Tax Forms Explained

Are all those tax form codes giving you a headache? Here's a quick guide of the most important forms you'll need when filing.

Which Form 1040 Should I Use?

For federal income tax returns, you have three related forms: Form 1040EZ, Form 1040A, and Form 1040. Start by checking if you can meet all requirements stated regarding the use of 1040EZ and if you are okay with its limitations. If not, check the requirements and limitations of Form 1040A. Finally, go see the conditions for using Form 1040 if they are applicable to you.

Form 1040EZ: U.S. Individual Income Tax Return for Single and Joint Filers with No Dependents

Also known as "the easy form.  "According to the IRS, you should use Form 1040EZ if and only if:

1. Your filing status is single or married filing jointly,
2. You claim no dependents,
3. You, and your spouse if filing a joint return, were under 65 on January 1, and not blind at the end of the year,
4. You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500,
5. Your taxable income is less than $100,000,
6. You did not receive any advance earned income credit payments,
7. You do not owe any household employment taxes on wages you paid to a household employee,
8. You do not claim a student loan interest deduction, an educator expense deduction, or a tuition and fees deduction, and
9. You do not claim an education credit, retirement savings contributions credit, or a health coverage tax credit.

Using Form 1040EZ means you are not allowed to list deductions or claim adjustments for income or tax credits, except earned income credit.

Form 1040A: US Individual Tax Return

Also known as "the short form". According to the IRS, you should use Form 1040A if and only if:

1. Your income is only from wages, salaries, tips, taxable scholarships and fellowships, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, and taxable social security or railroad retirement benefits and Alaska Permanent Fund dividends,
2. Your taxable income is less than $100,000,
3. You do not itemize deductions, and
4. Your only adjustments to income are the IRA deduction, the student loan interest deduction, educator expenses and the tuition and fees deduction.

Types of credits you can only claim when using 1040A are: child and dependent care expenses, earned income, adoption, (for the) elderly or disabled, education, child tax, additional child tax, and retirement savings contribution.

Form 1040: US Individual Tax Return

Also known as "the long form". According to the IRS, you should use Form 1040 if:

1. Your taxable income is $100,000 or more,
2. You have certain types of income such as unreported tips, certain nontaxable distributions, self–employment earnings, or income received as a partner, a shareholder in an "S" Corp., or a beneficiary of an estate or trust.
3. You itemize deductions or claim certain tax credits or adjustments to income, or
4. You owe household employment taxes.

For a complete list of conditions for the usage of Form 1040 is available in the instructions of Form 1040A

Form 1040NR: U.S. Nonresident Alien Income Tax Return and Form 1040NR-EZ: U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents

If you are a non-resident alien married to a U.S. citizen or resident alien, you are allowed to use Forms 1040EZ, 1040A, or 1040. However, other non-resident aliens must use Form 1040NR or Form 1040NR-EZ whichever is applicable. Resident aliens must abide by the same tax laws and procedures as U.S. citizens.

For more information on U.S. non-resident aliens, visit Topic 851

Form 1040X: Amended U.S. Individual Income Tax Return [Instructions]

Form 1040X is used to correct only Forms 1040, 1040A, 1040EZ, 1040NR, or 1040NR-EZ. For more details, read more here.

Wage Forms

Forms W-2 and W-3 are generally accomplished by your employer, but the information contained in them is still necessary in accomplishing your tax return.

Form W-2: Wage and Tax Statement

Form W-2 should be sent to you by your employer, as it is needed in accomplishing your tax return. These W-2's, which list your earnings and withheld taxes, must be completed and sent in by the end of January.

Note that Form W-2's are required in electronic submissions.

In case of a misplaced Form W-2, contact your employer immediately. If by mid February you have not received it, call the IRS for help. If you cannot obtain a Form W-2 by the tax deadline, use Form 4852: Substitute for Form W-2, Wage and Tax Statement

Form W-3: Transmittal of Wage and Tax Statements

Form W-2 summarizes the data contained in Form W-2.

State Tax Forms

The Federation of Tax Administrators (FTA) has a compilation of tax forms and instructions by state. For more information, choose your state here:

 

Tax Refunds

Basically, a tax refund is a refund on your income tax. It is money sent back to you by the government when you paid too much tax or withheld too much from your salary the previous year. The keywords here are "sent back" – while tax refunds might seem like a surprise gift from heaven, they're actually your money that you willingly gave to the government!

US taxpayers are eligible for a tax refund if the tax they owe is less than the sum of:

• The total amount of refundable tax credits that they claim.
• The total amount of withholding that they paid.

Refunds can be (1) directly deposited into the taxpayer's bank account, (2) mailed directly to them as a check, and (3) applied to the following year's income tax.

According to the IRS, the refund checks of taxpayers who filed complete and accurate tax returns will be issued within six weeks from the date the IRS received the return. The process is much quicker when the taxpayer e-filed his/her return: refund checks will be issued within three weeks.

Taxpayers can check on the progress of their tax refunds through the IRS' Where's My Refund web page, which has serviced more than 21 million requests from January 2006 to April 5, 2006. Alternatively, taxpayers can call the IRS Refund Hotline at 1-800-829-1954. For both services, you'll need to provide your social security number, your filing status, and the exact amount of the refund.

As mentioned earlier, tax refunds are actually your money, and it's never wise in the first place to give them to the government and let them keep it for a year, interest-free. You could've done a lot of things – pay off debt, invest in the stock market – if only you had that money all year round in your pocket instead of the US Treasury vaults. This means that getting a huge tax refund now shows that you made an oversight in last year's tax returns.

Experts have one unanimous advice on tax refunds – minimize them. If you get a big tax refund this year, promptly adjust your withholdings so that next year's refund check is small. Claim more withholding allowances so you can reduce your withholdings.

Now, if you're still expecting a big tax refund that you just can't wait to receive, you might be tempted to apply for a tax refund loan. These "refund application loans" allow you to pay a fee and receive thousands of dollars in cash against your coming tax refund. The problem is such loans come at exorbitant interest rates, and you'll be sorry in the end. So be patient in waiting for your tax refund and don't give in to refund loans!

 

 

Tax Filing

When Do I File?

April 15 (or the soonest business day if it falls on a weekend) is the key date here. That doesn't mean you can't start early. Remember to postmark the tax return you'll be sending by the deadline date, by midnight at the very latest. Give allowance for delays or other problems.

What's My Filing Status? Am I exempt?

Find out if you're going to file married (jointly or separately) or single, resident alien or non-resident alien, exempt or non-exempt. Also find out about your personal dependents, wherein everyone else is qualified except your spouse.

Remember that when filing jointly, both signatures are required on the form. If this is not possible, attach special representation or authorization for this.

What Information or Documents Shall Do I Need?

Social security, visa, and passport numbers, as well as TINs, will be mentioned in the forms.

What Should I Calculate?

You'll need to calculate the following:

• Income (an estimate will be provided by the Form W-2 sent in by your employer). Some part of your income may not be taxable.
• Deductions either standard (a flat rate) or itemized. Certain forms do not allow for itemized deductions, so choose carefully.
• Credits and additional taxes.

Once you've thoroughly examined which contribute to the taxes you have to pay, check too the amounts you've already paid (according to your withheld taxes, for example). At times you may have taxes overpaid, so these can be refunded (read more in Tax Refunds). Likewise, recall if you have any unpaid dues.

What Forms Should I Use?

It is a good idea to start with "the long form," that is, Form 1040, and choose whether Form 1040A or Form 1040EZ suits you better. If you are a non-resident alien, you'll be using either Form 1040NR or Form 1040NR-EZ. Remember that Form W-2 and Form 1099-R must be accomplished and attached with your 1040, whichever flavor that is.

If you're not too sure which one is best suited for you, try reading Tax Forms Explained. Accompanying instructions are also available in the IRS website (visit the article for links to those downloadable files), and as you go along these instructions will mention additional forms you need to accomplish and attach in your return.

Where Do I File?

Check the IRS website's Where to File Addresses for Individual Taxpayers By State [link] or the Where To File main page [link] to find out where you should file from your location.

Thinking of filing electronically? Visit the IRS e-file page for more information [link]. You may also want to check out Tax Preparation Software to make your tax preparation simpler, easier, and faster.

Extensions

If it is not possible for you to file by the due date, you can request for an extension by filing Form 4868; this entitles you to an automatic 6-month extension on your filing. Remember this, though: (1) an extension of filing does not equal an extension of payment—any taxes unpaid or paid late have interest, not to mention penalties; (2) you must send the said application for extension form by the due date of filing of tax returns.

While it all seems so quick and simple, the idea in filing, as well as in preparing for tax returns is not to be careless. For tips, head over to Tax Tips.

For more detailed information about filing, read Topic 301 - When, Where, and How to File [link].

Tax Basics

"Never before have so many been taken for so much and left with so little." – Van Panopoulos

The word tax has two meanings: first, the financial duty or levy contributed to the entity (be it a government or any other organization) a person or group of persons (say, a business) is part of. The second definition is "a very heavy burden" and can essentially summarize the first definition. It is easy to maintain the idea that tax—the cumbersome, "unrequited" payment made periodically, that is, and not the abstract idea of burden—is something people would rather do without. After all, governments can spend as much as 3.6 billion euros for income tax collection (the German government, with the most complex taxation system as well).

While there are opposing views on imposing tax, the general idea is that taxes are used to fund projects that can benefit society as a whole, or at least the majority of it. Businesses are taxed by the state because they use government-owned infrastructures and services. Individuals are taxed as part of their social contract, i.e., their rights and responsibilities as citizens of the state. Tax is what John F. Kennedy called "the annual price of citizenship."

April 15 usually marks tax day, but if that day is on a Saturday or Sunday, the deadline falls on the soonest business day. Tax returns must be sent in by that day.

According to US law, it is the Congress who has the power to impose and collect taxes from the citizens of the state; however, the task of collecting has been delegated to another body—the Internal Revenue Service (IRS) in the United States.

Taxes are typically spent on public works, military defense, protection of property, economic infrastructures, and public services—education, health care, pensions, energy/water/waste management, and public transport. The government uses different types of taxes to redistribute wealth and resources especially to the poor, to improve the economy (although there are arguments on this that it distorts the market, resulting in inefficiency instead), or alter consumer behavior or employment (i.e., making some transactions or purchases less attractive).

 

Who Pays Taxes?

Individuals

Anybody who's been earning something (from one's income or some other means) gains the responsibility of paying taxes. To be a little more accurate, however, people who earn below a certain income are tax-exempt. For more details, check the 2006 Federal Tax Rate Schedules [link]. If you are unmarried and under 65, with a gross income of at least $8,200, or you are 65 and above and earn at least $9,450, you have to pay taxes. This applies to citizens/residents of the United States as well as residents of Puerto Rico.

Remember to find out all the forms that are applicable to you so you can calculate the total amount you'll be paying. For more information, check out our related article, Tax Forms.

Businesses

Whether you're running a corporation or an independent business where you're self-employed, taxes have to be paid. "The form of business you operate determines what taxes you pay and how you pay them," says the IRS. It also mentions the general types of business taxes, namely: income tax, self-employment tax, employment tax, and excise tax. Learn more at the IRS website [link].

What about tax exemption? Interested organizations, such as charities, can apply for tax exemption by obtaining relevant forms: Form 1023, Form 1024, form instructions, and Tax-Exempt Organizations Tax Kit [link]. (For more information about tax forms, visit our related article, Tax Forms)

It is worth mentioning here, however, that a tax-exempt organization must pay taxes for unrelated business taxable income (UTBI) it is generating. The income generated from activities spearheaded by the organization is taxable if and only if: 1) the income comes from trade/business activities; 2) such activities are regularly held; and 3) such activities are not related to original exemption purpose of the organization.

If you're really sensitive about the money you'll be giving up to taxes, don't resort to a sneaky exemption, or even a tax evasion—they're both punishable by law. It's much better to take advantage of the all the tax deductions that have been decreed. Have a look at our Tips for some good ideas.

For more information about who are supposed to file taxes, view Topic 351 – Who Must File? [link]

 

Types of Taxes

What are the different types of taxes you'll be encountering? Taxes can be characterized as proportional (constant rate of percentage of income for all income levels), progressive (percentage of income increases as income increases), or regressive (percentage of income increases as income decreases). Taxes can also be either direct or indirect, and their meanings vary depending on which field you're using them.

Here are the most common types of taxes:

• Income Tax – designed to be characteristically progressive (the amount of tax you pay is proportional to the income you earn). Direct withholding (automatic deduction from salary by the employer) is currently used in most countries for more efficient tax collection.
• Retirement Tax – used to fund social security systems, which in turn give income to retired workers.
• Capital Gains Tax – levied on the profit gained for an asset sold.
• Corporation Tax – taxed on corporate earnings, including capital gains, of a company.
• Poll Tax – collected at a fixed amount per individual. Also called per capita tax/capitation tax.
• Excise – computed independently of the value of the product being taxed, and instead are based on the quantity of the product that is being purchased. Gasoline is a prime example, which has about 8-28 excise tax cents per gallon. Sales tax is a kind of excise tax.
• Tariff – collected for goods that cross a political border, either during import or export. Percentages of tariffs can be allocated to the protective bodies that manage those borders.
• Value Added Tax – historically used when sales and excise taxes could not be collected.
• Property Tax – applied to property owned, like real estate. Includes stamp duty, inheritance tax, which are event-driven property taxes.
• Wealth Tax – exacted from the percentage of one's net worth (computed by subtracting one's liabilities from the assets).
• Personal Property Tax – collected periodically from residents who own property in a certain area. Examples include vehicle and boat fees, as well as artworks that may have been lent in other areas.

The Organization for Economic Co-Operation and Development (OECD) has categorized the different types of taxes into a scheme which applied to all its member countries. Numbers ranging from 1000 to 6200 are used to describe which tax is being referred to:

• 1000 covers taxes on income, profits, and capital gains
• 2000 covers social security contributions
• 3000 covers taxes on payroll and workforce
• 4000 covers taxes on property
• 5000 covers taxes on goods and services
• 6000 covers taxes of other types
• 6100 – paid solely by business
• 6200 – paid by other than business/unidentifiable

For each type of tax there are a number of forms associated with it. It can get a bit intimidating to find out which one is for which purpose, but this guide will let you sort things out: Tax Forms.

Your Rights as a Taxpayer

While tax-paying is inherently "involuntary" as it is imposed by the law, that does not mean the IRS is entitled to take over your finances and you have nothing to say about that for the rest of your life. What if something goes wrong in your payments? What should you do?

The IRS lists your rights as a taxpayer in this online document [link]. The page includes an outline of your rights, namely:

1. Automatic protection of your rights
2. Privacy and confidentiality
3. Professional and courteous service
4. Representation (during interviews)
5. Payment of only the correct amount of tax
6. Help with unresolved tax problems
7. Appeals and judicial review
8. Relief from certain penalties and interest

You can also find information on audits/examination/repeat examination, appeals, collections, innocent spouse relief, refunds (read our article, Tax Refunds).

Are You Ready?

It's okay to feel a little queasy at the thought of sorting through all your tax forms—whether all by yourself, with a trained professional, or with the help of tax preparation software. Several articles have been lined up just for that, including:

• Tax Filing. Filing your tax return is easy and pain-free. Find out how.
• Tax Professionals. Don't worry. They're here to help.
• Tax Preparation Software. Finish tax prep quicker than ever.

Ready to fulfill the duties of a taxpaying citizen? Head on over to Tax Filing to get yourself started.

 

Tax Forms Explained

Are all those tax form codes giving you a headache? Here's a quick guide of the most important forms you'll need when filing.

Which Form 1040 Should I Use?

For federal income tax returns, you have three related forms: Form 1040EZ, Form 1040A, and Form 1040. Start by checking if you can meet all requirements stated regarding the use of 1040EZ and if you are okay with its limitations. If not, check the requirements and limitations of Form 1040A. Finally, go see the conditions for using Form 1040 if they are applicable to you.

Form 1040EZ: U.S. Individual Income Tax Return for Single and Joint Filers with No Dependents

Also known as "the easy form.  "According to the IRS, you should use Form 1040EZ if and only if:

1. Your filing status is single or married filing jointly,
2. You claim no dependents,
3. You, and your spouse if filing a joint return, were under 65 on January 1, and not blind at the end of the year,
4. You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500,
5. Your taxable income is less than $100,000,
6. You did not receive any advance earned income credit payments,
7. You do not owe any household employment taxes on wages you paid to a household employee,
8. You do not claim a student loan interest deduction, an educator expense deduction, or a tuition and fees deduction, and
9. You do not claim an education credit, retirement savings contributions credit, or a health coverage tax credit.

Using Form 1040EZ means you are not allowed to list deductions or claim adjustments for income or tax credits, except earned income credit.

Form 1040A: US Individual Tax Return

Also known as "the short form". According to the IRS, you should use Form 1040A if and only if:

1. Your income is only from wages, salaries, tips, taxable scholarships and fellowships, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, and taxable social security or railroad retirement benefits and Alaska Permanent Fund dividends,
2. Your taxable income is less than $100,000,
3. You do not itemize deductions, and
4. Your only adjustments to income are the IRA deduction, the student loan interest deduction, educator expenses and the tuition and fees deduction.

Types of credits you can only claim when using 1040A are: child and dependent care expenses, earned income, adoption, (for the) elderly or disabled, education, child tax, additional child tax, and retirement savings contribution.

Form 1040: US Individual Tax Return

Also known as "the long form". According to the IRS, you should use Form 1040 if:

1. Your taxable income is $100,000 or more,
2. You have certain types of income such as unreported tips, certain nontaxable distributions, self–employment earnings, or income received as a partner, a shareholder in an "S" Corp., or a beneficiary of an estate or trust.
3. You itemize deductions or claim certain tax credits or adjustments to income, or
4. You owe household employment taxes.

For a complete list of conditions for the usage of Form 1040 is available in the instructions of Form 1040A

Form 1040NR: U.S. Nonresident Alien Income Tax Return and Form 1040NR-EZ: U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents

If you are a non-resident alien married to a U.S. citizen or resident alien, you are allowed to use Forms 1040EZ, 1040A, or 1040. However, other non-resident aliens must use Form 1040NR or Form 1040NR-EZ whichever is applicable. Resident aliens must abide by the same tax laws and procedures as U.S. citizens.

For more information on U.S. non-resident aliens, visit Topic 851

Form 1040X: Amended U.S. Individual Income Tax Return [Instructions]

Form 1040X is used to correct only Forms 1040, 1040A, 1040EZ, 1040NR, or 1040NR-EZ. For more details, read more here.

Wage Forms

Forms W-2 and W-3 are generally accomplished by your employer, but the information contained in them is still necessary in accomplishing your tax return.

Form W-2: Wage and Tax Statement

Form W-2 should be sent to you by your employer, as it is needed in accomplishing your tax return. These W-2's, which list your earnings and withheld taxes, must be completed and sent in by the end of January.

Note that Form W-2's are required in electronic submissions.

In case of a misplaced Form W-2, contact your employer immediately. If by mid February you have not received it, call the IRS for help. If you cannot obtain a Form W-2 by the tax deadline, use Form 4852: Substitute for Form W-2, Wage and Tax Statement

Form W-3: Transmittal of Wage and Tax Statements

Form W-2 summarizes the data contained in Form W-2.

State Tax Forms

The Federation of Tax Administrators (FTA) has a compilation of tax forms and instructions by state. For more information, choose your state here:

 

 

Tax Refunds

Basically, a tax refund is a refund on your income tax. It is money sent back to you by the government when you paid too much tax or withheld too much from your salary the previous year. The keywords here are "sent back" – while tax refunds might seem like a surprise gift from heaven, they're actually your money that you willingly gave to the government!

US taxpayers are eligible for a tax refund if the tax they owe is less than the sum of:

• The total amount of refundable tax credits that they claim.
• The total amount of withholding that they paid.

Refunds can be (1) directly deposited into the taxpayer's bank account, (2) mailed directly to them as a check, and (3) applied to the following year's income tax.

According to the IRS, the refund checks of taxpayers who filed complete and accurate tax returns will be issued within six weeks from the date the IRS received the return. The process is much quicker when the taxpayer e-filed his/her return: refund checks will be issued within three weeks.

Taxpayers can check on the progress of their tax refunds through the IRS' Where's My Refund web page, which has serviced more than 21 million requests from January 2006 to April 5, 2006. Alternatively, taxpayers can call the IRS Refund Hotline at 1-800-829-1954. For both services, you'll need to provide your social security number, your filing status, and the exact amount of the refund.

As mentioned earlier, tax refunds are actually your money, and it's never wise in the first place to give them to the government and let them keep it for a year, interest-free. You could've done a lot of things – pay off debt, invest in the stock market – if only you had that money all year round in your pocket instead of the US Treasury vaults. This means that getting a huge tax refund now shows that you made an oversight in last year's tax returns.

Experts have one unanimous advice on tax refunds – minimize them. If you get a big tax refund this year, promptly adjust your withholdings so that next year's refund check is small. Claim more withholding allowances so you can reduce your withholdings.

Now, if you're still expecting a big tax refund that you just can't wait to receive, you might be tempted to apply for a tax refund loan. These "refund application loans" allow you to pay a fee and receive thousands of dollars in cash against your coming tax refund. The problem is such loans come at exorbitant interest rates, and you'll be sorry in the end. So be patient in waiting for your tax refund and don't give in to refund loans!

 

 

Tax Filing

When Do I File?

April 15 (or the soonest business day if it falls on a weekend) is the key date here. That doesn't mean you can't start early. Remember to postmark the tax return you'll be sending by the deadline date, by midnight at the very latest. Give allowance for delays or other problems.

What's My Filing Status? Am I exempt?

Find out if you're going to file married (jointly or separately) or single, resident alien or non-resident alien, exempt or non-exempt. Also find out about your personal dependents, wherein everyone else is qualified except your spouse.

Remember that when filing jointly, both signatures are required on the form. If this is not possible, attach special representation or authorization for this.

What Information or Documents Shall Do I Need?

Social security, visa, and passport numbers, as well as TINs, will be mentioned in the forms.

What Should I Calculate?

You'll need to calculate the following:

• Income (an estimate will be provided by the Form W-2 sent in by your employer). Some part of your income may not be taxable.
• Deductions either standard (a flat rate) or itemized. Certain forms do not allow for itemized deductions, so choose carefully.
• Credits and additional taxes.

Once you've thoroughly examined which contribute to the taxes you have to pay, check too the amounts you've already paid (according to your withheld taxes, for example). At times you may have taxes overpaid, so these can be refunded (read more in Tax Refunds). Likewise, recall if you have any unpaid dues.

What Forms Should I Use?

It is a good idea to start with "the long form," that is, Form 1040, and choose whether Form 1040A or Form 1040EZ suits you better. If you are a non-resident alien, you'll be using either Form 1040NR or Form 1040NR-EZ. Remember that Form W-2 and Form 1099-R must be accomplished and attached with your 1040, whichever flavor that is.

If you're not too sure which one is best suited for you, try reading Tax Forms Explained. Accompanying instructions are also available in the IRS website (visit the article for links to those downloadable files), and as you go along these instructions will mention additional forms you need to accomplish and attach in your return.

Where Do I File?

Check the IRS website's Where to File Addresses for Individual Taxpayers By State [link] or the Where To File main page [link] to find out where you should file from your location.

Thinking of filing electronically? Visit the IRS e-file page for more information [link]. You may also want to check out Tax Preparation Software to make your tax preparation simpler, easier, and faster.

Extensions

If it is not possible for you to file by the due date, you can request for an extension by filing Form 4868; this entitles you to an automatic 6-month extension on your filing. Remember this, though: (1) an extension of filing does not equal an extension of payment—any taxes unpaid or paid late have interest, not to mention penalties; (2) you must send the said application for extension form by the due date of filing of tax returns.

While it all seems so quick and simple, the idea in filing, as well as in preparing for tax returns is not to be careless. For tips, head over to Tax Tips.

For more detailed information about filing, read Topic 301 - When, Where, and How to File [link].

Tax Basics

"Never before have so many been taken for so much and left with so little." – Van Panopoulos

The word tax has two meanings: first, the financial duty or levy contributed to the entity (be it a government or any other organization) a person or group of persons (say, a business) is part of. The second definition is "a very heavy burden" and can essentially summarize the first definition. It is easy to maintain the idea that tax—the cumbersome, "unrequited" payment made periodically, that is, and not the abstract idea of burden—is something people would rather do without. After all, governments can spend as much as 3.6 billion euros for income tax collection (the German government, with the most complex taxation system as well).

While there are opposing views on imposing tax, the general idea is that taxes are used to fund projects that can benefit society as a whole, or at least the majority of it. Businesses are taxed by the state because they use government-owned infrastructures and services. Individuals are taxed as part of their social contract, i.e., their rights and responsibilities as citizens of the state. Tax is what John F. Kennedy called "the annual price of citizenship."

April 15 usually marks tax day, but if that day is on a Saturday or Sunday, the deadline falls on the soonest business day. Tax returns must be sent in by that day.

According to US law, it is the Congress who has the power to impose and collect taxes from the citizens of the state; however, the task of collecting has been delegated to another body—the Internal Revenue Service (IRS) in the United States.

Taxes are typically spent on public works, military defense, protection of property, economic infrastructures, and public services—education, health care, pensions, energy/water/waste management, and public transport. The government uses different types of taxes to redistribute wealth and resources especially to the poor, to improve the economy (although there are arguments on this that it distorts the market, resulting in inefficiency instead), or alter consumer behavior or employment (i.e., making some transactions or purchases less attractive).

 

Who Pays Taxes?

Individuals

Anybody who's been earning something (from one's income or some other means) gains the responsibility of paying taxes. To be a little more accurate, however, people who earn below a certain income are tax-exempt. For more details, check the 2006 Federal Tax Rate Schedules [link]. If you are unmarried and under 65, with a gross income of at least $8,200, or you are 65 and above and earn at least $9,450, you have to pay taxes. This applies to citizens/residents of the United States as well as residents of Puerto Rico.

Remember to find out all the forms that are applicable to you so you can calculate the total amount you'll be paying. For more information, check out our related article, Tax Forms.

Businesses

Whether you're running a corporation or an independent business where you're self-employed, taxes have to be paid. "The form of business you operate determines what taxes you pay and how you pay them," says the IRS. It also mentions the general types of business taxes, namely: income tax, self-employment tax, employment tax, and excise tax. Learn more at the IRS website [link].

What about tax exemption? Interested organizations, such as charities, can apply for tax exemption by obtaining relevant forms: Form 1023, Form 1024, form instructions, and Tax-Exempt Organizations Tax Kit [link]. (For more information about tax forms, visit our related article, Tax Forms)

It is worth mentioning here, however, that a tax-exempt organization must pay taxes for unrelated business taxable income (UTBI) it is generating. The income generated from activities spearheaded by the organization is taxable if and only if: 1) the income comes from trade/business activities; 2) such activities are regularly held; and 3) such activities are not related to original exemption purpose of the organization.

If you're really sensitive about the money you'll be giving up to taxes, don't resort to a sneaky exemption, or even a tax evasion—they're both punishable by law. It's much better to take advantage of the all the tax deductions that have been decreed. Have a look at our Tips for some good ideas.

For more information about who are supposed to file taxes, view Topic 351 – Who Must File? [link]

 

Types of Taxes

What are the different types of taxes you'll be encountering? Taxes can be characterized as proportional (constant rate of percentage of income for all income levels), progressive (percentage of income increases as income increases), or regressive (percentage of income increases as income decreases). Taxes can also be either direct or indirect, and their meanings vary depending on which field you're using them.

Here are the most common types of taxes:

• Income Tax – designed to be characteristically progressive (the amount of tax you pay is proportional to the income you earn). Direct withholding (automatic deduction from salary by the employer) is currently used in most countries for more efficient tax collection.
• Retirement Tax – used to fund social security systems, which in turn give income to retired workers.
• Capital Gains Tax – levied on the profit gained for an asset sold.
• Corporation Tax – taxed on corporate earnings, including capital gains, of a company.
• Poll Tax – collected at a fixed amount per individual. Also called per capita tax/capitation tax.
• Excise – computed independently of the value of the product being taxed, and instead are based on the quantity of the product that is being purchased. Gasoline is a prime example, which has about 8-28 excise tax cents per gallon. Sales tax is a kind of excise tax.
• Tariff – collected for goods that cross a political border, either during import or export. Percentages of tariffs can be allocated to the protective bodies that manage those borders.
• Value Added Tax – historically used when sales and excise taxes could not be collected.
• Property Tax – applied to property owned, like real estate. Includes stamp duty, inheritance tax, which are event-driven property taxes.
• Wealth Tax – exacted from the percentage of one's net worth (computed by subtracting one's liabilities from the assets).
• Personal Property Tax – collected periodically from residents who own property in a certain area. Examples include vehicle and boat fees, as well as artworks that may have been lent in other areas.

The Organization for Economic Co-Operation and Development (OECD) has categorized the different types of taxes into a scheme which applied to all its member countries. Numbers ranging from 1000 to 6200 are used to describe which tax is being referred to:

• 1000 covers taxes on income, profits, and capital gains
• 2000 covers social security contributions
• 3000 covers taxes on payroll and workforce
• 4000 covers taxes on property
• 5000 covers taxes on goods and services
• 6000 covers taxes of other types
• 6100 – paid solely by business
• 6200 – paid by other than business/unidentifiable

For each type of tax there are a number of forms associated with it. It can get a bit intimidating to find out which one is for which purpose, but this guide will let you sort things out: Tax Forms.

Your Rights as a Taxpayer

While tax-paying is inherently "involuntary" as it is imposed by the law, that does not mean the IRS is entitled to take over your finances and you have nothing to say about that for the rest of your life. What if something goes wrong in your payments? What should you do?

The IRS lists your rights as a taxpayer in this online document [link]. The page includes an outline of your rights, namely:

1. Automatic protection of your rights
2. Privacy and confidentiality
3. Professional and courteous service
4. Representation (during interviews)
5. Payment of only the correct amount of tax
6. Help with unresolved tax problems
7. Appeals and judicial review
8. Relief from certain penalties and interest

You can also find information on audits/examination/repeat examination, appeals, collections, innocent spouse relief, refunds (read our article, Tax Refunds).

Are You Ready?

It's okay to feel a little queasy at the thought of sorting through all your tax forms—whether all by yourself, with a trained professional, or with the help of tax preparation software. Several articles have been lined up just for that, including:

• Tax Filing. Filing your tax return is easy and pain-free. Find out how.
• Tax Professionals. Don't worry. They're here to help.
• Tax Preparation Software. Finish tax prep quicker than ever.

Ready to fulfill the duties of a taxpaying citizen? Head on over to Tax Filing to get yourself started.

 

Tax Forms Explained

Are all those tax form codes giving you a headache? Here's a quick guide of the most important forms you'll need when filing.

Which Form 1040 Should I Use?

For federal income tax returns, you have three related forms: Form 1040EZ, Form 1040A, and Form 1040. Start by checking if you can meet all requirements stated regarding the use of 1040EZ and if you are okay with its limitations. If not, check the requirements and limitations of Form 1040A. Finally, go see the conditions for using Form 1040 if they are applicable to you.

Form 1040EZ: U.S. Individual Income Tax Return for Single and Joint Filers with No Dependents

Also known as "the easy form.  "According to the IRS, you should use Form 1040EZ if and only if:

1. Your filing status is single or married filing jointly,
2. You claim no dependents,
3. You, and your spouse if filing a joint return, were under 65 on January 1, and not blind at the end of the year,
4. You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500,
5. Your taxable income is less than $100,000,
6. You did not receive any advance earned income credit payments,
7. You do not owe any household employment taxes on wages you paid to a household employee,
8. You do not claim a student loan interest deduction, an educator expense deduction, or a tuition and fees deduction, and
9. You do not claim an education credit, retirement savings contributions credit, or a health coverage tax credit.

Using Form 1040EZ means you are not allowed to list deductions or claim adjustments for income or tax credits, except earned income credit.

Form 1040A: US Individual Tax Return

Also known as "the short form". According to the IRS, you should use Form 1040A if and only if:

1. Your income is only from wages, salaries, tips, taxable scholarships and fellowships, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, and taxable social security or railroad retirement benefits and Alaska Permanent Fund dividends,
2. Your taxable income is less than $100,000,
3. You do not itemize deductions, and
4. Your only adjustments to income are the IRA deduction, the student loan interest deduction, educator expenses and the tuition and fees deduction.

Types of credits you can only claim when using 1040A are: child and dependent care expenses, earned income, adoption, (for the) elderly or disabled, education, child tax, additional child tax, and retirement savings contribution.

Form 1040: US Individual Tax Return

Also known as "the long form". According to the IRS, you should use Form 1040 if:

1. Your taxable income is $100,000 or more,
2. You have certain types of income such as unreported tips, certain nontaxable distributions, self–employment earnings, or income received as a partner, a shareholder in an "S" Corp., or a beneficiary of an estate or trust.
3. You itemize deductions or claim certain tax credits or adjustments to income, or
4. You owe household employment taxes.

For a complete list of conditions for the usage of Form 1040 is available in the instructions of Form 1040A

Form 1040NR: U.S. Nonresident Alien Income Tax Return and Form 1040NR-EZ: U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents

If you are a non-resident alien married to a U.S. citizen or resident alien, you are allowed to use Forms 1040EZ, 1040A, or 1040. However, other non-resident aliens must use Form 1040NR or Form 1040NR-EZ whichever is applicable. Resident aliens must abide by the same tax laws and procedures as U.S. citizens.

For more information on U.S. non-resident aliens, visit Topic 851

Form 1040X: Amended U.S. Individual Income Tax Return [Instructions]

Form 1040X is used to correct only Forms 1040, 1040A, 1040EZ, 1040NR, or 1040NR-EZ. For more details, read more here.

Wage Forms

Forms W-2 and W-3 are generally accomplished by your employer, but the information contained in them is still necessary in accomplishing your tax return.

Form W-2: Wage and Tax Statement

Form W-2 should be sent to you by your employer, as it is needed in accomplishing your tax return. These W-2's, which list your earnings and withheld taxes, must be completed and sent in by the end of January.

Note that Form W-2's are required in electronic submissions.

In case of a misplaced Form W-2, contact your employer immediately. If by mid February you have not received it, call the IRS for help. If you cannot obtain a Form W-2 by the tax deadline, use Form 4852: Substitute for Form W-2, Wage and Tax Statement

Form W-3: Transmittal of Wage and Tax Statements

Form W-2 summarizes the data contained in Form W-2.

State Tax Forms

The Federation of Tax Administrators (FTA) has a compilation of tax forms and instructions by state. For more information, choose your state here:

 

 

Tax Refunds

Basically, a tax refund is a refund on your income tax. It is money sent back to you by the government when you paid too much tax or withheld too much from your salary the previous year. The keywords here are "sent back" – while tax refunds might seem like a surprise gift from heaven, they're actually your money that you willingly gave to the government!

US taxpayers are eligible for a tax refund if the tax they owe is less than the sum of:

• The total amount of refundable tax credits that they claim.
• The total amount of withholding that they paid.

Refunds can be (1) directly deposited into the taxpayer's bank account, (2) mailed directly to them as a check, and (3) applied to the following year's income tax.

According to the IRS, the refund checks of taxpayers who filed complete and accurate tax returns will be issued within six weeks from the date the IRS received the return. The process is much quicker when the taxpayer e-filed his/her return: refund checks will be issued within three weeks.

Taxpayers can check on the progress of their tax refunds through the IRS' Where's My Refund web page, which has serviced more than 21 million requests from January 2006 to April 5, 2006. Alternatively, taxpayers can call the IRS Refund Hotline at 1-800-829-1954. For both services, you'll need to provide your social security number, your filing status, and the exact amount of the refund.

As mentioned earlier, tax refunds are actually your money, and it's never wise in the first place to give them to the government and let them keep it for a year, interest-free. You could've done a lot of things – pay off debt, invest in the stock market – if only you had that money all year round in your pocket instead of the US Treasury vaults. This means that getting a huge tax refund now shows that you made an oversight in last year's tax returns.

Experts have one unanimous advice on tax refunds – minimize them. If you get a big tax refund this year, promptly adjust your withholdings so that next year's refund check is small. Claim more withholding allowances so you can reduce your withholdings.

Now, if you're still expecting a big tax refund that you just can't wait to receive, you might be tempted to apply for a tax refund loan. These "refund application loans" allow you to pay a fee and receive thousands of dollars in cash against your coming tax refund. The problem is such loans come at exorbitant interest rates, and you'll be sorry in the end. So be patient in waiting for your tax refund and don't give in to refund loans!

 

 

Tax Filing

When Do I File?

April 15 (or the soonest business day if it falls on a weekend) is the key date here. That doesn't mean you can't start early. Remember to postmark the tax return you'll be sending by the deadline date, by midnight at the very latest. Give allowance for delays or other problems.

What's My Filing Status? Am I exempt?

Find out if you're going to file married (jointly or separately) or single, resident alien or non-resident alien, exempt or non-exempt. Also find out about your personal dependents, wherein everyone else is qualified except your spouse.

Remember that when filing jointly, both signatures are required on the form. If this is not possible, attach special representation or authorization for this.

What Information or Documents Shall Do I Need?

Social security, visa, and passport numbers, as well as TINs, will be mentioned in the forms.

What Should I Calculate?

You'll need to calculate the following:

• Income (an estimate will be provided by the Form W-2 sent in by your employer). Some part of your income may not be taxable.
• Deductions either standard (a flat rate) or itemized. Certain forms do not allow for itemized deductions, so choose carefully.
• Credits and additional taxes.

Once you've thoroughly examined which contribute to the taxes you have to pay, check too the amounts you've already paid (according to your withheld taxes, for example). At times you may have taxes overpaid, so these can be refunded (read more in Tax Refunds). Likewise, recall if you have any unpaid dues.

What Forms Should I Use?

It is a good idea to start with "the long form," that is, Form 1040, and choose whether Form 1040A or Form 1040EZ suits you better. If you are a non-resident alien, you'll be using either Form 1040NR or Form 1040NR-EZ. Remember that Form W-2 and Form 1099-R must be accomplished and attached with your 1040, whichever flavor that is.

If you're not too sure which one is best suited for you, try reading Tax Forms Explained. Accompanying instructions are also available in the IRS website (visit the article for links to those downloadable files), and as you go along these instructions will mention additional forms you need to accomplish and attach in your return.

Where Do I File?

Check the IRS website's Where to File Addresses for Individual Taxpayers By State [link] or the Where To File main page [link] to find out where you should file from your location.

Thinking of filing electronically? Visit the IRS e-file page for more information [link]. You may also want to check out Tax Preparation Software to make your tax preparation simpler, easier, and faster.

Extensions

If it is not possible for you to file by the due date, you can request for an extension by filing Form 4868; this entitles you to an automatic 6-month extension on your filing. Remember this, though: (1) an extension of filing does not equal an extension of payment—any taxes unpaid or paid late have interest, not to mention penalties; (2) you must send the said application for extension form by the due date of filing of tax returns.

While it all seems so quick and simple, the idea in filing, as well as in preparing for tax returns is not to be careless. For tips, head over to Tax Tips.

For more detailed information about filing, read Topic 301 - When, Where, and How to File [link].

Tax Basics

"Never before have so many been taken for so much and left with so little." – Van Panopoulos

The word tax has two meanings: first, the financial duty or levy contributed to the entity (be it a government or any other organization) a person or group of persons (say, a business) is part of. The second definition is "a very heavy burden" and can essentially summarize the first definition. It is easy to maintain the idea that tax—the cumbersome, "unrequited" payment made periodically, that is, and not the abstract idea of burden—is something people would rather do without. After all, governments can spend as much as 3.6 billion euros for income tax collection (the German government, with the most complex taxation system as well).

While there are opposing views on imposing tax, the general idea is that taxes are used to fund projects that can benefit society as a whole, or at least the majority of it. Businesses are taxed by the state because they use government-owned infrastructures and services. Individuals are taxed as part of their social contract, i.e., their rights and responsibilities as citizens of the state. Tax is what John F. Kennedy called "the annual price of citizenship."

April 15 usually marks tax day, but if that day is on a Saturday or Sunday, the deadline falls on the soonest business day. Tax returns must be sent in by that day.

According to US law, it is the Congress who has the power to impose and collect taxes from the citizens of the state; however, the task of collecting has been delegated to another body—the Internal Revenue Service (IRS) in the United States.

Taxes are typically spent on public works, military defense, protection of property, economic infrastructures, and public services—education, health care, pensions, energy/water/waste management, and public transport. The government uses different types of taxes to redistribute wealth and resources especially to the poor, to improve the economy (although there are arguments on this that it distorts the market, resulting in inefficiency instead), or alter consumer behavior or employment (i.e., making some transactions or purchases less attractive).

 

Who Pays Taxes?

Individuals

Anybody who's been earning something (from one's income or some other means) gains the responsibility of paying taxes. To be a little more accurate, however, people who earn below a certain income are tax-exempt. For more details, check the 2006 Federal Tax Rate Schedules [link]. If you are unmarried and under 65, with a gross income of at least $8,200, or you are 65 and above and earn at least $9,450, you have to pay taxes. This applies to citizens/residents of the United States as well as residents of Puerto Rico.

Remember to find out all the forms that are applicable to you so you can calculate the total amount you'll be paying. For more information, check out our related article, Tax Forms.

Businesses

Whether you're running a corporation or an independent business where you're self-employed, taxes have to be paid. "The form of business you operate determines what taxes you pay and how you pay them," says the IRS. It also mentions the general types of business taxes, namely: income tax, self-employment tax, employment tax, and excise tax. Learn more at the IRS website [link].

What about tax exemption? Interested organizations, such as charities, can apply for tax exemption by obtaining relevant forms: Form 1023, Form 1024, form instructions, and Tax-Exempt Organizations Tax Kit [link]. (For more information about tax forms, visit our related article, Tax Forms)

It is worth mentioning here, however, that a tax-exempt organization must pay taxes for unrelated business taxable income (UTBI) it is generating. The income generated from activities spearheaded by the organization is taxable if and only if: 1) the income comes from trade/business activities; 2) such activities are regularly held; and 3) such activities are not related to original exemption purpose of the organization.

If you're really sensitive about the money you'll be giving up to taxes, don't resort to a sneaky exemption, or even a tax evasion—they're both punishable by law. It's much better to take advantage of the all the tax deductions that have been decreed. Have a look at our Tips for some good ideas.

For more information about who are supposed to file taxes, view Topic 351 – Who Must File? [link]

 

Types of Taxes

What are the different types of taxes you'll be encountering? Taxes can be characterized as proportional (constant rate of percentage of income for all income levels), progressive (percentage of income increases as income increases), or regressive (percentage of income increases as income decreases). Taxes can also be either direct or indirect, and their meanings vary depending on which field you're using them.

Here are the most common types of taxes:

• Income Tax – designed to be characteristically progressive (the amount of tax you pay is proportional to the income you earn). Direct withholding (automatic deduction from salary by the employer) is currently used in most countries for more efficient tax collection.
• Retirement Tax – used to fund social security systems, which in turn give income to retired workers.
• Capital Gains Tax – levied on the profit gained for an asset sold.
• Corporation Tax – taxed on corporate earnings, including capital gains, of a company.
• Poll Tax – collected at a fixed amount per individual. Also called per capita tax/capitation tax.
• Excise – computed independently of the value of the product being taxed, and instead are based on the quantity of the product that is being purchased. Gasoline is a prime example, which has about 8-28 excise tax cents per gallon. Sales tax is a kind of excise tax.
• Tariff – collected for goods that cross a political border, either during import or export. Percentages of tariffs can be allocated to the protective bodies that manage those borders.
• Value Added Tax – historically used when sales and excise taxes could not be collected.
• Property Tax – applied to property owned, like real estate. Includes stamp duty, inheritance tax, which are event-driven property taxes.
• Wealth Tax – exacted from the percentage of one's net worth (computed by subtracting one's liabilities from the assets).
• Personal Property Tax – collected periodically from residents who own property in a certain area. Examples include vehicle and boat fees, as well as artworks that may have been lent in other areas.

The Organization for Economic Co-Operation and Development (OECD) has categorized the different types of taxes into a scheme which applied to all its member countries. Numbers ranging from 1000 to 6200 are used to describe which tax is being referred to:

• 1000 covers taxes on income, profits, and capital gains
• 2000 covers social security contributions
• 3000 covers taxes on payroll and workforce
• 4000 covers taxes on property
• 5000 covers taxes on goods and services
• 6000 covers taxes of other types
• 6100 – paid solely by business
• 6200 – paid by other than business/unidentifiable

For each type of tax there are a number of forms associated with it. It can get a bit intimidating to find out which one is for which purpose, but this guide will let you sort things out: Tax Forms.

Your Rights as a Taxpayer

While tax-paying is inherently "involuntary" as it is imposed by the law, that does not mean the IRS is entitled to take over your finances and you have nothing to say about that for the rest of your life. What if something goes wrong in your payments? What should you do?

The IRS lists your rights as a taxpayer in this online document [link]. The page includes an outline of your rights, namely:

1. Automatic protection of your rights
2. Privacy and confidentiality
3. Professional and courteous service
4. Representation (during interviews)
5. Payment of only the correct amount of tax
6. Help with unresolved tax problems
7. Appeals and judicial review
8. Relief from certain penalties and interest

You can also find information on audits/examination/repeat examination, appeals, collections, innocent spouse relief, refunds (read our article, Tax Refunds).

Are You Ready?

It's okay to feel a little queasy at the thought of sorting through all your tax forms—whether all by yourself, with a trained professional, or with the help of tax preparation software. Several articles have been lined up just for that, including:

• Tax Filing. Filing your tax return is easy and pain-free. Find out how.
• Tax Professionals. Don't worry. They're here to help.
• Tax Preparation Software. Finish tax prep quicker than ever.

Ready to fulfill the duties of a taxpaying citizen? Head on over to Tax Filing to get yourself started.

 

 

Income Tax

An income tax is a tax levied on the income of individuals or businesses (corporations or other legal entities). Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). Various systems define income differently, and often allow notional reductions of income (such as a reduction based on number of children supported).

Principles

The "tax net" refers to the types of payment that are taxed, which included personal earnings (wages), capital gains, and business income. The rates for different types of income may vary and some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is significant or based on the manner in which it is paid. Some types of income, such as interest on bank savings, may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). In some tax systems, personal earnings may be strictly defined where labor, skill, or investment is required (e.g. wages); in others, they may be defined broadly to include windfalls (e.g. gambling wins).

Tax rates may be progressive, regressive, or proportional. A progressive tax applies progressively higher tax rates as earnings reach higher levels. For example, the first $10,000 in earnings may be taxed at 7%, the next $10,000 at 10%, and any more income at 30%. Alternatively, a flat tax taxes all earnings at the same rate. A regressive income tax may apply to income up to a certain amount, such as taxing only the first $90,000 earned. A tax system may use different taxation methods for different types of income.

Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government by taxpayers who did not pay enough during the tax year; and tax refunds from the government to those who overpaid. Income tax systems often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years.

The idea of a progressive tax has garnered support from macro economists and political scientists of many different ideologies - ranging from Adam Smith to Karl Marx, although there are differences of opinion about the optimal level of progressivity. Some economists[1] trace the origin of modern progressive taxation to Adam Smith, who wrote in The Wealth of Nations:

The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.[2]

Income taxes are used in most countries around the world, but are not without criticism. Frank Chodorov wrote "... you come up with the fact that it gives the government a prior lien on all the property produced by its subjects." The government "unashamedly proclaims the doctrine of collectivized wealth. ... That which it does not take is a concession."[3] Some have argued that the economic effects of an income tax system penalize work, discourage saving and investing, and hinder the competitiveness of business and economic growth.[4][5] Income taxes are also not border-adjustable; meaning the tax component embedded into products via taxes imposed on companies cannot be removed when exported to a foreign country (see Effect of taxes and subsidies on price). Alternate tax systems such as a national sales tax or value added tax remove the tax component when goods are exported and apply the tax component on imports.

Accounts payable - is a file or account that contains money that a person or company owes to suppliers, but hasn't paid yet. When you receive an invoice you add it to the file, and then you remove it when you pay. Thus, the A/P is a form of credit that suppliers offer to their purchasers by allowing them to pay for a product or service after it has already been received.

In household, accounts payable are ordinarily bills from the electric company, telephone company, cable television or satellite dish service, newspaper subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using checks or credit cards. In a business, there is usually a much broader range of services in the A/P file, and accountants or bookkeepers usually use accounting software to track the flow of money into this liability account when they receive invoices and out of it when they make payments.

Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which creates a cash conversion cycle, a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer. Certain companies, most famously Dell, have been able to profit handsomely by reversing the conversion cycle: they receive payment before they ship the product. Instead of granting credit to their customers, they receive it from them.