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Get expert answers to your top 7 tax questions in this comprehensive guide. Understand tax deductions, credits, filing status, and more to navigate tax season with confidence.
To minimize your tax liability, you can take advantage of various strategies provided by the tax code. One effective method is to leverage deductions and credits. Deductions enable you to reduce your taxable income, while credits directly lower your tax amount.
When earning income from employment, consider contributing to an employer-sponsored retirement plan or an individual retirement account (IRA). Additionally, if you have a high deductible health plan through your employer, explore options like a Health Savings Account (HSA) or Flexible Spending Account (FSA). These accounts allow you to contribute pre-tax funds, thereby decreasing your taxable income and ultimately saving on your tax bill.
For individuals with dependents, the Child Tax Credit is a valuable resource. This credit, worth up to $2,000 for 2023 and 2024, directly reduces your tax liability. Furthermore, the American Rescue Plan expanded the Child Tax Credit for the 2021 tax year, increasing the per-child credit to $3,600 or $3,000 depending on the child's age. Notably, the credit is fully refundable for 2021. To expedite support for families, the IRS initiated advance payments of the 2021 Child Tax Credit from July 2021.
Related: ROTH 401(K) vs. A Traditional 401(k) | Which is better?
Most individuals are eligible for either the standard deduction or itemized deductions, both of which play a crucial role in reducing taxable income. The choice between the two depends on individual circumstances, as outlined in item 6 below.
While self-employed individuals and business owners often have additional avenues for tax savings, employees can still benefit from various deduction opportunities. For employed individuals, contributions to IRAs, Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs) can be deducted when filing Form 1040.
Employee contributions to a 401(k) or other employer-sponsored retirement plan don't require deduction on the tax return, as these amounts are already withheld from wages, as indicated on the Form W-2.
Furthermore, specific deductions are available for employees, such as those for student loan interest (subject to income criteria), home mortgage interest, and state and local taxes.
If you engage in a side hustle, work as an independent contractor, or own a small business, you gain access to a plethora of deductions related to business operations. These deductions may cover expenses like home office costs, self-employment taxes, supplies, equipment, depreciation, health and business insurance, utilities, and more.
Related: Itemized Deductions: What They Are, How to Claim
In the United States, the tax system operates on a progressive basis, where higher incomes are subject to higher marginal tax rates. The country has seven marginal tax brackets, with rates ranging from 10% for taxable income above a certain threshold to 37% for income above $578,125 for single filers and $693,750 for married couples filing jointly. Your marginal tax rate corresponds to the tax rate of the bracket in which your last taxed dollar falls.
For instance, if your taxable income in 2023 is $525,000, your marginal tax rate would be 35% because this amount falls within the 35% bracket.
On the other hand, the effective tax rate represents the overall percentage of your taxable income that goes toward income taxes. Calculating the effective tax rate involves determining your taxable income, calculating your total tax liability, and then dividing the total tax by your taxable income. This computation provides a comprehensive view of the average tax rate applied to your entire income.
In general, all else being equal, a tax credit is typically more advantageous than a tax deduction. The key distinction lies in how they impact your overall tax liability. Tax credits directly reduce your tax liability dollar for dollar, providing a more substantial benefit. For instance, if your total tax bill is $10,000 and you have a $1,000 tax credit, your bill is reduced by the full $1,000.
On the other hand, a $1,000 tax deduction doesn't directly lower your tax liability by the same amount. Instead, it reduces your taxable income. For example, if you earned $50,000 in taxable income and claimed a $1,000 tax deduction, your taxable income would decrease to $49,000. The actual tax savings from this deduction would depend on your tax bracket, resulting in a potentially lower benefit compared to the direct reduction offered by a tax credit.
Annually, the IRS permits the deduction of unreimbursed medical expenses that qualify, provided they exceed 7.5% of your adjusted gross income (AGI). Qualifying medical expenses can encompass various categories, including preventive care, medical treatments, surgeries, dental and vision care, psychologist and psychiatrist visits, prescription medications, and prescription appliances such as glasses, contacts, false teeth, and hearing aids. Additionally, travel expenses incurred to receive medical care, such as mileage, bus fare, and parking fees, are also eligible for deduction.
The amount you can deduct hinges on your income and whether you choose to itemize your deductions. For instance, if your AGI is $100,000 and you opt for itemized deductions, you can deduct unreimbursed medical expenses exceeding 7.5% of your AGI, which amounts to $7,500 (7.5% of $100,000). If your unreimbursed qualifying expenses total $10,000, you can deduct $2,500 ($10,000 - $7,500).
Determining whether to itemize deductions or claim the standard deduction has become more straightforward after the 2017 Tax Cuts and Jobs Act. Generally, if the standard deduction offers greater savings on your tax bill, you opt for it instead of itemizing.
The standard deduction nearly doubled from 2017 to 2018, making itemizing less compelling for many taxpayers. In 2023, the standard deduction stands at $13,850 for single taxpayers and $27,700 for married taxpayers filing jointly. Despite these amounts, it's essential to calculate your itemized deductions each year and compare them to the standard deduction to maximize your available tax savings. For 2024, these standard deduction amounts increase to $14,600 for single taxpayers and $29,200 for married couples filing jointly.
In 2023, tax law underwent significant changes, creating a challenge to stay abreast of the updates. However, there's no need for concern. Vincere Tax is well-informed and keeps a close eye on the latest modifications to tax laws each year, ensuring that our tax tips are continually updated for the new tax year. This commitment is designed to provide you with confidence when filing your taxes.
Whether you prefer comprehensive assistance from experts to manage your taxes entirely or expert guidance while you navigate the filing process independently, Vincere Tax offers expert-backed solutions tailored to your needs. Our team of tax experts is available to support you in completing your taxes, addressing any errors, and offering clear explanations of the subsequent steps in the tax-filing procedure.
Rest assured that with Vincere Tax, your taxes will be handled with 100% accuracy, and we guarantee you'll receive your maximum refund.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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