when compared to those of higher income. Taxpayers should pay higher taxes when they earn more incomes or pay lower taxes for lesser income.

Regressive Taxes

Taxes are bound to be regressive when they impose harsher pain on the poor than the riches. In a number of families, they cannot even afford to cover up for their basic needs such as food, clothing, and shelter however these tax systems add more burden to their existing miseries. However, on the other hand, regressive taxes don’t impact the basics of riches yet it limits their ability to make other investments like retirement plans, investments in stocks and mutual funds and planning a dream vacation. This tax includes sales, property and income tax.

Proportional Taxes

With this taxing system, the lower class, middle class, and upper class all pay the same rate of tax regardless of their income.  In other words, it imposes the same relative burden on all the taxpayers. Sales tax is a typical example of proportional tax because all the consumers irrespective of their incomes pay the same fixed rate.  One of the greatest benefits of this tax system is, it reduces the tax theft from rich sectors of the community. When there is a variation of tax rates, the riches often look for loopholes to dodge tax paying however proportional taxes doesn’t give room for such things.

Progressive Taxes

This tax policy requires higher income earners or individuals with wealth to pay taxes at a rate higher than those with lower incomes. Although the riches opposes this policy yet it is welcomed by the poorer sections. Progressive taxes shifts the tax burden to those able to pay however the inflation can push the taxpayers into a higher tax bracket. Apparently, supporters of progressive taxes claim that higher salaried people have the ability to pay higher tax rates so this is the fairest system. Wealth, property tax, tax on luxury goods or exception of sales tax on basic essentials fall into the progressive tax system.

Conclusion

While the US tax code is structured so the wealthy pay higher tax rate, the low-income earners often take advantage of this situation and enjoy tax benefits. They even figure out ways to fit their income in retirement savings and plan for emergencies.


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