Taxes take different shapes and forms, and their incidence falls in varied and unexpected ways.
In this article, I’m using the word, ‘tax’ to describe economic costs that can easily go missed because, in these cases, they are not explicitly stated or explained anywhere in the tax code. However, these taxes will cost you thousands if you are not careful.
Marriage Penalty The marriage penalty refers to the difference that the income tax is assessed on two single individuals who have comparable incomes, as opposed to one married couple, due to tax brackets. For example, take two unmarried individuals who each have $100,000 in income. They will fall into the 28% Federal income tax bracket, and each pay $21,617, or $43,234 combined. If they filed jointly, the tax will be $44,070. The marriage penalty in this case is the difference, or $836.
The Refund ‘Tax’ Whereas most people look forward to receiving income tax refunds, a closer look shows that large income tax refunds pack a hidden tax. The IRS and most state governments do not pay interest on regular tax refunds. Therefore, if you receive a tax refund in April, you essentially had extended the government an interest-free loan for the last four to sixteen months. However, if you owe the state and Federal governments $1,000 or less in income taxes at year-end, interest nor penalties will be assessed on the balances. The effect is the government will be giving you a $1,000 interest-free loan! The lost interest income, or use of your own money is the hidden tax. Using conservative assumptions, on $5,000 of Federal and state tax refunds, the hidden tax is about $300.
Government Budgeting When the Federal or state governments reduce certain public funding or assistance, the effect is one of a hidden tax. For instance, the President reduced funding for public nutrition by $1 million; in Connecticut, Medicaid expenses were cut; and in New York, Medicaid and public education are facing cuts. Also, in 2010 and 2011, social security recipients did not receive automatic increases in their payments to make up for inflation. The effects of the above are taxes on students, the elderly and those who have lower income levels.
The best advice to safeguard your wealth from these risks and others is to speak with a tax specialist that understands your tax situation and can help you plan to reach your financial goals.