Happy Columbus Day! It’s a holiday for many across the country. I can think of a bunch of fun ways to spend a day off.
However, if you’re one of those taxpayers who filed an extension waaaay back in April to get a little extra time to file your federal income tax return, you might want to spend the day getting your receipts together. The filing deadline for individuals on a regular extension is Thursday, October 15.
Remember that an extension to file is not the same as an extension to pay. If you owe taxes, you will likely owe a few extra dollars in interest (lucky for you, interest rates are fairly low).
Taxpayer asks:
I have a difficult situation. I won a lot of money in my church’s 50/50. I know I have to report it as income but when I asked for written information from my church, they asked me not to report it. They say they aren’t legally allowed to run a 50/50 and if I report it, I’ll get them in trouble and they could have to close. I don’t want to get anyone in trouble but I don’t want to cheat on my taxes. What do I do?
Taxgirl says:
You’re absolutely right that you need to report the income. So good on you.
As to the church, this kind of thing happens all of the time. Many organizations are barred by state law from conducting “games of chance” and other random lottery type fundraisers. And the 50/50 is just that: everyone pays into a pot and a random winner takes 50% and the church or other organization takes the remainder. It’s a win-win for the church or other organization because it requires no upfront cash, no real efforts beyond promotion. There’s just that little detail of whether it’s allowable…
The good news in your case is that you don’t have to have a form from the church in order to report the income. Just report it on Line 21 as other income. The IRS asks you to describe the type and amount – it doesn’t actually require you to name the source.
All of that said, it’s not beyond the realm of possibility that you could be asked, at audit, to provide the source of the funds. In that event, do it. The church is clearly aware that what they’re doing is wrong and they’ve made the decision to do it anyway. That’s not on you, it’s on them: any of the fall out resulting from the 50/50 is the result of their calculated risk. And so long as it’s working for them, they’ve decided to keep doing it. Again, not your problem.
So go, enjoy your winnings. Don’t waste another moment worrying about it.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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The good news: nearly 50% of American households (47%, to be precise) won’t pay any federal income tax in 2009.
The bad news: the remaining 50% (or so) will have to foot the bill for everyone.
You can thank (or blame) the new economic recovery package for bumping the percentage of taxpayers who won’t be paying a wee bit higher (about 10%).
But don’t just start pointing fingers at the working poor. While it’s true that the majority of those who are paying no federal income tax this year make below $30,000 annually, up to 10% of households making between $75,000 and $100,000 also qualify. New tax breaks, refundable credits, exclusion of a portion of unemployment benefits and state and local sales tax deductions account for much of the zero income tax for 2009.
It’s important to note that these figures don’t include payroll taxes (Social Security and Medicare). On average in 2009, taxpayers will pay an average of 8.4% of their income in payroll taxes. If you take those taxes into account, only 24% of households will pay no tax.
Payroll taxes often get left out of the “who pays tax?” equation. While it’s true that the top percentage of wage earners pay most of the federal income taxes as a percentage of income, they are also among the lowest in terms of payroll taxes. The top 1% of income earners report 16% of total income but pay less than 4% of payroll taxes. That’s because contributions for Social Security are capped at $106,800. If you make more than that, the overage is not subject to Social Security; this is referred to as a regressive tax (our “regular” income tax system is said to be progressive). Additionally, much of the unearned income in the country (dividends, etc.) is attributable to the very wealthy; unearned income is not subject to payroll taxes.
The lower 60% of income earners report 25% of income but pay about 33% of payroll taxes. Those somewhere in the middle pay the rest (of course).
How does this play out in terms of averages? In 2009, the average federal tax rate paid as a percentage of income in the US is 18.2%. The top 0.1% wealthiest taxpayers will pay an average of 27.9% (not as high as I would have guessed) while the very poorest taxpayers actually “pay” a negative tax (this is due to refundable credits like the EITC and the Making Work Pay credit).
In terms of all federal taxes, and not just income tax, the top 20% of income earners will report more than half of total cash income but will pay a whopping 2/3 of all federal taxes (including income, estate, etc.).
Of course, this data can be manipulated a million different ways (look, I already started!) and you can bet it will continue to be throughout the next election. For now, it’s just something to munch on. You can read the entire Tax Policy Center report here (downloadable as a pdf).
William Gifford, MBA, writes:
Congress should eliminate the current system altogether. Throw out the federal income tax because it’s too broken to be fixed.
In it’s place, I think we should pass something like the VAT in Europe: a federal sales tax. Think about it. Rather than penalize people for making more money, a federal sales tax would only apply when you spent money. Everyone spends money so everyone pays tax, instead of how it works now with the top taxpayers paying for everyone else. And everyone is paying the same rate.
I know that many people will say that a federal sales tax will be unfair to the poor, so I would suggest exempting necessities like food and medicine.
When you tax income, you are giving people a disincentive to make more money. This way, people can make more money without getting a penalty. But if they spend their money, it benefits everyone.
This works very well in most European countries. I think we should try it.
