It's almost impossible to avoid paying taxes. While you may be able to reduce what you owe through deductions and credits, the government considers virtually everything you make taxable. You might even have to pay tax if you give your money to someone else, such as your children. In addition to federal income taxes, earning money means paying Social Security, Medicare, and possibly even state and local income taxes.
Taxes as a Percentage of Total Income Earned
Federal income taxes range from 10 to 35 percent of your income as of 2012. However, as of 2011, the median four-person American family paid just 5.6 percent of their income in federal income taxes thanks to credits and deductions. You can't get around Social Security taxes, which are assessed on your first $106,800 of income. For 2012, Social Security and Medicare taxes took 4.2 and 1.45 percent respectively. If you're self-employed, you have to pay the employer portion of those taxes as well, adding an additional 6.2 percent to the Social Security tax hit and 1.45 percent to the Medicare tax.
How Much Money Do You Have to Make to Owe Taxes?
Whether or not you owe any taxes depends on more than the money you make. For example, if you earn $40,000 running your own business, but you can document $45,000 in business expenses, you might not owe a thing. However, if you earn $10,000 as a part-time sales clerk, that entire amount might be taxable. It all comes down to how much taxable income you have, which is your gross income less allowable deductions and credits. Even if you don't owe taxes, you usually have to file a return if your income is above a certain minimum level. That level depends on your filing status, age and the source of the income.
How Much Time to Send in Your Tax Return if the Government Owes You Money?
There's no reason to wait if the government owes you money. Every day the government keeps it, you're essentially extending it an interest-free loan. The IRS must have a W-2 with your return, and you should get that from your employer starting Jan. 31. If you get your W-2 on Feb. 1, you could send your taxes in that day. If you've already filed your taxes and want to claim a refund from a prior year, you have to make amends within three years from the time the return was originally due.
How Much Money Can You Gift Your Children & Not Owe Taxes?
As of 2012, the annual gift tax exclusion, or the amount you can give to any one person completely tax free in a single year, was $13,000, or $26,000 for couples. If you give above that amount, you may owe a gift tax. But you can avoid the gift tax if you deduct the gift from your "unified credit" amount, which is $5.12 million per person ($10.24 million per couple) as of 2012. For example, if you gift your child $146,000 in one year, you could apply both your combined $26,000 annual exclusion and $120,000 of your unified credit to avoid paying gift tax in that year. There is eventually a price to pay for this generosity. Your unified credit doubles as your estate tax exemption. In other words, the first $5.12 million in your estate value can be passed on tax free -- unless you have reduced the exemption amount by giving taxable gifts. If you reduce your unified credit through gift giving, you will reduce the amount of your estate's tax exemption, and your heirs may pay the price in higher estate taxes as a result.
How Much Money Would You Owe in Taxes if You Won 26 Million Dollars?
Lottery winnings and other prizes are considered ordinary income by the government, and they're taxed at the marginal income tax rate. A prize of $26 million would put you well above marginal -- you'd be in the top tax bracket. You'd pay 35 percent in federal tax on the bulk of that income, or about $9.1 million if you take it as a lump sum. Your state will expect a cut too if it has an income tax and assesses it on lottery winnings -- and most do. In New York City, things are even worse; you'll owe both 8.82 percent in state tax and an additional 3.87 percent in city tax.
- Tax Policy Center: Average and Marginal Federal Income Tax Rates for Four-Person Families
- Rutgers University: 2012 Marginal Tax Brackets
- Social Security Online: Social Security and Medicare Rates
- IRS: Do I Have to File a Tax Return?
- Bankrate.com: Estate Tax and Gift Tax Amounts
- Forbes.com: How Much Tax Will You Owe on $640 Million Jackpot?