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Financial Advice

Time To Change?

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In a few more days, we'll have a brand new president. Whether it's going to be for the good or bad depends on how you feel about many things. We can be fairly sure he'll propose some changes to the tax laws and other financial administrative matters; we can only speculate about the final results. Two items will probably be at the forefront of change, the marriage penalty and social security administration.

The marriage penalty is not so much a penalty as an archaic way of thinking. Back in the dark ages when there was supposed to be one wage earner, two were supposed to live as cheaply as one and a half. Remember those good old days, when one person (usually the man) went out and earned the money and the other person (usually the woman) stayed home, kept the house clean, and spent the afternoon watching soap operas? No one in my family ever enjoyed that luxury.

Congress, not wanting to give an advantage to anyone who actually worked for a living, created the situation in which two-earner families actually ended paying more taxes than single-wage earners. Here's how: If both John and Mary are single and earn $7,200 each for the year, they would pay zero taxes. If they are married and earn the same amount (combined income: $14,400), their tax liability would be $216. And it doesn't matter who earned what. It still works out the same. If you're in an income bracket where $216 doesn't seem like a lot of money, watch what happens next.

If John and Mary are single, earn $50,000 each and have no additional deductions, they each would owe the government $8,565, or $17,130 between them. Married, their additional liability wouldn't be an insignificant $216, but a whopping $1,537 for a grand total of $18,667. The spread gets wider as the income increases because when the two incomes are added together, the majority of the second paycheck falls into a higher tax bracket.

Then, there's the Social Security trap. The new administration has proposed turning the Social Security Trust Fund over to Wall Street. Without getting on a soapbox on this subject, let two facts show us where the danger lies. First, most financial institutions charge around 2 percent a year to handle a trust fund (that's 2 percent of $10 trillion). Obviously someone stands to make a lot of money out of this deal if it goes through. Second, thousands of "red-hot" stocks took a big nosedive and crashed into oblivion last year, losing millions of dollars for investors. You can do your own math, but if our $10 trillion had gotten invested this year, your grandparents would be living in your kitchen right now.

Who Has To File

Not everyone has to file a tax return. As far as the I.R.S. is concerned, if you're a single person and earned less than $7,200 for the year, you don't have to file at all. If you're filing Married Jointly, it's $12,950, while Married Separately is $2,800. If you qualify for Head of Household status, you don't have to file a tax return if you received less than $9,250. Over 65 and other special status get additional deductions. And no, you won't get in trouble from the I.R.S., and you won't get audited for not filing. No one is going to wonder why you didn't file. It's a computer, and it probably knows more about what you earned than you do.

There are also special filing requirements for children and dependents. They may be required to file if their income is more than $700. If you're self-employed, the rules are different. In this case, you have to file if you have a profit of $400. You're also required to file if you had tip income or owe the government a penalty for early pension withdrawals.

Of course, you may want to file even if you don't have to. If you worked for wages and your employer took out withholding taxes, you'll want to file a return to get the refund. In fact, if you didn't earn enough to file, you'll be getting back every penny. In addition, you probably qualify for an Earned Income Credit. More on that later.

Next week: getting started. BSW

Frank Wyman is a tax consultant for Amanda Tax and Financial Services.

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