I want to be part of a wonderful government system that gives me a tax deduction that is greater than my income!
Actually, on second thoughts, I can't speak Greek so I think I'll pass.
Actually, on second thoughts, I can't speak Greek so I think I'll pass.
(Of course, the IRS doesn't actually let their forms go negative.)
What is a standard deduction? It sounds like you get an amount of money back no matter what you paid. Is this true?
It's NOT INCOME. It was already my money. If anything, I should get it back with interest, since they had it for a while.
It's as easy easy as (not pie) flying with wax and feather wings.
For state/local taxes, as smoyer points out, if you erroneously deducted a larger amount of state taxes than you actually owe, then, when you get the difference back, you have to correct that on the next year's form, if you had claimed the larger amount as a deduction. If that weren't the case, you could game the system by purposely having your state taxes massively over-withheld, deducting the inflated amount from your federal taxes, then receiving a state tax refund.
You only get money refunded if you have a "refundable tax credit". Tax credits lower your tax liability; refundable credits can lower it below zero liability such that you are owed money. One common refundable credit is earned by paying higher education tuition.
(It should go without saying that I'm not an accountant; I only play one on the Internet.)
The difference, though, seems to be that in Australia, all of your deductions reduce your taxable income whereas if Australia was using the same tax system as the US, you would have to have more than $6,000 in deductions before actually affecting your taxable income.
That's the way I see it, anyway.
1) Exemptions - each person gets $x worth of income before any tax is owed at all. Roughly, this depends on your family size (there are many other nuances). This sounds like your $6,000 rule. 2) Deductions -- these are allowable expenses (business expenses, charitable contributions, certain types of interest, and so on). You can either keep records and claim the actual amount (which sounds like your system), or you can take the "standard deduction", which is the IRS's estimate of the amount of expenses an average person might have. The advantages of the standard deduction are that you don't have to keep records, and the standard deduction may actually be more than your real expenses if you don't have a lot of them.
If you assert that people with low incomes wouldn't have itemized expenses greater than the standard deduction then it is somewhat progressive, but deductions in general are of greater benefit to people with higher marginal rates.
So suppose someone had $60,000 income, and $5,000 in expenses which fall into the permitted categories; they could calculate their tax as if their income was $55,000.
But to do this, you must use what is called "itemized deduction"; you must be able, if asked, to provide documentation of the amount of each expense and proof that it was of a permitted type.
Or you can use the "standard deduction". This is a simple flat amount that anyone can apply with no questions asked. For example, if the standard deduction was $6,000, the person above with $60,000 income could simply apply the standard deduction and pay tax on income of $54,000, and not have to document any specific expenses.
The exact amount of the deduction depends on whether you are single or married, have children you pay to care for, etc.
Some people spend a lot of time figuring out which option will result in the lowest amount of tax; most people just use the standard deduction unless they know that they have enough large expenses to be worth the trouble of itemizing.
For some people with low income, this means they pay no tax at all, or even receive a refund -- in the US, employers have you fill out a form stating how you plan to file your taxes (i.e., if you will be applying deductions for being married/having children/etc.) and automatically withhold from your pay and send to the IRS an amount calculated to match what you will probably owe. If the amount withheld is greater than the amount of tax you actually needed to pay, you receive money back. Some people with higher income also deliberately have their withholding set high; this is based on the idea that it is better to withhold too much and receive a refund than it is to withhold too little and perhaps have an unexpectedly large tax bill that must suddenly be paid.
So that's deductions. You don't get the money back, you just get to subtract it, as if you'd never earned it in the first place.
How do I calculate these deductions? Well, the first problem is that you will need to keep a bunch of receipts for a couple years, just in case the IRS summons you to account for your deductions. But okay, what receipts should you save?
(1) If you donate to a registered charity, it's as if you never earned the money in the first place. This is the least WTF-y part of this idea.
(2) If you paid medical bills, you are only taxed on the first 7.5% of those bills (wtf?) -- the rest is a deduction. Old wealthy white folks, rejoice.
(3) You also have to pay taxes to your state, because otherwise the 50 states would get into a nasty tug of war over federal money. (But they do this anyway.) These taxes are deductible.
(4) Certain forms of interest (mortgages and investments) might not count in certain cases.
Since that's complicated and is entirely devoted to making rich people pay less tax, there is also a deduction for poor folk like myself who don't want to keep receipts, and that is called your "standard deduction". Standard deductions are also a bit WTF, but less so.
The concept of getting back more money than you paid is called "negative income tax". (http://en.wikipedia.org/wiki/Negative_income_tax)