How Adjustments And Deductions Can Affect Income Tax Rates?

Answer 1

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.