From Paycheck to 1040: Understanding Your Income Tax

As Benjamin Franklin said - there are only two certainties in life, and today, I’m not here to talk about death.

If you’re like most people I know, you’re probably frustrated with our tax system.  Whether you feel that your taxes are too high or irritated that our federal, state and local governments waste tax dollars, trust me, you are not alone.  I remember a comedian mentioning one time that he was reviewing his paycheck and noticed a lot of his tax dollars going to “some guy name FICA” and proceeded to give a great punchline…  I don’t even know the guy!” 

So, let’s talk about taxes: Income taxes to be specific. If you earn a paycheck, you likely pay income tax, but if you are like many people the how and the why behind their annual 1040 forms remains a mystery to be solved only by their accountants every year.  

Today, I am going to take a look at what, exactly, is income tax and how it works.

Hi, I’m John Gigliello and you are listening to Invest in Knowledge, a podcast for people nearing or in retirement who want to learn more about proactive tax planning, retirement income planning, social security timing, investment management and asset protection.  After a life-altering health issue at age 39, my calling in life became clear: To share my knowledge of personal finance with people who are looking to make smart and responsible choices with their money. 

Did you know that Income Tax was first collected by the United States government in 1862 to help finance the Civil War. President Abraham Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.

The federal tax code was created in 1913, at the time, just 400 pages long. It now covers more than 70,000 pages of complex rules regarding income, exemptions and credits.

So, what is Income Tax, other than something that we all dread paying? In a nutshell: Governments impose Income tax on money generated by businesses and individuals within their jurisdiction. By law, taxpayers in the U.S. must file an income tax return annually to determine their tax obligations.

This tax then serves as a source of revenue for governments, used to fund public services, pay government obligations, and provide goods for citizens. Historically, the funds collected also help pay for government programs and services, such as Social Security, national security, schools, and roads. 

In addition to the federal government, many states and local jurisdictions also levy income taxes.

One of the services I offer high net worth retirees is proactive tax planning. We review anticipated income, from all sources, each year and employ strategies to help clients make the most of their hard-earned money. If this sounds like something from which you could benefit, reach out to us. You can find more about the services we offer at www.jgigliello.com. 

And don’t forget, we always encourage you to take part in the financial planning process to pursue a confident financial future and in turn, feel optimistic and proud about your accomplishments.  If you’ve diligently saved over the years and have accumulated investment and retirement assets AND you understand that the success of your retirement is too important to be managing yourself and you value experienced and professional guidance, feel free to give us a call for a complimentary initial consultation.  

If there is a financial planning topic you would like us to address on a future episode of Invest in Knowledge, please reach out and let us know.