5 Things To Know Before Tax Planning

Taxes are a liability that you cannot escape but can try to minimize. Do not confuse tax planning with tax evasion. Tax planning is arranging and allocating your funds and income wisely that secures your future. Effective tax planning is legal.  

Tax planning, IRS rules, and tax filing may sound strange to you if you are not a financial expert, but to protect your business and its income from hefty penalties, increase your financial knowledge. Learn these 5 things that one should know, or hire tax preparation services in Mesa and allow experts to handle your income and taxes.

5 Tax Planning Prerequisites

Learn About Your Tax Bracket

In the USA, a progressive tax bracket is followed, i.e., your tax rates increase as your incomeincreases. In short, people with high incomes will be taxed at a higher rate. There are different tax brackets such as 10%, 12%, 22%, 24%, 32%, 35%, and 37%. It protects taxpayers from lower income groups to pay their entire income as taxes.

Let’s understand it with an example.

Suppose you have an income of $43,265 and you are a single filer. Now, if you have no idea about tax brackets, at what rate will you calculate your taxes?

The IRS will calculate your tax as follows:

  • 10% for income up to $10275 = $1027.50
  • 12% for income above $10275 but not more than $41775. So, on next $31500 = $3780.00
  • 22% for income above $41775 but not more than $89075. So, on rest $1490 = $327.80

This is how progressive taxation works. But you are not supposed to pay the entire $5135.30. Instead, there are several deductions you can claim, which will lower your tax liability.

Tax Deductions And Tax Credits

People are often confused about tax deductions and tax credits, but these are very easy to understand.

Tax deductions are relaxations from expenses you get if you fulfill certain conditions. For example, say you will get a saver’s credit if you contribute to an IRA fund. Similarly, if you have a qualified residence, you can avail of the deduction of qualified residence interest. 

Suppose you have a loan of $80000 and paid interest of $2000 in the previous year; you can avail of the deduction of $2000.

The major difference between a tax deduction and a tax credit is that a deduction lowers an individual amount while a tax credit lowers your overall tax liability.

Say you are an S Corporation, and you paid $20000 as per the pay-as-you-go option. At the year’s end, your tax liability is only $10000. Now, you will have a tax credit of $10000, which you paid in excess. Next year, you will have to pay nothing if your tax liability is under $10000, as your money is already lying with IRS.

So, you get a dollar-for-dollar credit on your overall liability if you have a tax credit. But you must claim individual deductions. Don’t be confused by standard deduction, as it is covered in the next point.

Standard Deduction And Itemizing

If you do not possess expert financial knowledge, then claiming various income deductions might be tricky. So, hiring a tax preparer in Mesa who can guide you best is recommended.

But you must learn what standard deduction is and whether it is beneficial, or you should go for itemizing.

The standard deduction is an aggregate amount of deduction that is permissible to be deducted from your total income. It lowers your overall gross income, and even a beginner can benefit from a standard deduction if they file their tax return independently.

But what if the standard deduction is not beneficial for you? What if itemizing will get you more benefits?

Thus, you need a tax preparation service in Mesa. Itemizing is claiming individual deductions from separate items, such as deductions for qualified residence interest, IRA payments, etc. But it requires having an idea of how to calculate a deduction amount.

The ceiling of the standard deduction is fixed. You can only claim a certain amount. If you hire a tax preparer, they will calculate your income both ways and help you exercise the most beneficial option.

Understand The Requirements Of Your State

The Federal system means there are different laws in different states. Therefore, you must understand the laws of your state before you file your taxes. If you are single and filing individually, then most laws are the same, but being a business, you need to know about the various taxes.

Businesses must learn about these taxes:

Payroll Taxes: Different payroll taxes, such as withholding tax, vary from state to state. Also the tax rates differ in states.

Income taxes: The taxes and tax rates are different for companies. Whether you are an S Corporation or a C Corporation, it impacts the laws you must adhere to.

Sales Tax: Businesses must collect and pay sales taxes from customers to the government.

Smart Investments

To protect your hard-earned money from being snatched away as taxes, hire a tax preparer in Mesa or an investment expert to help you understand the following tax planning strategies, which can help you lower your tax liability.

Investing money in retirement funds is a good idea. You can put money in a 401(k) account which your employer facilitates.

You can also put money in an IRA account. There is a ceiling limit of $6000 for contributions. However, other factors also affect your limit, such as your contribution to retirement funds at work.

Protect your health by investing in Health Savings Accounts which allow you to pay your medical expenses and save you from unexpected spending.

Apart from these, you can invest in mutual funds, open a flexible spending account, a 529 account, etc.

Final Words

Tax planning requires a good understanding of the laws governing your income, expenses, and investments. Tax preparation services in Mesa are a better option than filing your taxes on your own, as they are experts and help numerous individuals and businesses daily. It will also save you time and costly mistakes. So, if you want to save money on your taxes, hire a tax preparer in Mesa now.

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