08 Dec What You Need to Start Tax Planning
Economic disruptions highlight the importance of long-term financial planning. If there’s one thing we’ve learned is that taxes are inevitable, regardless of a health crisis and global recession. While we can have peace of mind that the taxes we pay are devoted to maintaining economic stability in troubling times, it’s only natural that we also look out for our best interests and survival. And the best way we can do that is by reducing our tax burden to save more money for the future.
Tax planning plays a crucial role in helping taxpayers fulfill their tax responsibilities while also securing their financial future’s stability. But with the different tax planning strategies, it can be overwhelming for those with little tax code knowledge. Here’s what you need to start tax planning.
Understand Your Tax Bracket
Your tax bracket is determined by:
- Filing status (single, married, head of household, married filing jointly)
- Taxable income
There are seven federal tax brackets:
Because we have a progressive income tax system, you pay higher tax rates when you have a comparatively higher income. These rates are based on the concept that taxpayers who earn more money can afford higher tax rates. And this is why low-income taxpayers pay a lower percentage of their taxable income.
Understanding your current tax bracket helps you with tax planning because there are legal strategies that allow you to get into a lower tax bracket. Using tax deductions and tax credits are ways to lower your income into a lower tax bracket. A tax planning expert can show you how deductions such as property taxes, mortgage interest paid, charitable donations, and earned income tax credit can be used to your advantage.
Understand Your Adjusted Gross Income (AGI)
Gross income includes:
- Business income
- Capital gains
- Retirement distributions
- Other streams of income
Adjusted Gross Income (AGI) is what is left after adjustments have been subtracted from your gross income, such as 401(k) contributions, student loan interest, alimony payments, health savings account contributions. There are strategies to reduce AGI and, therefore, taxable income. These methods include bundling medical expenses, capitalizing on the capital loss deduction by selling assets, or making charitable contributions.
Understand the Difference Between Tax Credits and Tax Deductions
Both tax credits and tax deductions reduce your tax burden but in different ways. Tax credits directly reduce the amount of tax you owe because they are subtracted directly from your tax liability – reducing taxes dollar for dollar. Therefore, the value of the credit applies to everyone who is qualified for it.
A tax deduction, on the other hand, involves itemizing deductible expenses. Technically, deductions are adjustments to income. Unlike credits that have a specified value, tax deductions depend on your liability and marginal tax rate. Understanding the difference between tax credits and tax deductions helps with tax planning because there are ways to maximize credits and itemized tax deductions.
At Golden Tax Relief, we provide expert tax planning services to those who need help understanding the complexities of tax planning. With decades of experience and tax code knowledge, we can help ensure you’re not overpaying your taxes and rewarded with financial stability. For expert tax planning advice, click here for a consultation or call 844 229 8936.