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HOW TO PAY ZERO TAXES, 2011
By Jeff A. Schnepper
The McGraw-Hill Companies, Inc.Copyright © 2011The McGraw-Hill Companies, Inc.
All rights reserved.
Is It Legal?
"Taxation must not take from individuals what rightfully belongs to individuals."
In 2008, a record 51.6 million tax returns—36.3% of all returns filed—had no income tax liability because of the available credits and deductions in the tax code.
"The purpose of the IRS is to collect the proper amount of tax revenue at the least cost to the public, and in a manner that warrants the highest degree of public confidence in our integrity, efficiency, and fairness. To achieve that purpose, we will: Encourage and achieve the highest degree of voluntary compliance in accordance with the tax laws and regulations; Advise the public of their rights and responsibilities; Determine the extent of compliance and the causes of non-compliance; Do all things needed for the proper administration and enforcement of the tax laws; Continually search and implement new, more efficient and effective ways of accomplishing our Mission." (IRS statement of organization and functions, 39 Fed. Reg. 11,572, 1974)
It has been said that "the Internal Revenue Code is a remarkable essay in sustained obscurity ... a conspiracy and restraint of understanding." (All State Fire Insurance Company [Ct. Cl.], 80-1 USTC-, 45 AFTR 2d, 80-1096)
For 2009, individual taxpayers received over $259 billion in refunds. That's a $259 billion interest-free loan to the IRS. At a 5 percent rate, that's $12.95 billion in lost interest—enough to cover my kids' spending for most of their teenage years!
When the modern income tax law was introduced in 1913, only one American in 271 was affected; the taxable incomes of the great majority did not exceed the exempt amount of $3,000 for individuals, $4,000 for couples. Those who were affected paid at the rate of 1 percent on taxable income up to $20,000 and, at most, 6 percent on income over that amount. The average tax rate for the 437,036 individual tax returns filed in 1916 was 2.75 percent. For 2009, over 140 million individual income tax returns were filed and the IRS processed over two billion pieces of paper—which, if placed side by side, would stretch over 200 miles.
You pay too much in taxes, and it costs too much for you to do your tax returns. Here are a few "for instances:"
Even after adjusting for inflation, the U.S. government collected twice as much income tax revenue in 2001 as it did in 1981.
An increase of 250 million hours in the burden on the public of complying with the tax system during 2000 resulted in an overall increase of 180 million hours in the burden on the public of federal agencies' collection of information.
Let's talk about complexity. By 2009, our tax rules needed 70,320 pages and it contained 3.7 million words. The epic book War and Peace has 1,444 pages and 660,000 words, while the Bible contains 1,291 pages and 774,746 words.
According to Daniel J. Mitchell of the Heritage Foundation:
The paperwork received by the IRS would circle the globe 36 times.
The IRS sends out 10,000,000 correction notices each year. 5,000,000 of them are wrong!
The IRS has lost more than 6,400 computer tapes and cartridges.
Between the beginning of 2000 and March 2009, there were 29 separate tax bills passed and signed into law, with about 2000 changes in the tax code.
In 1948, the average American family with children paid 3 percent to the federal government in income and payroll taxes.
Time is money, and these dollars come out of your pocket and drain your ability to save and invest, while inflation compounds your financial concerns by draining your ability just to keep even.
Even if your earnings can keep even with inflation, you still lose. For example, assume you have a taxable income for 2010 of $82,400 and pay $16,781 in taxes. You have $65,619 left to spend. With both inflation and a raise of 8 percent, you will now earn $88,992 and pay $18,627 in taxes, leaving you $70,365 to spend. But due to inflation, this $70,365 is worth only $64,736. In real dollars, the progressive nature of your tax structure and the purchasing power decay caused by inflation have together decreased your real buying power by $65,619 minus $64,736 = $883 on a $6,592 increase in earnings! The impact of state and social security taxes further magnifies your financial dilemma.
What can you do? One simple answer is to try to reduce your taxes, and the rest of this book will tell you how to do so. Some of the techniques found in this book are the result of mixing complicated and convoluted tax code sections, but all of them are completely legal. Some are legal not because Congress intended them to be there but because both Congress and the Internal Revenue Service were lax in their homework and the tax code language allowing them is there. While Congress writes the tax law, that law is read and interpreted by the courts. Quite often the Internal Revenue Service and the courts differ in their interpretations of various code sections and their applications—the courts always win. Even if a tax effect is contrary to original congressional intent, the courts must and do support the language of the code. Such effects are the law and can be changed or eliminated only by congressional action. Until such action is taken, it is fully within the legal rights of the American taxpayer to use such code combinations to reduce, minimize, or even completely eliminate taxes. Each individual must pay taxes, but not one penny more than the law requires. If you want to make voluntary contributions to our federal Treasury, you'll have bought the wrong book.
On the other hand, most of the techniques detailed here have been intended by Congress. In many cases, legally reducing your income tax liability is both good for you and good for America. Certain kinds of receipts are intentionally excluded from gross income for tax purposes in order to achieve some economic or social objective. These provisions are frequently referred to as "tax incentives" and are specifically designed to encourage certain types of activity. Tax incentives have the same impact on the federal budget as direct expenditures because they represent revenues not collected by the federal government. These special tax provisions, therefore, have been labeled "tax expenditures" or "tax aids" by the Treasury Department.
These expenditures are revenue losses arising from provisions of the tax code that give special or selective tax relief to certain groups of taxpayers. These provisions either encourage some desired activity or provide special aid to certain taxpayers. For example, the federal government seeks to encourage certain forms of investment. Thus business investment is encouraged by the accelerated rather than straight-line depreciation. This tax advantage has been legislated so that business will have additional capital to be able to expand. Tax advantaged investment helps create new businesses and new jobs. These new jobs produce more paychecks and these additional paychecks produce more taxes. In the long run, if everything works as it should, everyone wins.
Alternatively, other tax expenditure provisions have been adopted as "relief provisions" to ease "tax hardships" or to "simplify tax computations." For example, the elderly and the blind receive special financial benefits through a deduction called the "additional amount." The other tax benefits for the aged—the retirement income credit and the potential exclusion of social security annuity payments from taxable income—also fall into this "personal or tax hardship" category.
Excerpted from HOW TO PAY ZERO TAXES, 2011 by Jeff A. Schnepper. Copyright © 2011 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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