Back to Basics: Important Things You Need to Know About Your Taxes
Filing a tax return is still seen as a daunting thing to do by many, not only because of the frequently changing tax codes and the uncertainties we face today but also because of the complicated nature of tax returns. In reality, however, getting your taxes in order is not as difficult as you think. There are calculators, apps, and automated software that will do most of the hard work for you.
Despite the wealth of tools you can now use to get your tax returns calculated properly, it is still necessary to take the time to understand the basics. To help you get started, here are the most important things you need to know about your taxes.
Getting It Right
One of the most important things to note is that you must always aim to get your taxes right from the start. If you think calculating your taxes and finding out that you owe the government hundreds of dollars at the end of the calculation is bad, wait until you realize that the money you should get back from overpaying could be earning interest or generating extra revenue if you didn’t give it to the government for the year.
Some planning is needed if you want to be better at managing your taxes. You can start by calculating the amount of taxes you pay on your income. This should act as the baseline since it is the amount you have to pay before deductions are calculated. Next, look into the possible tax deductions you can claim as the year progresses. You’ll get closer and closer to an accurate bottom line with every year.
Understand Your Tax Brackets
Northeastern University and its online master of science in taxation department posted a very good explanation about progressive and regressive taxation systems on their website. The United States uses a progressive taxation system, which means you pay a different amount of tax depending on the amount of money you earn that year. Students taking the online MST program are studying to master the progressive taxation system as part of their course.
What you also need to understand is that the tax brackets you’re in will also affect your tax deductions. You can’t simply use the top tax bracket to calculate your deductions. Each deduction is calculated in progressions, similar to the way your income tax is calculated. This means you have to take into account these brackets when planning deductible expenses such as charitable donations.
Deduction vs. Credit
Lastly, you need to know the difference between the tax you pay and a tax credit. A tax deduction will reduce the amount of taxable income. Certain expenses and donations fall into the tax deduction category, and they can help you save on your taxes.
A tax credit, on the other hand, is the amount of money you can subtract directly from the taxes you owe the government. There are non-refundable and refundable credits, with the latter being the only type that gives you the full amount, even when your tax liability is below zero.
Master these basics and you will be able to plan ahead and manage your taxes better. With the basics covered, you can start learning more about the different deductions and credits you can use to save more on your taxes.