- Businessweek.com Susan...
PART TWO of my interview with Ashley Dorsey of APLUSTAXES.
Junious (J): Ashley, everybody thinks they know what a tax deduction is or isn’t. Please explain, what are legitimate tax deductions?
Ashley (A): There are two types of deductions in relations to your tax return. You have deductions for AGI (Adjusted Gross Income) and deduction from AGI. I like to call them really good deductions and good deductions, respectively.
A deduction for AGI is a deduction on page one of the 1040, there 15 special items that the IRS allows you to deduct from your income; normal wages, salaries, and tips, to arrive at what is called your AGI.
Your AGI is an important number because it determines how much you can deduct from your AGI; for example chartable deductions cannot exceed 50% of your AGI. Your AGI also determines qualification for certain credits, in regards to the Earn Income Credit (EIC) if your AGI is over $13,425 and you have no dependents you do not qualify for the credit.
J: Give some basic information on forms W-2 and 1040 and their importance.
A: Your W-2 form is an employer provided form that summarizes your earnings, retirement contributions and withholdings.
Your 1040 form is the form you submit to the IRS that is used to report income, calculate taxes to be paid to the federal government of the United States, and disclose other information as required by the IRS.
J: Mitt Romney’s tax rate has been in the news recently how is it possible a multi-millionaire pays a tax rate less than me?
A: The reason Mitt Romney’s tax rate was so low was because the majority of his income was form investments which is considered capital gains and losses. So in Romney’s case he was able to net his gains with his losses and remaining gains is tax. Therefore, according the code section 1250 of the Internal Revenue Code, capital gain rate is only 15%.
Romney’s tax return also had a lot of business and charitable deductions, which will reduce your taxes due. So it wasn’t that Romney’s tax rate was lower than the “working” man, his tax rate was actually 35% which is the maximum individual tax rate, it was the percentage of the amount he paid in relations to his earnings.
J: I guess that’s how Warren Buffet has a lower tax rate than his secretary. Another popular item has been the payroll tax cut, what exactly is the payroll tax cut?
A: The payroll tax cut reduced the Social Security tax withholding rate. Previously individuals paid 6.4 % towards Social Security; under the new law the rate is 4.2%. This reductions essentially means a 2% increase in your paycheck.
J: Thanks Ashley. Once again, where can we get more information on your business?
A: For more information about APLUSTAXES, you can email us at APLUSTAXES2012@Gmail.com and follow us on twitter at @APLUSTAXES.