What are Our Income Taxes Used For?

Tax Act

No one likes to pay taxes. In fact, you may even wonder where your hard earned money goes. It’s especially upsetting to hear that government money was used to fund some insane research, like whether or not mice like cheese. Regardless, you have to pay them. Still, it helps to know where that money goes. This April, maybe you’ll be a bit more at ease knowing that your tax dollars are actually be used for some pretty amazing things.

How Are Federal Income Taxes Used?

It may surprise you, because our military gets paid so little, but over 50% of our federal tax dollars in 2009 went towards our current military members, veterans and the current wars that we’re fighting. This includes the costs of weapons, housing, etc. The rest of our tax dollars are spent on human resources (education, medical), general government (government officials’ salaries) and physical resources (agriculture). The government includes Social Security in their figures. However, many point out that Social Security is collected separately from federal income taxes and is thus a trust fund. When we think of what the government does individually with our income tax dollars, defense and wages for government employees eat up a large chunk of our income taxes, but it’s important to remember that our taxes cover the costs of thousands of expenses. While our government does spend money on unwise decisions, it also spends money on Pell grants for college students, food for needy families and other important expenses.

How Are State Income Taxes Used?

State income taxes may be used differently in different states. However, many states use state income taxes to pay for education, government officials’ salaries, police forces, EMTs, health and social services and even public transportation. What a state uses it’s money on will depend on what the state’s government determines needs the most help. However, not all states have state income taxes. States like Tennessee only charge federal income taxes, but have a much steeper sales tax than states that do have an income tax.

While paying federal and state income taxes may not be ideal, chances are these taxes have paid for something in your life. It may have been the schools you attended or the roads you drive on. Either way, income taxes are a necessary evil. After all, if we were given the chance to pay for these items, instead of being forced to, chances are many people wouldn’t shell out their own money willingly.

About the Author: Manuel Phyfe is a volunteer with an organization that helps senior citizens find free tax support. He finds that many are angry at tax time not because they have to file a return, but because they don’t understand where their money has gone.

Income that is Not Taxable

Income that is Not Taxable

Almost all income earned by American citizens is taxable but there are some exceptions that the IRS makes based on taw law. Some forms of income that the IRS deems not to be nontaxable include adoption expense reimbursements, child support, gifts, worker’s compensation benefits, welfare benefits, and economic stimulus payments received during the last tax year.

Sometimes Taxable

Then there are a couple forms of income that are at times taxable and at other times nontaxable. When you are the beneficiary of a life insurance policy, those proceeds are not taxed. But if an insured cashes out a life insurance policy than income from the event is taxable. Another good example is scholarship and grant money for college. Both scholarship and grant money used for tuition is not taxable. But money from either source used for room and board is taxable by the federal government.

For a more in-depth look at Taxable and Nontaxable Income take a look at IRS publication 525.

Federal Stimulus Bill Provides Tax Benefits

Federal Stimulus Bill Provides Tax Benefits

The American Recovery and Reinvestment Act also known as the Federal Stimulus Bill provides a number of new benefits for tax payers and the unemployed. Included in the new federal law is an AMT patch, First Time Home Buyer Credit, and a Car Buyer Tax Deduction.

AMT Patch

The Alternative Minimum Tax continues to affect more and more Americans as salaries gradually increase over time and the tax law does not adjust or index to inflation. In the recently enacted  stimulus bill, the federal government has patched the AMT law to keep levels similar to last year to protect millions from paying the higher tax rates.

First Time Home Buyer Credit

Congress and the President saw the need to increase home sales to refuel the economy and therefore included the First Time Home Buyer Credit in the new law. This credit unlike previous similar credits does not have to be repaid and goes as high as $8,000 when a home is purchased between January 1, 2009 and December 1, 2009.

Car Buyer Tax Deduction

Regardless of whether you itemize or use the 1040 EZ tax form, you can tax a deduction for automobiles purchased during 2009. The credit includes all state and all local sales and excise taxes associated with the car purchase.