Smart tax planning is crucial for early success with tax returns. Maximizing both tax credits and tax deductions can reduce the amount of tax owed. Deductions reduce the amount of income, which in turn can reduce your tax liability. Credits are a dollar-for-dollar reduction in the amount of tax you owe. Tax planning is integral to understanding the impact to overall income and tax liabilities.
Commonly asked questions:
- What income do I pay taxes on?
Taxable income is any earnings from employment, retirement distributions, pension payments, interest, dividends, and capital gains. However, municipal bond interest would be exempt.
- How do I know my tax bracket and rate?
The U.S. has a progressive tax system, so not all of your income is necessarily taxed at the same rate. Tax brackets refer to the range of incomes taxed at specific rates, while your marginal tax rate is the highest tax bracket applicable to your income.
- What are some deductions and credits I can claim?
The deductions and credits you are eligible to claim vary depending upon your situation. Here are some examples of deductions you may be able to claim: 50% of self-employment taxes, student loan interest, tuition, contributions to a health savings account, retirement contributions, dependents, and many more.
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