The following roundup was first published in 2008.
The cherry blossoms have erupted, birds have flown back north, public parks have turned the water fountains on, and … it's time to file your taxes. Today the Explainer opens its archives with a roundup of questions about one of the more enigmatic American traditions.
Taxpayers have the option of checking a box to send $3 to the Presidential Election Campaign Fund, making it available for presidential candidates during the primary and general election. But John McCain and Barack Obama may choose not to use that money in the '08 race. If that happens, where does the money go?
It stays put. The fund, which is maintained by the U.S. Treasury Department, would simply build up in anticipation of the 2012 election, at which point it would again be available for the parties and qualifying candidates. Since being established in 1976, the account has provided matching funds for the primary campaign and grants in the general election to candidates who meet certain guidelines and agree to abide by set spending limits. (This year, the grants would total about $85 million for each candidate.) The Presidential Election Campaign Fund also supplies a subsidy of about $16 million to each party for its nominating convention, regardless of whether the candidates decide to accept public money.
If both the Democratic and Republican nominees turn down the public funds—for the first time since the program began—Congress may move forward with the debate over whether to raise the program's spending caps. So it's possible that by the time the pot of money accumulated from those check-off boxes rolls over to the 2012 election, it will be doled out a little differently.
If you do check the box, do your taxes increase?
Nope. As the IRS promises on the forms, checking the box to give $3 to the fund "will not change your tax or reduce your refund." It merely tells the government that you want $3 from the big pool of tax revenue to go toward the election campaign fund. Despite that assurance, the percentage of taxpayers who check the box has declined steadily from a high of 28.7 percent in 1981. (Back then it was only a $1 contribution; it jumped to $3 in 1993.) In 2006, only 9.1 percent checked the box. (For more on the check-off box, read this Explainer from 2001.)
Campaigns aren't the only cause benefiting from tax-form check-offs. Taxpayers filing their state taxes can also choose to give to a host of charitable organizations. How do charities get a check-off box?
By convincing state legislatures. That's harder in some states than others. In Oregon, for instance, an organization needs 10,000 signatures and proof that it received at least $1 million in contributions and revenue the previous year. Virginia and California require that charities make a certain amount from the check-off box donations (at least $10,000 a year over three years in Virginia and more than $250,000 in the second year in California) in order to stay on the form. But too much success can get you booted: In 2000, after two funds brought in $10 million to $15 million, each over 20 years, Michigan took them off its state tax form. (For more on how charitable organizations can get a tax-form check-off box, read this Explainer from 2007.)
Once you send in your forms, where does your tax check actually go?
To the Federal Reserve Bank of New York—eventually. If you pay by check or money order, that first goes to a lockbox bank that is equipped to process a whole lot of mail. From there, your check is deposited into a Treasury Department account, and the money is wired to the Federal Reserve Bank. If you file electronically, your money takes a slightly different route: It's transferred directly from your bank account to the Electronic Federal Tax Payment System. (To read more about the path of your tax dollars, read this Explainer from 2006.)
Americans living and working abroad are often allowed to exclude tens of thousands of dollars of income and the cost of housing from their federal taxes. How come?
Because the country wants to encourage businesses to expand overseas. The Foreign Earned Income Exclusion statute, introduced in 1954, makes it more appealing for U.S. citizens to work a couple of continents away by offering them massive tax breaks. It's a sweet deal for people sent to Third World countries, where local taxes are barely existent. But for corporate types sent to London or Paris, the high European taxes could basically negate the hometown perks. (For more on tax breaks for Americans working abroad, read this Explainer from 2003.)
Is there any way to have someone else pay your taxes for you?
Yes, but it has its own tax implications. Since having your tax bill covered is a form of income, you'd be liable for the taxes on the taxes that were paid on your behalf. (For more on having someone else pay your taxes, read this Explainer from 2006.)
Do informants have to pay taxes on the rewards they get from the government for revealing terrorists' whereabouts?
Well, they should. Reward money has been subject to taxation since 1913, so terrorist informants do owe taxes on their earnings. Congress can choose to exempt a specific reward from being taxed, and there are other ways around the informant tax. David Kaczynski was awarded $1 million in 1998 for helping the FBI crack the case on his brother, Ted, the Unabomber, which he intended to use for legal fees and to pay the families of his brother's victims. Despite the noble intentions, he would have been taxed on that money at the highest rate. By putting it into a fund administered by a charity, he cut down his liability. (For more on reward money for terrorist informants, read this Explainer from 2003.)
So terrorist informants don't get tax breaks, but the blind do? What's the deal with that?
It's a result of the Revenue Act of 1943, which provided a slew of tax breaks, including a $500 deduction for the blind, meant to offset their higher cost of living. The tax break is available to anyone who can't see better than 20/200 or who has a field of vision of less than 20 degrees. People with other medical disabilities can deduct significant medical expenses from their income, but not all conditions are as easy to diagnose as blindness. (For more on tax breaks for the blind, read this Explainer from 2005.)
What if you cheat on your taxes—are you going to end up in an orange jumpsuit on a dingy cot?
Not likely. Tax cheats end up in prison if they're found guilty in criminal court. But the government has the time and money to make criminal charges against only a few thousand people each year. Most of the cases are tried in civil court, where a fine—not a jail sentence—is the punishment for fraud. Careless filers can also get hit with a fine: The IRS imposes a 20 percent "negligence" penalty on people who recklessly disregarded the rules. (For more on what happens to tax tricksters, read this Explainer from 2006.)
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