0
There is sometimes a perception that the income tax rates for various individuals are tightly fixed percentages that cannot be changed in any way. This is not always the case, and there are a number of factors that can help to change the tax rate for an individual, or even a business. Through the use of various mechanisms within the tax code, the amount of income that can be taxed can be lowered, effectively reducing the income tax rate for that amount. These provisions and strategies that exist within the tax code, however, are often well hidden and require a good knowledge of the law. Still, there are some basic concepts that, if understood, can potentially help lower the income tax rates paid when filing a return.
Possibly the most important concept to understand when attempting to lower income tax rates to be paid is taxable income. In a simple tax return, this is basically all of the money that was earned through nearly all methods in the prior year. The resulting gross income ultimately determines the income tax rate for an individual. Even though the initial amount and idea of gross income might seem very basic, through adjustments and deductions, the amount can actually be lowered to help reduce the income tax paid.
An adjustment to the gross income of an individual or business is, most often, a reduction in the amount of income based on money paid or used for some purpose. Sometimes, adjustments are made based on money that was paid into an account or fund that will be taxed at a later date, while other times adjustments can be made for the purpose of providing incentives for businesses or certain investment types. This area is highly complicated, and there are many exceptions, as well as adjustments that actually increase gross income.
Deductions are like adjustments, and can reduce gross income. Individuals who are not itemizing their deductions can take standard personal deductions, while businesses generally take a number of itemized business deductions for various operating costs and other required spending. Well planned deductions, coupled with good documentation, can save a business or individual a significant amount of income tax.
Balancing deductions and adjustments to help reduce the gross income of an individual or business, and consequently the income tax rates, can be very complex and full of unforeseen problems. The tax code is not simple or straightforward in many regards and a lack of knowledge when filing a tax return could lead to mistakes that result in penalties or other problems later on. In many situations, using a tax preparation professional to, at the very least, look over a return before filing could be very beneficial.
Wiki User
∙ 12y ago
Add your answer:
Earn +20 pts
Federal Tax Deductions?
Federal tax deductions are items subtracted from the taxpayer' gross income and are not factored in calculating the income tax of the taxpayer. There are dozens of available deductions for many taxpayers, depending on their income bracket and how their income was used throughout the year. Unlike tax credits, deductions are utilized before the tax is calculated For example, an individual earns $50,000 per year, and is eligible for a $5,000 IRA tax deduction. The taxable income of the taxpayer is reduced by $5,000 and the tax is calculated on the remaining $45,000 of income. Because the US tax system is progressive, with higher tax brackets as income increases, the deduction is worth more in real dollars for someone in a higher tax bracket. Thus, the $5,000 deduction is worth $1,250 for someone in the 25% tax bracket ($5,000 X .25 = $1,250) as opposed to a tax savings of $750 for someone in the 15% bracket. Some federal tax deductions may be taken regardless of other deductions made by the individual, others can only be taken if the individual's total deductions exceed their Standard Deduction. The standard deduction is the minimum deduction allowed for all taxpayers. The IRA deduction, stated above, can be taken by anyone, regardless if they itemize their deductions. Other deductions of this type are student loan interest deductions, alimony paid, contributions to a health savings account and deductions for health insurance premiums by a self employed individual. Deductions for mortgage interest paid, most state taxes paid charitable deductions, medical expenses exceeding 7.5% of adjusted gross income, theft and casualty losses, and certain job expenses are examples of the latter type of deductions. They are reported on Schedule A. They may only be used if the total of all of the deductions of this type exceed $5,800 for a single taxpayer and $11,600 for married persons filing jointly. Though a person may itemize, if their deductions do not exceed the standard deduction rates, they are better off using the standard deduction. There are other deductions available to those who qualify. Certain taxpayers may be able to deduct the cost of operating a vehicle when it is used for company business or education expenses for some. Businesses and corporations have many more deductions available. However, these deductions are often geared to the cost of doing business, and attempt to separate gross profit from net profit. Thus, businesses will be able to utilize deductions such as fuel costs, utilities, depreciation, cost of labor, etc. A self employed individual is normally permitted to utilize many of these deductions.
Definition of minimum alternative tax?
Alternative Minimum Tax (AMT) Go to the IRS gov website and use the search box for Topic 556 - Alternative Minimum TaxThe tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.The AMT is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax. The tentative minimum tax rates on ordinary income are percentages set by law. For capital gains and certain dividends, the rates in effect for the regular tax are used.You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
Purpose of income taxes?
The primary purpose of income taxes is to raise money to pay for government operations. However, they have been used secondarily to encourage or discourage certain types of activity. For example, deductions for home mortgage interest encourage the purchase of homes and reduced tax rates for stock dividends encourage investment in the stock market.
Can state sales tax be deducted from your taxes?
According to the IRS, if you itemize deductions on your federal return you may deduct either state and local incometaxes or state and local sales taxes. You get to choose which to deduct, but you may not deduct both, and you can't deduct either unless you itemize deductions.Chances are pretty good that unless your state has low income tax rates and fairly high sales tax rates, you'll be better off deducting the income taxes instead, but you do have the option.
What are the different income tax brackets?
Tax brackets are the rates that people pay on their taxable income. The actual rates vary and can range anywhere from 10% to 35%. The tax rates vary based on factors such as marriage status.
How do income tax laws affect payroll deductions?
Income taxes affect payroll, because it is the amount of money that is taken out of each check. Income tax must be paid by every working citizen.
Would the type of house I live in affect my insurance rates?
Yes. The type of house you live in, along with your income, will affect your insurance rates tremendously.
What is the difference in income tax rates between 2010 and 2011?
The income tax rate from 2010 and 2011 hasn't changed that much. The only thing that has changed is that now there are a number of new deductions that are on the 2011 tax forums.
How does CPI affect tax revenue?
An example of how dollar values may be adjusted is the use of The CPI (Consumer Price Index) to adjust the federal income tax structure. The adjustments stop inflation-induced increases in tax rates, which is an effect called "bracket creep".
Are tax rates getting highter?
Not really so much...if at all. Raising artes is political suicide. Hence, they change the base (like what is considered income, or eliminating deductions) that the existing rate is applied to.
What are Con Edison gas rates?
Con Edison gas rates are divided into basic rates and low income rates. Basic rates are $18.50. Low income rates are $17.10.
How can a change in interest rates affect the profitability of financial institutions?
A change in interest rates affects the cost of acquiring funds for financial institution as well as changes the income on assets such as loans, both of which affect profits. In addition, changes in interest rates affect the price of assets such as stock and bonds that the financial institution owns which can lead to profits or losses.
What is the tax rate for retired people?
Tax rates for retired people can vary depending on their income, sources of income, and deductions. Retirees may be subject to federal income tax, state income tax, and potentially other taxes depending on their individual circumstances. It's best to consult with a tax professional or use tax software to accurately determine the tax rate for a retired individual.
What was the main purpose of the tax cuts Reagan supported?
to eliminate deductions and reduce rates.
What does annual income rates mean?
Tax rates by IRS based on annual income. They are on the web site. Income determines tax bracket.
What tax advantages regarding interest rates?
The tax advantages regarding interest rates is that there are tax deductions for the interests payable. This would translate to repayment of lower interest rates.
What will not affect reaction rates?
Astrological signs will not affect reaction rates.
