If you’re trying to address your finances, the way that you handle your taxes is of the utmost importance. Individuals are responsible for both federal and state income taxes and can address their money management more prudently when they master these issues.
Accounting services are worth roughly $145 billion as a market today. This means that you’re not only if you need help. However, it’s important that you also internalize some concepts that will help you out.
These tips will help you when you’re working toward understanding tax brackets and other points of accounting that can be useful to you.
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What Are Tax Brackets?
Get to know Federal tax brackets so that you can understand how it affects your filing status and how much you will ultimately pay. A tax bracket is a range of earnings that people bring in which will dictate how much you will pay in your taxes for the year.
This is all codified as part of the United States’ tax system. When you know what tax bracket you’re in, it becomes easier for you to address your return each year. This system has seven different tax bracket categories that filers fall within.
Use this as a rule of thumb so that you are better able to accurately assess your tax obligation so that you can handle it properly.
What Are Tax Rates?
When you fall within a certain tax bracket, the amount of money that you will pay in taxes is referred to as your tax rate. This refers to a specific percentage per tax bracket. Both individuals and businesses are subject to a variety of tax rates.
As your taxable income goes up, so does your tax rate. These rates are applied to all forms of income, whether it comes from wages, salary, capital gains, or other avenues of income. When taxes are levied at increasing percentages, it’s an example of marginal tax rates, which are imposed regularly.
Understanding Tax Brackets
When you are getting to know your tax rates and brackets, there are some rules of thumb that will dictate how you handle them. You’ll need to study your tax bracket so that you can pay the correct amount, but there are also other details that you’ll need to keep in mind.
Here are some tips for understanding tax brackets more clearly:
Learn Your Tax Filing Status
In studying tax brackets, you’ll be more prepared to take advantage of your tax situation. The tax system breaks down into a variety of different filing statuses that you need to get to know.
These break down to include single, married filing jointly, and married filing separately. Each category has different tax rates and brackets that you need to consider. They also open you up to different deductions.
For example, a single person might be subject to a 12% tax rate when they earn between $11,000 and roughly $45,000, while a couple married filing jointly will be in the same tax bracket when they jointly earn between $22,000 and close to $90,000.
If you’re married, you’ll want to look into this and a variety of other details to figure out whether it makes more sense to file jointly or separately. You may also classify as head of household, which has its own tax implications.
Consider Your Taxable Income
Taxable income is where the rubber meets the road with your tax filing situation. Knowing what kind of income is taxable will determine how much you end up paying.
In most cases, adjustable gross income (AGI) is the starting point, and then the amount left after you take your deductions and write-offs reveals your taxable income. It refers to the part that is subject to federal income tax rates.
You will find that taxable income can come from a variety of sources, including compensation from your job or career, hourly wages, salary, royalty payments, earnings from businesses, and other areas. Start by understanding which filing status you are claiming and then work backward to figure out how much of that is actually taxable.
Consider Deductions and Exemptions
With that said, you should also get to know what kinds of deductions and exemptions are available. Knowing this will help you get all of the write-offs you are eligible for so that you can then factor in your taxable income.
There are several different deductions that you can take advantage of, including:
- The standardized deduction
- Earned Income Tax Credit (EITC)
- Write-offs for charitable donations
- The home office tax credit
- Writing off the depreciation of a vehicle
- Mileage deductions
- Deducting medical expenses
When you’re in a position to accurately claim your deductions, it’s easier for you to also lower your tax responsibility so that you can keep more of your money. It allows you to keep more money in the bank while still taking care of your taxes in full.
Stay on Top of Your Financial Education
The most important thing that you need to do is stay ahead of the game with your financial education. It allows you to always be in the loop with your tax rate and bracket and will ensure that you avoid underpaying.
If you’re interested in money management, financial education is of the utmost importance. Take the time to not only brush up on the current tax code but also learn about things like filing, the most important Internal Revenue Service (IRS) documents to use, fees, and more.
You can also further your knowledge by taking courses, reading books, and otherwise brushing up on pertinent information.
Check the Tax Rate and Bracket Annually
One of the most important things to recognize is that tax rates are subject to change. You need to check the current tax rate and bracket each year for a better idea of how much you will typically have to pay.
For example, tax brackets were boosted by roughly 7% most recently in 2023. There are always a variety of tax laws passed that could either open you up to more credits and write-offs or limit them. Keep this in mind so that you’re better able to manage how much you pay and remain aware of it.
Other Types of Tax Rates
Aside from income tax, there are a variety of other types of taxes that you may need to get a handle on. Consider the current rates for sales tax and capital gains tax as well.
Sales tax refers to the amount of tax charged on a purchase, while capital gains tax is the tax that you pay on profits from a stock or other investment. Examining these rates will help you know how much you’re subject to paying each year.
Tips for Handling Your Taxes
There are also some useful tips that’ll help you address your taxes correctly. By addressing your taxes in the correct manner, you will not only understand your tax bracket but will also be in a better position to address your obligations.
These points will assist you when you’re trying to optimize the way that you do your taxes:
Hire a Team of Professionals
There are several professionals available that’ll assist you when it’s time to do your taxes. When you need to address your taxes, working with a certified public accountant (CPA) is one of the best decisions that you can make.
These pros are helpful in keeping you organized and making sure that your returns are in order. They can handle your filing for you quickly and conveniently and will make sure that everything is accurate. When you have an accountant by your side, you will be better able to avoid audits, pay the correct amount, and stay organized.
You might also need the help of a tax lawyer to assist you with audits and other such situations. Make sure that any attorney that you hire is State Bar Association certified and licensed to practice. Take the time to vet them and get some recommendations from people you know who have hired lawyers in the past to assist with their tax needs.
Keep Accurate Records and Documents
Another important piece of the puzzle is making sure that you keep tabs on your documents and paperwork. When you are able to keep tabs on your tax filings every year, you will be able to pull them for reference.
This is often a requirement when you have a tax question or concern. For instance, to verify your information, an IRS professional will often ask for the AGI on your previous year’s tax return or other pertinent information. It’s always best to keep tax returns for every year for your personal reference so that you have a clear record of how much you earned, how much you wrote off, and other key points of information.
Pay Estimated Taxes
You will also need to do your due diligence in staying ahead of your tax obligations. The best way to do this is by staying on top of your estimated taxes. These are the tax payments that you make each quarter leading up to the April filing deadline.
Certain business owners and professionals are required to pay estimated taxes, otherwise, they’ll run the risk of being charged certain penalties. Estimated taxes also make life easier for you because you can take advantage of your tax obligations throughout the year, rather than waiting to pay it all in one lump sum.
Keep track of your estimated tax deadlines each quarter so that you pay them with no problem and are able to chop down your tax bill little by little.
Always Seek as Many Deductions as Possible
Part of the game of wealth generation boils down to finding deductions that minimize your tax bill. There are quite a few that you are probably eligible for without even knowing it.
The only way to claim these deductions is by researching and understanding them, and correctly applying them to your tax return. Working with a tax specialist is helpful because it’ll allow you to find all of the deductions that you are eligible for and write them off on your taxes accordingly.
Keep accurate records of your bills, data, and transactions so that you can take advantage of these deductions and credits each year.
Be Careful to Avoid Audits
Above all, make certain that you are thorough and accurate with your taxes. When there are gross discrepancies, you are far more likely to get audited.
During an audit, an IRS agent will request further information and will test or verify the legitimacy of your claims. You might be subject to penalties, or it may warrant a correction in your taxes that could cause you to end up paying more than you otherwise would have.
The best way to avoid an audit is by being thorough and careful with your taxes the first time. If you’re doing them yourself, there are a variety of tax preparation software platforms that come with audit protections and other checks and balances that can help.
Get to Know the Tax System
Understanding tax brackets is an excellent starting point for handling your finances correctly. The tax system has a wide variety of laws, codes, and other information that you should get to know when you’re trying to stay on top of your obligations.
Polston Tax Resolution and Accounting can assist you when you need help with all sorts of situations. Take the time to contact us online or pick up the phone and dial 844-841-9857 to learn more.
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