Tax Basics you should know
In less than a week the year is over and it is time to start putting together our tax returns. It is time to get in the mail all of our documents needed to put together our taxes. I always make out a reminder list of what documents I should be getting. For instance, I list W-2’s from each company, 1099 from another business, Mortgage statements and more. Then when each comes in I check them off. I keep track of all my home and business expenses each month so it is a lot easier at tax time. like I have said before it is better to hire someone to do your taxes for you. But here are some basics to know;
Top things to know
1. If you get a big refund each year, you’re having too much withheld from your paycheck.
In effect, you’re giving the government an interest-free loan.
2. If you have too little withheld, you may be charged an underpayment penalty.
You must pay 90 percent of what you owe for the tax year by the end of that year or an amount equal to 100 percent of your tax liability for the previous tax year, whichever is smaller.
3. Not every dollar of your taxable income is taxed at the same rate.
That’s because portions of your earned income fall into different brackets, which are assigned different tax rates. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Your marginal tax rate is the tax bracket at which the highest (or last) portion of your income is taxed.
4. Your combined tax bracket determines how much tax you’ll owe on income from investments such as CDs and money market funds.
Your combined bracket is the sum of your top (or marginal) federal tax rate and your top state income tax rate. It may be less if you itemize deductions since you will be able to deduct your state income tax on your federal return.
5. If you file your return by April 15, but don’t pay the tax you owe, you may receive a late payment penalty.
The same goes if you file for an extension. An extension only allows you to file your return after the due date. But full payment is still required by April 15. If you make a partial payment by then, you may be charged interest on the amount outstanding.
6. You can reduce your chances of being audited.
One of the best ways is to fill out your return completely, correctly, and on time every year.
7. You should pay estimated taxes if you’re self-employed; expect hefty investment income or profits from a property sale; or if you don’t have enough taxes withheld to cover the taxes you’ll owe on non-wage-related income.
Retirees should also consider paying them if they haven’t opted for voluntary withholding on their pension or IRA payments. Estimated taxes are due four times a year (April 15, June 15, Sept. 15, and Jan. 15).
8. Your adjusted gross income (AGI) is your total income minus certain “above the line” deductions such as deductible IRA contributions, alimony payments, or health savings account contributions.
Your AGI primarily determines whether or not you’re eligible for tax breaks. Almost every break, be it a deduction, exemption, or a credit, has its own AGI limit.
9. Your taxable income is your AGI minus exemptions and deductions.
The less your taxable income, the less in taxes you’ll owe. That’s why it’s in your best interest to take advantage of tax breaks where you can.
10. A credit is better than a deduction.
A credit is a dollar-for-dollar reduction of the taxes you owe. A $100 credit means you pay $100 less in taxes. A deduction reduces the taxes you owe by a percent of every dollar you’re allowed to deduct.
You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. If you’re in the 25 percent tax bracket, a $100 deduction means you’ll pay $25 less in taxes (0.25 times $100).
Doing your tax return isn’t always as daunting as it seems. In fact, it actually can be a great opportunity to get your financial house in order.
Tax basics
Understanding tax fundamentals can save you money.
If that opportunity lacks appeal or your finances are just too complicated to handle on your own, there are plenty of tax professionals who can do the dirty work for you.
No matter which route you choose, however, you should understand tax basics for two reasons: You are legally responsible for your tax return; and being tax-savvy throughout the year can save you a great deal of money over time.
In this lesson we’ll go over some tax essentials, including:
- How much you should withhold;
- What those oft-heard but rarely defined phrases on your 1040 mean;
- What tax records you should keep;
- How you can avoid an audit; and
- Some good tax-planning strategies.
Unless we note otherwise, we’re talking primarily about federal taxes. State and local governments impose a variety of income, sales, and property taxes that are too complex and varied to address here.
Not every dollar of your income is taxed at the same rate
Source:CNNMoney.com
Are you getting a refund or not?
If you are not getting a refund and paying a lot in you should ask for advice on what the best thing to do in your situation. It may be as simple as changing your deductions at work. In a perfect world would be that we would not have to pay in or get a refund. I know everyone has different opinions on this. Some say it is better to keep your money during the year and pay in taxes at the end, some like to pay extra in taxes during the year and get a large refund.
No one can say one way is right or wrong. Everyone has there own opinions and Financial Advisers will tell you what they feel is best for your financial situation. I know everyone has different goals, some may be to pay in extra during the year to be able to get a large tax refund to pay off Christmas gifts or to take a family vacation because they don’t seem to be able to save money on their own each month.
Let me know your thoughts and suggestions to help others out. Have a great day.
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