Now that the 2013 tax filing season is over, it is time to consider just what income taxes you had to pay. Our income tax system is more complex than what many people believe. One major reason for the complexity is that a brand new income tax system, created by the Affordable Care Act (Obamacare), came into being in 2013. So, you might wonder, how many income tax systems do we have? The answer: we have four parallel income tax systems. See below. We pay all four taxes when they apply. The first three starting from the left are federal taxes and are combined on your federal income tax return.
Each of the tax systems have their own definitions of income, deductions, credits, and tax rates. They apply when taxpayers have certain types of income or deductions in sufficient amounts. Taxpayers with similar overall income levels can pay very different amounts of income taxes depending upon the make-up of their income and deductions.
For example, some tax-exempt interest not taxable under the regular tax system or under the net investment income tax (NIIT) system might be taxable by the alternative minimum tax (AMT) system and by your state income tax system. Another example is that not all itemized deductions allowed for regular tax purposes are deductible under the AMT or NIIT systems, and if your income is too high in Utah, none of your itemized deductions are permitted.
Tax planning is difficult to get right if you don't consider all four of these income tax systems. Tax planning requires the use of sophisticated software and the analysis must consider at least the current and the subsequent tax year. Now that your 2013 tax return has been filed, consider how these four parallel tax systems impacted your tax expense, and how you might better arrange your financial affairs to reduce their impact on your 2014 income tax.
Each of the tax systems have their own definitions of income, deductions, credits, and tax rates. They apply when taxpayers have certain types of income or deductions in sufficient amounts. Taxpayers with similar overall income levels can pay very different amounts of income taxes depending upon the make-up of their income and deductions.
For example, some tax-exempt interest not taxable under the regular tax system or under the net investment income tax (NIIT) system might be taxable by the alternative minimum tax (AMT) system and by your state income tax system. Another example is that not all itemized deductions allowed for regular tax purposes are deductible under the AMT or NIIT systems, and if your income is too high in Utah, none of your itemized deductions are permitted.
Tax planning is difficult to get right if you don't consider all four of these income tax systems. Tax planning requires the use of sophisticated software and the analysis must consider at least the current and the subsequent tax year. Now that your 2013 tax return has been filed, consider how these four parallel tax systems impacted your tax expense, and how you might better arrange your financial affairs to reduce their impact on your 2014 income tax.
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