Issue in personal finance Research Paper Example | Topics and Well Written Essays - 1250 words

Issue in personal finance - Research Paper Example Taxes are the compulsory charges against the income. Taxes are charged as per tax laws and these laws include provisions whose right understanding can lead to minimization of tax liability. This report will discuss the ways in which taxes on incomes can be minimized to leave individual with maximum possible take-home-pay to support his/her financial plans. This report will discuss tax management issues in the perspective of United States’ tax laws. Tax Administration, Nature of Taxes and Tax planning US citizens pay the largest amount of tax on incomes (Garman, 1999). In US the Internal Revenue Service (IRS) is responsible to collect tax on personal income of US citizens. The tax is collected as per the rules of ‘Internal Revenue Code’. The nature of US income tax is progressive which implies that higher tax would be charged from high income recipients and vice-versa. In progressive taxation system higher marginal portions of the income are charged to tax at highe r rate. There are two ways in which U.S citizens discharge their tax liability. One method is tax ‘withholding by employer’. Employer deducts a specific amount on account of employee’s tax liability from its paycheck. ... Tax is paid in four quarterly installments of April 15, June 15, September 15 and January 15. Rationales behind avoiding tax or minimizing it Paying tax involves the opportunity cost of forgoing some consumption that could have possibly satisfied a want. Moreover the substantial amount of money given in taxes also involves a loss of possible investment of that money in some venture that earns an interest. Hence if tax liability can be reduced legally, it is likely to benefit tremendously individual in terms of higher income to support his/her financial objectives. Ways to legally minimize tax liability 1. Reduction in taxable income If taxable income is somehow reduced it would result into lesser tax liability for an individual. There are various provisions that can make taxable income reduced. One such provision is the deduction allowed on account of contribution to IRS approved health premium plan. Under this plan employee pays a certain amount for heath benefit premium. This amoun t is deductible from income when calculating the taxable income. Hence such amount avoids income tax, social security and Medicare. ‘Flexible spending accounts’ is another tax shelter offered by employer. In this case employee is supposed to make contributions into government approved medical or dependent care reimbursements accounts. Such amounts are deducted when calculating taxable income and hence avoid any charge on account of income tax, Medicare or social security. 2. Tax-sheltering returns on investment Congress permits several investments whose return is exempted from tax either or such investment, in some way, cause reduction in tax liability. Such tax-shelter is provided