Income tax correction

My colleague just told me that for the first time ever he has an income tax liability. He owes $6,000.

This got me thinking about income tax reflecting a person’s true ability to pay. Not only what is claimed and deducted but the tax rate that is placed on varying income levels by the federal and state government.

A recent article from the New York Times exemplifies the same problem experience by my colleague being experienced by many high earners in New York. Many of these people relied on their year end bonuses or stock options to make up their taxes owed to the government. However, this year with the market performance being so poor and many bonuses being withheld, they do not have the ability to pay their tax liabilities. http://www.nytimes.com/2009/02/21/your-money/21wealth.html

As a result of these types of situations, and others, the IRS is making some allowances. They are not forgiving debts, but they are educating people on better ways to file and how best to use the payment schedule. They are helping people better represent who they are to the government. http://www.newsday.com/services/newspaper/printedition/friday/business/ny-bztax0612389172mar06,0,127356.story

The government is not taken more than we owe… they are instead making sure we represent ourselves correctly and pay accordingly.

As I believe the statement above holds true, I want the tax rate applied to upper incomes to accurately target the earners ability to pay. As we all know, President Obama is allowing the Bush tax cuts to sunset and the federal government income tax will once again be suitable. A higher income tax rate for higher income earners is a tax that best represents the person’s ability to pay as wealthier people have more expendable income. http://www.star-telegram.com/opinions/story/1242131.html

However, not everyone agrees with a progressive income tax on upper income earners. There is a bill in legislation in Oklahoma, right now, to lower their top rate income tax from 5.5% to 5.25%. http://www.forbes.com/feeds/ap/2009/03/04/ap6123904.html

Overall, the current income tax system is progressive and does well taxing people on their ability to pay. However, it is crucial that we realize that our filing status and declared deductions tell the government who we are and what ability we have to pay. When we make a change in status or forget to declare a deduction the government misreads our identity and we get hit with the bill, or refund, to correct it.